Even low import tariff rates have a significant compounding effect on the final retail price of medicines, which in turn impacts on affordability. While much of the “access to affordable medicines” debate is about intellectual property rights (IPRs) and business practices of pharmaceutical manufacturers, import duties and national protectionism are swept under the political rug. In this paper, we provide a synopsis of tariff barriers for exports of pharmaceutical products to the world’s major low and middle income countries (BRICS-MINT countries).
Studying the impact on final prices for consumers, we estimate that the annual compounded financial burden of import tariffs on pharmaceuticals and prevailing trade facilitation inefficiencies is highest for China (up to 6.2bn USD), Russia (up to 2.8bn USD), Brazil (up to 2.6bn USD) and India (737mn USD), followed by Mexico (663mn USD), Turkey (290mn USD), Indonesia (251mn USD), South Africa (177mn USD) and Nigeria (60,000 USD). For Brazil and India, tariffs on medicines increase their final price by up to 80 per cent of the original sales price ex factory. As most BRICS-MINT governments directly buy or settle patients’ invoices for a bulk of medicine products, the sum of all tariff-induced premiums on final prices for pharmaceuticals tends to exceed by far the tariff revenues initially collected by these governments’ customs authorities.
While import tariffs on medicines can cause substantial net losses for governments, taxpayers and patients, they effectively work as a subsidy for companies along national distribution chains. This may lead to a political economy, in which customs authorities and pharmaceutical distributors may have a common interest in maintaining (high) import tariffs. We call for all low and middle income countries to join the “zero for zero” pharmaceutical agreement, which would help to significantly cut the costs of medicines in general, reduce obscurity and absurdities in government spending and create better conditions for the access to medicines for low-income patients in these countries.
Research assistance by Julie Richert and Nicolas Botton is gratefully acknowledged.
Tariffs are like Hydras: they create more problems than they solve. Tariffs on pharmaceutical products are a case in point. By levying import tariffs on pharmaceutical products, the governments of many low and middle income countries, including the world’s major low and middle income economies, explicitly aim to maintain a source of government income and at the same time protect domestic producers from foreign competition. However, by squeezing out financial rents from the import of much-needed medicine products, these governments impair the affordability of medicine products for low income patients in their countries. Unlike high-income countries, patients in low and middle income countries largely pay for medicines out of their own pockets and, in addition, suffer from a great number of inefficiencies along regional value chains for medicine products.
The right to health is well-founded in international law. It was declared a fundamental human right in the Constitution of the World Health Organization (WHO) in 1946, stating that “[t]he enjoyment of the highest attainable standard of health is one of the fundamental rights of every human being […]” and that “[g]overnments have a responsibility for the health of their peoples which can be fulfilled only by the provision of adequate health and social measures.” (WHO 1946, p. 1; see also Sammut and Levine 2016 and Goel 2015).
While access to medicine is not a human right except in those countries which have specifically codified the right to health in their constitutions (mainly South American countries), it is regarded by the United Nations a fundamental element of the right to health and governments are obliged to develop national health legislation and policies to strengthen their national health systems. For this purpose, key issues related to access to medicines, such as affordability of essential medicines, procurement practices and supply chains, must be taken into account (OHCHR 2017).
Improving health equity is a major priority in global development policymaking. In international development cooperation frameworks, such as the 2030 Sustainable Development Agenda that came into force in 2016, improvements in global health and, more specifically, “making essential medicines and vaccines affordable” has become a top-tier priority once again. According to the United Nations’ official announcements, policy areas to be addressed comprise research and development (R&D), intellectual property rights policies (IPRs), healthcare finance and improvements in the management of national and global health risks (UN 2015).
In line with these overarching objectives, the UN Secretary General’s High-Level Panel on Access to Medicines recently called on private sector pharmaceutical companies to cooperate with governments, particularly in providing enhanced access to information regarding R&D costs, production costs, marketing and pricing practices and the distribution of healthcare products and technologies (UN 2016). There is, however, one fundamental piece that is missing in expert analyzes, policy discussions and the public debate about global health and access to medicines respectively: tariffs and taxation. Access to medicines is a also function of prices and affordability (WHO 2004), which are directly affected by national trade policies and regional taxation practices.
