May 18, 2016 1:58PM

Frenemies of the TPP

All the presidential candidates are opposed to the Trans-Pacific Partnership, some because protectionism seems to sell well during elections and others because they generally oppose foreign trade.  But the most immediate obstacle to passage of the TPP may be a counterproductive demand from one of the agreement’s most ardent congressional supporters.

Orrin Hatch (R-Utah) is Chair of the Senate Finance Committee, which oversees trade policy, where he has been instrumental in securing trade promotion authority and building support among Republicans for the TPP.  Hatch is also a committed advocate for the inclusion of strong intellectual property protections in trade agreements and has been very critical of one provision in the TPP that he doesn’t think goes far enough to provide regulatory exclusivity for biologic drugs.  He's made his support for the entire agreement contingent on whether the administration can fix that one provision. 

Exclusivity (often called data exclusivity) is the practice of denying regulatory approval of a competitor’s drug until the original drug has had a numbers of years of monopoly status in the market.  This is unrelated to whether the drug is covered by a patent. 

The U.S. government provides 12 years of exclusivity, the highest of any country in the world, for a special class of drugs known as biologics.  At Hatch’s insistence, U.S. negotiators officially pushed for a minimum 12 year term in the TPP. 

But the TPP was never going to have a 12 year term for biologic exclusivity, because the other members were dead set against it.  Japan and Canada currently provide 8 years, while the other TPP members provide either 5 years or zero.  There was no interest from the other members to increase their own level of protection, so the United States wasn’t going to be able set an international standard of 12 years.  Indeed, U.S. negotiators knew that they best they could really hope for was 8 years. 

Even the 8-year proposal met a lot of resistance.  Australia was especially adamant that they would not increase exclusivity beyond the 5 years they currently impose.  This made biologic exclusivity an especially intractable issue in the TPP negotiations, and the text we now have was agreed to under tremendous pressure to finish the deal and was reached in the closing hours of the negotiations. 

The final compromise is a peculiar dual provision that gives TPP members two options.  Under one option, TPP members are required to provide at least 8 years of exclusivity.  Under the second option they can provide only 5 years of exclusivity as long as they also use “other measures” to provide a “comparable market outcome” to the first option.  What makes the second option extra curious is that “market circumstances” may be relied upon to ensure that 5 years of exclusivity provides a comparable outcome to 8 years.  This arrangement enables the U.S. government to claim they negotiated an 8 year term, while Australia can still claim that they didn’t agree to anything more than 5 years. 

Senator Hatch has seen through this simple scheme and correctly describes the provision as requiring only 5 years.  Because the requirement to provide a comparable outcome through “other measures” allows reliance on “market circumstances,” there is no requirement for government intervention aside from the 5 year minimum of regulatory exclusivity.  The Obama administration is trying to say that 5 + 0 = 8.

The pharmaceutical industry has expressed disappointment at the outcome.  They think they should have gotten 12 years, and Senator Hatch seems to agree.  But the idea that the TPP could ever have had a 12-year term is impressively wishful thinking.

Hatch and the pharmaceutical industry really ought to be happy that they got the 5+ deal in the TPP.  That’s more than they had before and it shows that momentum is on their side in adding this new issue into the trade agenda.  Creating a special provision that treats biologics differently than other drugs and offers some sort of additional protection sets a bar that can be expanded on in future agreements.  The TPP’s dual provision provides a good starting point for U.S. business interests to further develop a more-stringent international norm.

It’s been reported that Hatch may be trying to secure a commitment from the administration that it will pressure TPP members who provide only 5 years of exclusivity to adopt particularly effective “other measures” to achieve an 8-year outcome when they implement the TPP.  Even after implementation, the provision will serve as a mechanism for the U.S. Trade Representative to exert continued pressure on TPP members.

Hatch is essentially complaining that the TPP doesn’t do enough of a good thing.  The idea that the agreement could be better is hardly a reason to oppose it altogether.  That’s especially true in this case, where the “better agreement” that Hatch and the pharmaceutical industry were asking for was unrealistic.  

The whole episode shows how the politics of trade agreements have gotten mixed up in regulatory issues that don’t have a direct connection to trade.  A lot of the regulatory provisions in trade agreements were originally included at the behest of protectionists who wanted to put conditions on trade.  That’s why trade agreements include labor and environment rules. 

It’s a shame that supporters of free trade are now also putting so much emphasis on regulatory issues, elevating arcane regulatory tweaks above actual free trade.  Senator Hatch’s inflexibility on biologics is only making it harder to achieve the real gains that come from trade liberalization.  If Senator Hatch values free trade, he ought not oppose the agreement simply because it doesn't do as much he would like to benefit one U.S. industry.