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Differential pricing for drugs to help people or corporations

by Chakravarthi Raghavan

Geneva, 6 Apr 2001 -- Differential pricing, segmentation of  markets, and measures to restrict or prevent, through import or export bans, ‘leakage’ of products in ordinary trade from low-priced to high-priced segmented markets are some of the ideas that the World Trade Organization secretariat has flagged for next week’s workshop in Norway on differential pricing and financing of essential drugs, jointly convened by the secretariats of the WTO and the World Health Organization.

Such a differential pricing would need changes to the TRIPS, including the obligation to prevent parallel imports and a weakening of the compulsory licensing right, two changes pushed in the Uruguay Round by the corporations and the US and EC governments, but which did not succeed, trade observers noted.

The differential pricing for medicines - a lower price in the poorer countries and a higher price in the richer nations - being promoted by the WHO and the WTO, and the European Commission’s ideas of a global “tiered pricing” system, are all responses to the mounting public outcry, led by international non-governmental advocacy groups (Medicines Sans Frontier, Oxfam, and even earlier, specific to the AIDS drugs by the AIDS lobby) against the WTO and its TRIPS Agreement over the exorbitant profits of the transnational pharmaceutical industry.

While the high costs of medicines has captured publica attention and struck a chord everywhere, the basic problem is the TRIPS and the international/global statutory monopolies and the abuses it creates.

Reading between the lines of the proposals and ideas of the WTO secretariat  note, the EC proposals, and others from the industry, the suspicion emerges of a hidden agenda of sorts - of change in the TRIPS rules that would prevent parallel imports from one market to another or of compulsory licensing provisions that governments of countries can invoke.

A report in the Financial Times, a pro-WTO financial media, speaks of the ‘differential pricing’ that pharmaceutical companies already use, and their ‘offers’ to slash prices of anti-AIDS medicines for the African countries, and says that the WTO-WHO want a more systematic programme so that “governments will not need to invoke health safeguards such as compulsory licensing and parallel imports, built into the WTO’s intellectual property accord.”

And while presenting it in the context of the WTO’s Trade-Related Intellectual Properties (TRIPS) Agreement, where the monopoly is not a ‘natural monopoly’ but a statutorily created one (by the rules of the WTO and its dispute settlement, ensuring a global monopoly), and presenting it as a “win-win” situation that would be beneficial to consumers both in the rich and poor countries and the suppliers, the WTO paper raises more troubling questions than providing answers.

The oft-repeated phrase ‘win-win’ situation comes out of the game theory, implying a game in which both parties can win - but often becomes more of a slogan, without relationship to actual facts of outcomes in real life and in the real economy.

The background document for the WTO-WHO workshop has to be seen against the background of the repeatedly iterated WTO secretariat view that the TRIPS agreement, and more so, its provisions on patents, was one of the texts concluded after some very difficult and prolonged negotiations. A WTO fact sheet of March 2001 for e.g. has a sub-title ‘Philosophy: TRIPS attempts to strike a balance”, and says the agreement is an attempt to strike a balance between social rights and private rights of inventors and creators.

The fact sheets prepared by the WTO secretariat media section ‘to help public understanding’, and how IPRs, by promoting invention and creativity, provide social and technological benefits, how it encourages new inventions, such as drugs, and how social goals are advanced in the way IP is protected.

In seminars and meetings, where WTO officials speak or interact orally in their personal capacities, the view is also advanced that the negotiators accepted the compromises (put forward by the chair of the negotiating group on TRIPS), and hence, the countries concerned should not complain or raise ‘implementation’ issues etc.

And from time to time too, the secretariat pulls out from its internal files, its views of the negotiating history of the Uruguay Round and the TRIPS agreement, and presents them to the panels.

Absent in all the discourse in the WTO literature is the simple fact - found in news reports in the transnational financial media that the WTO reads - that the entire IP negotiations has been a case of negotiations under duress, of developing-country governments and their trade negotiators here negotiating under the threat of US retaliation under its trade law - its ‘Special 301’ and ‘Super 301’, enacted as part of the Omnibus Trade Act, which gave the administration fast-track authority. The ‘Special 301’ vested the USTR with the obligation of monitoring and publishing, and initiating actions for trade retaliation against countries viewed by the US as not providing sufficient protection to the US enterprises depending on intellectual property (for earnings).

And the WTO secretariat cannot plead ‘ignorance’, for the issue figured repeatedly at the GATT.

The attempts of the United States and the European Communities to bring the IPR issues into the GATT, goes back to the Tokyo Round, and the inability of the two at that time to persuade the then GATT Director-General, Olivier Long, to put a draft agreement prepared by the US and EC, through a ‘green room’ consultation process, to get the agreement of all other participants. Mr Long reportedly saw it as outside the GATT framework and asked the US-EC to sponsor it themselves.

