Tuesday, May 10, 2011
Summer means sunshine, frilly dresses, sandals, hats, burgeoning complexes about one’s appearance in a bikini, and of course ample sunscreen protection. I got all those things covered, but let’s face I am not the kind of girl that blogs about that sort of thing. I do however want to establish my nerd-tastic street credibility, so I write about…drum roll please…free trade agreements!
First things first, definitions; a free trade agreement establishes a relationship of free trade between two or more countries. Free trade agreements eliminate tariffs and hindrances to movement of goods and services between signatory countries. For example, NAFTA the North American Free Trade Agreement became law in 1994 removing most barriers to trade and investment between its signatory states the United States of America, Mexico, and Canada. FTAs do not necessarily mean that capital and labor will move freely between signatory states, as is the case with common market agreements. Signatory states negotiate terms of free trade agreements, with each country aiming for greatest national benefit. Free trade agreements bring with them economic winners and losers, as the case with NAFTA, but most economists agree that free trade creates a net gain for society. I think N. Gregory Mankiw said it best, "Few propositions command as much consensus among professional economists as that open world trade increases economic growth and raises living standards."
Since 2007 India and the European Union have been negotiating a free trade agreement. The two governments completed 12 rounds of negotiations and the FTA may get signed into law either this month or at the end of June. The official name of the agreement, Broad-based Trade and Investment Agreement or the BTIA encompasses a number of industries. As much as 90% of bilateral trade would be covered by the BTIA. As part of this pact India will relax its investment rules. In 2009, India and EU’s bilateral trade relationship resulted in a flow of 53 billion Euros in goods and 16 billion Euros in services. The European Union is India’s largest trading partner. While New Delhi already completed FTAs with Japan, South Korea, and ASEAN and is conducting similar agreement negotiations with Thailand and Malaysia, the India – EU FTA is by far the most ambitious trade endeavor.
Gains for both sides abound. Currently, the EU is struggling with economic woes such as slow growth, creeping unemployment, and let’s not touch Greece, Spain, and Portugal’s financial troubles. Through this FTA, the 27 nation bloc gains access to one of the fastest growing and dynamic economies in the world. With bilateral trade in goods and services between the EU and India growing, a free trade agreement will facilitate further expansion of each partners’ economy. For example, recently the EU granted duty free access to Bangladeshi manufacturers, flow of clothes from Bangladesh into the EU increased by an impressive 40% providing the producers with an extra $14 billion USD in a mere eight months. The Europeans recently negotiated an FTA with South Korea and are finishing up another FTA with Vietnam. The Europeans hope that the India FTA will trigger more free trade agreements across Asia.
As with any free trade agreement, negotiations stalled with regard to several industries. Negotiations regarding European access to markets of auto and auto components, wines and spirits, agriculture, stricter enforcement of property rights, as well as to insurance and banking sectors. First, I will address intellectual property rights and why they matter. Second, I want to focus on access to insurance and banking sectors in India.
The European Union has been pushing for the Indian government to tighten intellectual property laws which will adversely affect India’s pharmaceutical industry. This past week India’s Prime Minister Singh instructed negotiators not to compromise the country’s stand on IPRs (intellectual property rights) with a special emphasis on pharmaceuticals.
India and Israel are the world’s leading generic drug makers. Canada, South Africa, Brazil and Thailand also developed fairly large generic drug industries. Producing generic drugs in India costs about 35 – 40 % less than generic drugs produced in the US and the EU. Some estimates put India’s pharmaceutical industry at over $20 billion USD. About 50% of generic drugs produced in India leave the country for sale in Africa and Asia. Indian pharmaceutical companies provide antiviral medications to AIDS patients in a variety of African, Asian and South American countries at a fraction of the price of name brand medicines.
