USMCA Avoids Reimportation Mistake

Negotiators recently reached an agreement to replace the North American Free Trade Agreement with a new deal called the U.S.-Mexico-Canada Agreement (USMCA). As Bryan Riley and I explain, the deal is a mixed bag, but achieves the important goal of preserving economic and diplomatic stability on the continent:

The new deal modernizes portions of NAFTA, but moves in a protectionist direction in some areas. Overall, it’s slightly worse than the existing NAFTA, but far superior to withdrawal. It is essential to preserve economic stability and certainty with two of our most important trading partners and allies.

Our brief study provides an overview of many of the key sections of the deal, but what we didn’t discuss are the numerous proposals that could have been included, but weren’t. For example, whenever the subject of trade between the United States and Canada comes up, prescription drug reimportation undoubtedly enters the conversation. Fortunately for taxpayers, no such provision was included in the USMCA.

My colleague Pete Sepp succinctly explained the dangers of “reimportation” in a 2016 paper:

Traditional conservatives who back free trade often believe that first and foremost, negotiations with other countries over such policies are worthwhile because they can help to open up foreign markets to U.S. goods and services.

Importation works the opposite way. Pharmaceutical companies would be even further limited in pursuing the already meager opportunities to recover at least some of their initial investment costs by selling to customers outside of the U.S. (admittedly at lower prices extorted by governments). Ironically, in the name of cheaper prices in the U.S., importation would deprive our own firms and foreign firms with a significant U.S. presence, of the capital and incentives to keep driving the discoveries that other countries want. As a result, pharmaceutical exports, as well as some of the jobs, shareholder returns, and other economic boons behind them, would shrink. That shrinkage would not be limited to the biopharma sector alone, which directly or indirectly supports over 4.4 million jobs.

While the absence of reimportation was a victory, USMCA is also a missed opportunity to move in a more free market direction across the continent. Under the Bipartisan Congressional Trade Priorities and Accountability Act of 2015 -- often referred to as Trade Promotion Authority or TPA -- the administration was directed by Congress to “achieve the elimination of government measures such as price controls and reference pricing which deny full market access for United States products.” In other words, it should have forced the Canadian government to stop controlling drug prices and liberalize its markets. While that’s a lofty objective to pursue, doing so would have made restrictions on reimportation unnecessary and opened up more international commerce.

While imperfect, the USMCA achieves the primary goal of maintaining strong relationships with two of our most important trading partners and allies. And by not including troubling provisions on prescription drugs, it passed an important test for taxpayers.