Date created: 7/11/04
Last modified:7/11/04
Maintained by: John Quiggin
John Quiggin

Labor must stand firm

Australian Financial Review

26 August 2004

It is looking increasingly possible that the conflict between the Pharmaceutical Benefits Scheme and the US-Australia Free Trade Agreement will become the central issue of the election. It is also apparent that, despite many reassurances to the contrary, that the FTA and the PBS are in mortal conflict. In the long run, only one of the two can survive.

A year ago, those who suggested that the PBS was even an issue were denounced as ‘scaremongers’. The government assured us that the PBS was “not on the table” and that the Americans knew better than to interfere in such a central aspect of our health policy.

The first crack in the government’s public position came with the passage of a Medicare Bill through the US Congress in December. Buried in the 1100 pages of the Bill was a clause requiring the Bush Administration to apprise Congress of 'progess in opening Australia's drug pricing system". This is code for the abolition of the Pharmaceutical Benefits Scheme.

At about the same time, the government subtly shifted its position, saying that it would stand firm against any terms that would affect "the ability of the Australian government to provide inexpensive medicine to its citizens”. This, and similar formulations, left open the possibility that Australian taxpayers would have to pay more

When the Agreement was finally announced, the clauses about the PBS raised concerns, butthe government maintained that it had either stared the Americans down or dudded them. The pharmaceutical lobby had wanted a right of appeal against adverse decisions from the Pharmaceutical Benefits Advisory Committee. All they got, we were told, was an essentially meaningless right of review.

In the immediate aftermath of the announcement, most attention was paid to sugar and beef, and to the battle between competing models of the economic impacts of the Agreement. This battle finally ended in a nil-all draw, with the best estimate being that the net benefit to Australia was around $50 million per year, close enough to zero for all practical purposes.

Meanwhile the Parliamentary committees inquiring into the FTA were deluged with submissions pointing out the adverse effects of the intellectual property components of the deal including the extension of the term of copyright and the increased protection given to pharmaceutical patents.

Labor’s amendments, which initially appeared as little more than a facesaving way of covering a backdown, have finally focused attention on the issue. The government’s curious reluctance to accept the amendments, which turned what would have been a huge political win into a defeat, has become comprehensible in the light of the American reaction.

The US Trade Representative indicated ominously that the US had chosen not to intervene in Australia "at this point". Last week US Ambassador Schieffer stated that the US may not certify the Australian legislation as consistent with the FTA.

The government, and pro-government commentators, have also changed their line. The PBS clauses are now seen as integral to the deal as a whole. Several commentators have raised the possibility of an ‘October surprise’ scenario, in which the US announces rejection of the agreement just before election day.

Writing in The Australian, Christopher Pearson made some particularly interesting observations regarding other remedies available to the US in relation to Labor's amendments. He pointed out two further possible courses of action.

One is based on the fact that trade agreements are negotiated on the basis of "standstill". In other words, once an agreement is reached, the parties are expected not to introduce legislation that would alter their relative positions. The other is that the Americans could argue that the amendments are likely to give rise to a dispute under the "reasonable benefits" clause, in the event that their drug companies are unable to realise benefits that they anticipated would flow from the agreement.

It is critical to observe that these points have nothing to do with the specific content of Labor's amendments. They apply to any legislation concerning the PBS that an Australian government might seek to introduce in the future and, arguably, to any administrative decisions made by Ministers. That is, if Pearson’s analysis is correct, the FTA gives the Americans an effective veto power over anything we might attempt to do to improve the functioning of the PBS.

It is critical, in both policy and political terms, for Labor to hold its ground on this issue. Even without the threat to the PBS, the Agreement was a bad one for Australia. If the Bush Administration refuse to certify the amended legislation, Labor should announce its intention to renegotiate the entire deal, this time on more equal terms.

John Quiggin is an Australian Research Council Federation Fellow in Economics and Political Science at the University of Queensland.

Read more articles from John Quiggin's home page

Go to John Quiggin's Weblog