According to Sen Gupta of the Delhi Science Forum, an NGO, from 2003 to 2008 the Indian pharmaceutical industry provided about 80% of medicines used by internationally funded AIDS treatment programs. South Africa, Brazil and Thailand all use Indian made antiviral medicines to run HIV treatment programs. Thailand, a country lauded for its expansive public health system may be adversely affected by stricter IPR regulation in India. With a public health system that covers approximately 96% of Thailand’s population, increases in drug prices may put the affordability of such a government safety net system into question.
Implementation of stricter IPR regulation in India will result in price increases of generic drugs that treat heart disease and cancer, as well as managing AIDS. As things stand, the Indian government negotiators will not go beyond domestic law and agreements signed with the WTO. With respect to taking a stricter stance on IPRs, the Europeans want data exclusivity to be part of the FTA. When a drug manufacturer, both name brand and generic, wants to introduce a drug to the market, the company needs to show clinical data that this drug is safe for public consumption. After patents expire generic drug makers use the same clinical data submitted by name brand drug manufacturers to show that their generic drugs are safe for consumption.
Data exclusivity on drugs means that the clinical safety data submitted for approval of a drug belongs exclusively to the company that submits this data. Thus with data exclusivity rules in place, after a patent of a name brand drug expires, generic drug makers will not be able to use clinical trials associated with that drug and patent to prove that the drug’s generic version is safe for consumption. Why does that matter? Generic drug makers will need to conduct their own clinical trials, which take time, labor and expense. Therefore data exclusivity rules will delay genetic medicines from entering the market. The extra expense of clinical trials the manufacturer will pass on to consumers. Additionally, if data exclusivity regulations are put in place in India, generic drugs currently produced by Indian firms will technically become illegal, since no clinical data was previously submitted, putting further stress on consumers that depend on those medicines.
Banking and Insurance Industries
The EU negotiators also want access to Indian banking and insurance sectors. Since initial market liberalizations of the early 1990s, India’s economy grew at a healthy clip. In 2010 the Indian economy grew by 10.4%. With business booming and growth opportunities opening up every day, the banking and insurance sectors stand at the center of India’s economic growth. Start-up companies need seed money and loans, new entrants into the middle class want loans to purchase housing and other consumer goods, while other people with new disposable income think about extra financing for their children’s school fees and wedding expenses. Owners of new businesses, housing, cars and consumer goods want to insure their properties, thus it follows that demand for insurance products will also grow in this thriving economy.
Access to these growing industries in India will help the Europeans grow their own economy, as they can provide expert financial and insurance services for the growing Indian economy. If India opens up its banking and insurance to the EU opportunities for the Europeans abound. However, India has been very careful about opening its markets, careful at calibrating local employment and industrial demands while taking advantage of opportunities offered by foreign investments and experts. Currently, foreign firms such as large supermarket chains and furniture stores have had no success in accessing local retail markets.
As any trade agreement, the India – EU FTA will bring tremendous growth opportunities for both the Europeans and Indians, however as any economic policy the agreement will also negatively affect the livelihoods of people in both countries. With that said, the estimated benefit for both partners of this FTA amounts to a boost of 160 billion Euros by 2015, a sizable net gain for society.
Balakrishnan, Reghu “Pharma MNCs take JV route for India” The Business Standard. 17 April 2011 <http://www.business-standard.com/india/news/pharma-mncs-take-jv-route-for-india/432494/>
“Singh favours strict rules for drug trade” The Telegraph. 1 May 2011. <http://www.telegraphindia.com/1110501/jsp/business/story_13925562.jsp#>
Srivastava, Shruti “India-EU FTA likely by end of June, says commerce secy” Indian Express.com. 5 May 2011 <http://www.indianexpress.com/news/India-EU-FTA-likely-by-end-of-June--says-commerce-secy/786075/>
“The Arab spring’s chill winds” The Economist. 23 April 2011 <http://www.economist.com/node/18587630?story_id=18587630>
“Will free trade prevail?” Pharmaceutical Technology Europe; Apr2011, Vol. 23 Issue 4, p8-8, 2/3p