As concerns trade policy, the UN High Panel indeed acknowledges that “[t]rade and intellectual property rules were not developed with the goal of protecting the right to health, just as human rights doctrine does not primarily concern itself with promoting trade or reducing tariffs.” (UN 2016, p 16). At the same time, the Panel does not at all address frictions in the system that are caused by national trade policies, i.e. import duties (tariffs) and other protectionist policies, beyond matters related to the World Trade Organization’s (WTO) Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). In other words, much of the “trade in medicines” debate is about intellectual property rights (IPRs) and, often, about putting the blame on pharmaceutical manufacturers, while tariffs and the quality of governance and taxation are swept under the political rug. As a result, and as will be shown below, many governments still unnecessarily, but substantially inflate the cost of medicines through import tariffs, taxation and other domestic regulations.
During the Uruguay Round negotiations (1989 to 1994), several major trading partners agreed to reciprocal tariff elimination, a “zero-for-zero initiative,” for pharmaceutical products and for chemical intermediates used in the production of pharmaceuticals. The “Pharmaceutical Tariff Elimination Agreement” was agreed by 22 countries (Australia, Canada, Czech Republic, European Communities, Japan, Norway, Slovak Republic, Sweden, Switzerland, and the US) and entered into force on 1 January 1995. Due to the EU’s enlargement, there are now 34 signatories to the zero-for-zero pharmaceutical agreement, which enshrines a commitment to zero tariffs on medicine products that are imported from abroad and to not replace tariff barriers with non-tariff trade barriers. The treaty even extends to cover products imported from states not signatory to the zero-for-zero agreement including low and middle income countries.
Most developing countries are still net importers of pharmaceuticals, but many impose tariffs and non-tariff barriers (NTBs) on finished drugs, active pharmaceutical ingredients (APIs), and excipients (inactive substances that contain the active ingredients). As shown by Banik and Stevens (2015), a larger proportion of globally marketed medicine products are now potentially subject to tariffs and other trade barriers, increasing upstream prices along the distribution chain of these medicines. Accordingly, the impact of import tariffs on pharmaceutical products gained in relative importance and adverse distortions of markets and consumer welfare increased significantly in absolute terms (see analysis below).
Compared to policies that aim to tackle local frictions in the distribution of medicines, such as a lack of education, high levels of corruption, lack of medical advisory capacities or the lack of domestic innovative capacities, the elimination of tariffs on pharmaceutical imports would be low hanging fruit. It would enhance access to medicine and contribute to the realization of the right to health in low and middle income countries. For various reasons, such as maintaining tariff revenues and the facilitation of contentious national industrial policies, low and middle income have not yet signed up to this agreement. Tariffs and NTBs, however, substantially contribute to pharmaceutical costs by increasing the final price of medicines, thus limiting access for the poorest people. As already outlined by the World Health Organization (WHO) in 2005, “[t]ariffs on medicines are essentially a regressive form of taxation since a smaller proportion of the payers’ income is affected by the tariff as income rises. This regressive ‘tax’ on medicines targets the poor and the sick.” (Olcay and Laing 2005, p. 2).
Aware of the necessity to build policy coherence and government accountability in trade and domestic healthcare policy, we start by providing a synopsis of trade and major barriers for exports of pharmaceutical products to the world’s major low and middle income countries, i.e. Brazil, Russia, India, China, South Africa (so-called BRICS countries), Mexico, Indonesia, Nigeria and Turkey (so-called MINT countries). In the subsequent part, we analyze how tariffs and inefficient customs procedures contribute to an inflation of prices of imported medicines. We aim to estimate the real size of border protection against medicines from abroad. We will show that nominal tariffs and non-tariff trade barriers are still high in many BRICS-MINT economies and that these barriers are significantly pushing up the price of medicines, increasing the initial percentage tariff surcharge by a high multiple. The estimations will be based on existing research and data sources, but will add new elements showing the real (and not just the nominal) size of the financial burden imposed on the consumers of imported medicines in BRICS-MINT countries. Based on our findings, we call for a new free trade accord that would help to substantially cut the costs of medicines in low and middle income countries in general and create better conditions for access to medicines for patients in these countries.