Rough Road on Trade

Under Trump, U.S. Companies Face a Rough Road on Trade

Other nations are plowing ahead on the TPP deal, without the provisions America wanted. Will NAFTA go any better?

By MICHAEL GRUNWALD

In October 2015, as President Barack Obama was hoping to rush the newly signed Trans-Pacific Partnership trade deal through Congress, he invited leaders of the pharmaceutical industry in the White House. The industry had emerged as a key obstacle to the largest free trade agreement in history, insisting that TPP didn’t provide enough protection for an expensive class of nature-based drugs called biologics.

In fact, Obama’s negotiators had already fought hard to protect U.S. drug manufacturers in the TPP deal, securing protections almost all the other 11 TPP nations opposed. For biologic drugs, they had won eight years of market exclusivity, insulating American-made name-brand products from competition from generic knockoffs.

Global aid groups were denouncing the provision as a corporate giveaway that would limit access to medicine in the developing world. But pharma was still demanding 12 years of exclusivity in Asia, to match the protections it already had in the U.S., and Senate Republicans were refusing to move TPP without the industry on board.

In the Roosevelt Room meeting, Obama made the case for pharma’s leaders to accept half a loaf: The eight years they’d get under TPP were way better than the zero years they’d get without it, and his administration would have no way to extract a better deal if it tried to reopen negotiations. The industry reps did not dispute either point. But they said they would still oppose the trade deal, even though it beat their status quo.

“So what do you want me to do?” Obama asked in frustration.

“Everyone just looked at their shoes,” one attendee recalled.

Ultimately, Congress punted on TPP, and President Donald Trump formally withdrew from the pact in January. But now the deal is moving forward—just without the United States, and without 20 provisions originally included at the behest of the United States. One of the provisions the remaining 11 TPP nations deleted was the eight years of exclusivity for biologics. What the drug industry got, in the end, was zero.

As the U.S. continues its effort to renegotiate the North American Free Trade Agreement with Canada and Mexico this week, the Trump Administration is now facing its own version of the biologics challenge, multiplied wildly. The U.S. negotiators have demanded a slew of concessions they say are necessary to improve what the president has called “the worst trade deal ever made,” and Trump has threatened to walk away from NAFTA if the demands aren’t met. But multilateral trade deals are usually more about mutually painful compromises than my-way-or-the-highway tactics, and free traders point to TPP as evidence that countries that leave the table tend to get added to the menu.

Pharma wasn’t the only U.S. loser in the new version of TPP. The minus-America deal now moving forward also deletes a provision that would have expanded access for U.S. express delivery services like UPS and FedEx, and several additional intellectual property protections that would have benefited U.S. software, music and publishing companies. It also dropped measures promoting wildlife conservation and labor rights that U.S. environmental groups and unions had considered too weak, but were clearly stronger than nothing. U.S. exporters will also be unable to take advantage of TPP’s lower tariffs on 18,000 products. And in general, the U.S. will lose some of its influence along the Pacific Rim.

“You never get everything you want in these deals. You have to be willing to compromise,” says Wendy Cutler, who helped negotiate TPP as Obama’s deputy U.S. Trade Representative. “When you’re too greedy, you can end up with nothing.”

The dispute over biologics may sound arcane, but even the biggest trade deals are just collections of arcane-sounding issues. And the financial stakes are huge. Biologic drugs are a massive growth driver for pharma, an industry that says it invested nearly $60 billion in research and development in the U.S. in 2015, supporting 4.5 million jobs. It argues that manufacturers would have less incentive to develop name-brand biologic drugs like Avastin for cancer or Humira for autoimmune diseases if they weren’t assured a long period of protection from copycats. The industry’s critics say its monopoly protections merely protect its windfall profits while restricting access to life-saving medicines; the annual cost of biologics range from over $40,000 for cystic fibrosis and hepatitis C drugs to drugs costing over $500,000 a year to treat very rare diseases. Copycat generic drugs are much more affordable, accounting for nearly nine of every ten prescriptions in the U.S. but barely one in every four dollars spent.

Trade negotiators often carry water for their biggest exporters, and the U.S. pharmaceutical exports top $50 billion a year. So Obama’s TPP negotiators tried to help pharma expand its reach in the Pacific Rim, making its case so aggressively that in July 2015, a TPP draft was leaked to POLITICO to expose how, in the words of one industry critic, “there’s very little distance between what Pharma wants and what the U.S. is demanding.” The biologics dispute was one of the three thorniest issues—along with dairy and cars—that dragged out the TPP negotiations until that fall, long enough for fiery populist rhetoric by Trump and Bernie Sanders to drag down support for the deal among Republicans as well as Democrats. Even Hillary Clinton, who had praised TPP quite lavishly as secretary of state, came out against the final product, fearful that otherwise Democratic labor unions would endorse Sanders.