The 1978-79 move must be seen in the context of the UN/WIPO conference for the revision of the Paris Union Convention on industrial property, where developing countries had proposals relating to compulsory working and other ideas to enable transfer of technology and attack the restrictive practices of TNCs.

Having failed to get a ‘code’ accepted through the Tokyo Round, the issue was brought up in the preparations for the 1982 GATT ministerial meeting (and the talks and negotiations prior to it). At the end, the 1982 meeting adopted a decision of the GATT Contracting Parties, instructing the GATT Council to examine the question of counterfeit goods with a view to determine appropriateness of joint action within the GATT framework on the trade aspects of commercial counterfeiting.

Subsequently, in the run-up to the Punta del Este meeting where the Uruguay Round was launched, the issue again came up and ended with a two-part mandate in goods negotiations: for clarification of GATT rules to ensure that promoting the effective and adequate protection of intellectual property rights and their enforcement do not become barriers to legitimate trade; and for developing a multilateral framework to deal with international trade in counterfeit goods.

Attempts to use this mandate to define norms and standards met with developing- country resistance, and was one of the issues that stalemated and collapsed the Montreal Ministerial meeting (1988). Subsequently, the GATT secretariat (Director-General Arthur Dunkel) in the first of several interventions throughout the negotiations where the secretariat threw its weight behind the US and EC positions (when the two were agreed), a compromise ‘award’ was given for participants to agree to negotiate norms and standards in IPRs in the Uruguay Round - the April 1989 mid-term accord in Geneva.

And even when these negotiations were taken up subsequently, both before the 1990 ministerial meeting and subsequently, the negotiations were among a small group of countries, with the chairman of the negotiating group putting forward compromises that were then pushed through the ‘green room’ processes - where a few objectors were forced to face the phalanx of protagonists and subjected to intense pressures.

And all these were done, with the United States wielding the ‘big stick’ of trade and economic threats against those not cooperating with it in the TRIPS negotiations, through its family of ‘S.301’ laws, forged in 1988 as part of the fast-track authority granted by Congress to the administration in the Omnibus Trade Act.

Right through the Uruguay Round negotiations, and afterwards too, the US repeatedly put on its ‘watch list’ and ‘special watch list’ countries supposedly not providing the kind of protection that the US wanted, and the initiation of investigations or retaliatory actions, it was announced, would depend on the extent to which the negotiators of the countries concerned cooperated or obstructed the achievement of US objectives in this area in the multilateral negotiations. And very frequently, the GSP or other preferences were withdrawn, but since it was withdrawal of a preferential benefit, the countries could not raise it as a dispute in the GATT (though mention used to be made in the GATT Council and in the Trade Negotiations Committee).

From the time the 1988 US trade law changes and the ‘Special 301’ provisions and US initiation of actions - either putting countries on the ‘watch list’ and announcing possible exports of countries that could be hit (to generate domestic pressures in the exporting countries) or announced withdrawal of GSP benefits over IPR protection failures - figured at the GATT Council and the Trade Negotiations Committee about a dozen times, right till the end of the Uruguay Round.

And side by side, from about 1984, when the processes for launching a new round of multiliateral trade negotiations with new issues were under way, and throughout the Uruguay Round, there was the wielding of this ‘stick’ (of US trade sanctions) and the ‘carrot’ of market access benefits in goods.

It was in such circumstances that the very weakened provisions for international balance that the TRIPS Art. 6 (TRIPS and the DSU not applicable to exhaustion of rights - and the corollary of parallel imports), Art. 7 and 8 (enabling members to take measures to protect public health and nutrition), and the provisions of Art. 31 on compulsory licensing were put into the TRIPS.

But as the ‘cost’ of TRIPS for consumers everywhere has begun to sink in, and public interest health and other organizations, as well as advocacy groups, have begun to focus on these, and even free trade ideologues like Prof Jagdish Bhagwati and Prof. T.N. Srinivasan have begun to come out, critical of TRIPS, and supportive of some of the NGO concerns, the WHO and WTO have joined to hold the first consultations.

The WTO secretariat paper tries to throw doubts about the NGO criticism that TRIPs is responsible for high costs of medicines, by citing other studies that the price variations and costs are not so high. Two of the studies cited were those commissioned by the transnational pharmaceutical lobby.

In trying to downplay the size of the problem, the paper says that at the entry of the WTO, fewer than 20 developing countries excluded pharmaceutical product patents, and these latter have time till 2005 to introduce product patents, and that even among this group, not all were availing of the transition period and had introduced their patent legislation.

Here too, as in the understanding of the forces at play during the UR negotiations, the US sanctions threats and the ‘special 301’ provisions and the direct bilateral pressure that the US has brought to bear in ‘persuading’ countries to undertake IPR legislation and provide ‘TRIPS plus’ (including in the current talks for an FTAA) are not irrelevant.

‘Differential’ pricing, and charges for pharmaceuticals ‘inversely related to price sensitivity’ of consumers in different countries, could be achieved if ‘right conditions’ could be established for a form of price discrimination, citing the ‘Ramsey pricing’ theory, which the WTO says, has been used in the US to address the pricing of utilities to allocate burden of high fixed or sunk costs.

However, as Richard A.Posner (in a chapter on ‘Public Utility and Common Carrier Regulation’ in his book ‘Economic Analysis of Law’) has explained, Ramsey pricing in its original form meant charging a higher price, the less elastic the buyer’s demand - the less elastic demanders paying more and the more elastic demanders paying less.

[The WTO’s bibliography does not cite Posner, incidentally, though probably he is the most competent US authority, and one brought in to promote a compromise in the Microsoft case.]

To view essential drugs and medicines and their pricing in terms of high and low elastic demands of the consumer is not a preposition that can be sustained (outside of text-books and private processes of the WTO) in public health contexts.

Posner underlines the formidable information costs in measures to measure elasticities and prevent arbitrages and presents the best form of ‘Ramsey pricing’ as one where every buyer pays an entry fee to cover fixed costs, with the fee varying with the buyers elasticity of demand - and in addition a marginal cost for each unit of product bought.

The differential pricing and market discrimination theories evolved from situations of monopoly suppliers or at least, a supplier having such a dominant market situation that it amounts to a monopoly price-taker, and the differential pricing that such a supplier could engage in different markets depending on elasticities of demand and availability of substitutable products.

Price discrimination and differential pricing themselves are viewed in most national jurisdictions as an anti-competitive practice and are dealt with as such.

In the case of ‘natural monopolies’ - utilities like power suppliers, railroads, telephone and telegraphs etc - the monopoly power, the costs of entry for a rival supplier and the social costs of competition - were balanced by regulators fixing the rates for the consumer, different classes of consumers and different markets, to prevent discrimination, and at the same time ensuring a fair return.

As Posner points out, long before there were ‘measured elasticities of demand’, public utility and common carrier pricing sometimes approximated Ramsey pricing, and the various problems of fixing the rates and for ‘internal subsidisation’ (as in telephone utilities).

Patents are awarded and monopolies created statutorily in national jurisdictions, balancing the private and public interests: the need to provide incentives for innovation and the generation of ‘public good’ of such innovation without creating a ‘free rider’ problem of those not generating or expending resources on R&D, and benefitting from others is dealt with through patents and a monopoly of exploitation for a limited period, full disclosure, and the safeguarding of public interest against monopoly through national competition laws, and even through government financing to help those affected and suffering welfare losses.

The TRIPS has created a global monopoly, with the benefits of this monopoly accruing mainly to a few major transnational corporations of a few industrialized countries (the US and Europe), but without any international machinery to take care of the welfare losses out of TRIPS for most, if not all, the developing countries - even if in a few odd cases, their firms are able to innovate, patent and benefit.

The WTO and the trading system has rules to restrict the powers of national governments, and has thus enlarged the space for corporations and their practices.

To attempt to deal with the problems in the area of pharmaceuticals by talking of ‘differential pricing’ and the willingness of corporations to provide cheaper medicines as a charity or aid to the poor countries, provided they can be assured there would be no leakage from the low-priced markets to the high-priced ones, and enabling the pharmaceutical firms to charge different prices to different developing countries - to put it charitably, is a circuitous and cumbersome way of dealing with the problems.

The pharmaceutical companies are now in a tight spot because of the high price of drugs for AIDS, and the very powerful campaign launched by the gay movement.

But AIDS, and the high cost of treatment, is not the only affliction. There are other pandemics too. And in most, if not all these cases, much of the research work has been done or are funded by the governments.

What is needed is strengthening the hands, and the rights of governments of member-countries to deal with these issues through compulsory licensing, and even expanding the conditions under which compulsory licences can be issued.

These can neither await protracted negotiations between companies and individual countries. And going beyond these, the entire TRIPS and the global monopolies and the use of the trade system for this has to be rethought, if the trading system is to survive. –SUNS4873

The above article first appeared in the South-North Development Monitor (SUNS) of which Chakravarthi Raghavan is the Chief Editor.

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