Still, Republican Senate leaders generally supported free-trade deals, and Obama aides believed they had the votes to pass TPP. But Senate Finance Chairman Orrin Hatch (R-Utah) made it clear the deal was going nowhere, because he wanted 12 years of exclusivity for biologics. That wouldn’t have been the only obstacle to quick passage; Senate Majority Leader Mitch McConnell (R-Ky.) had problems with TPP’s tobacco provisions, and some Republicans would have been happy to delay the deal until a GOP president like Jeb Bush or Marco Rubio could sign it. But the Pharma delay turned out to be deadly, because by the time Trump became the party’s nominee, Senate Republicans were never going to ratify a deal he hated.

One Republican aide said that Obama’s negotiators should only blame themselves, because they should have demanded 12 years of exclusivity for biologics, instead of signaling they were open to compromise. “They could have pushed harder,” the aide said. “They made it clear this wasn’t their top priority.” The aide said it was disappointing that the remaining TPP nations retained no protections for biologics, but he said eroding the 12-year standard would have set a terrible precedent for future trade deals, diminishing the incentive of U.S. biotech and pharmaceutical companies to plunge hundreds of millions of dollars into researching a single drug that might never make it to market.

“TPP was supposed to be a state-of-the-art agreement for intellectual property. A little better than the status quo isn’t good enough,” the aide said. “It’s unfortunate that the other TPP countries are going backwards, but this way we preserve the flexibility to fight for higher standards in the future.”

A Pharma spokeswoman declined to comment on the record, pointing instead to the group’s website and its comments on the NAFTA talks, which emphasize how intellectual property protections abroad promote life-saving innovation at home. And even though President Trump has vowed to lower drug prices because the industry is “getting away with murder,” his NAFTA negotiators are now pushing for the 12 years of exclusivity for biologics that Pharma wanted, and couldn’t get, in TPP.

Some industry critics suspect the main reason the drug industry has been so insistent on 12 years of exclusivity for biologics in trade deals has its roots in domestic policy: to avoid backsliding on the 12-year standard the Congress established for biologics in America. Obama once proposed in his budget to reduce the exclusivity period to seven years, a move that would have reduced costs for consumers and taxpayers and profits for the industry. In his first year in office, Trump has avoided substantive battles with pharma, and recently nominated an Eli Lilly executive to be his next health secretary.

“What the drug companies really care about is maintaining their monopoly in the U.S. market, locking in these unsustainable prices,” says Maria Fabiana Jorge, a trade consultant who has represented manufacturers of generic drugs.

Can Trump do better with NAFTA? Global trade experts say there’s no way Mexico or Canada would agree to 12 years of exclusivity on pricey biologic drugs—just one of a litany of issues where the Trump administration appears to be making demands they expect to be rejected. The president wrote a book about the art of the deal when he was a Manhattan real estate developer, and he has made it clear he believes that playing hardball is always the best way to force reluctant negotiating partners to make concessions. He sees negotiations as zero-sum games where the strong dictate terms to the weak.

But global trade is supposed to be a win-win game, where the promise of economic gains for both sides fuels agreements that often have political risks. And the demise of TPP is a reminder that hardball has its limits if the ultimate goal is a deal. The longer the negotiations drag out—and the closer they get to elections—the harder they can be to complete. And when negotiators make intransigent demands their counterparts can’t possibly meet, the usual result is an impasse that doesn’t provide benefits for anyone. “At some point, you’ve got to be realistic about what’s achievable and what’s never going to happen,” Cutler says. “Otherwise, you’ll never get to yes.”

The fifth round of NAFTA talks are now underway, and the Trump team has made a litany of harsh demands—about dairy, cars, government procurement, dispute resolution and more—that no one expects Mexico or Canada to accept. The prospects for common ground will only get bleaker as next summer’s Mexican elections approach, further reducing the desire of Mexican politicians to make concessions to a president who wants to wall off their country at their expense.

U.S. automakers, farmers, and other business groups have urged Trump to take a more realistic approach to NAFTA. But he's still the politician who had the chutzpah to close his rallies with "You Can't Always Get What You Want" by the Rolling Stones. He’s already walked away from TPP, despite its business support, as well as the Paris global climate deal. He’s already threatened to walk away from NAFTA, which he’s called “the worst deal ever.” He doesn’t seem all that interested in getting to yes.