Drugs Like Defense. Trump Wants to Rebalance, and He's Not Entirely Wrong

After retreating on tariffs and suspending the trade war with China for three months, Donald Trump has opened another front – this time internal – with Big Pharma . “I am doing it against the most powerful lobby in the world: the pharmaceutical one”. On Monday, the President of the United States signed an executive order that, in his intentions, will lead to a reduction in the price of drugs of up to 90%: “Starting today, the United States will no longer subsidize health care in foreign countries”.

According to the White House analysis, the United States represents less than 5% of the global population and yet finances about 75% of global pharmaceutical profits : a strong imbalance due to the fact that pharmaceutical companies apply very low prices in the rest of the world offsetting them with much higher prices in the United States: "We are essentially subsidizing socialism abroad with skyrocketing prices at home," Trump said. And, therefore, his executive order provides for a reduction in prices through the application of the principle of the "Most Favored Nation" (MFN ): "We will pay the lowest price in the world," he said. "Whoever pays the lowest price, that's the price we will pay." The government will set a price target for drugs in the next 30 days aligned with the lowest price of developed nations and, if pharmaceutical companies do not comply, federal agencies will take a series of enforcement actions and authorize imports from countries where drugs cost less.

The first somewhat paradoxical aspect of Trump's measure is that, in order to reduce prices, he threatens to do the exact opposite of his protectionist policy: he applies the most favored nation clause, which is the principle underlying the WTO and the reduction of barriers to international trade; he opens up to imports from countries where prices are lower to force domestic industry to lower its profit margins; in fact, he exempted the pharmaceutical sector from the Liberation Day duties.

The pharmaceutical industry, of course, is opposed, arguing that such measures will negatively impact the ability to discover and develop new treatments. Trump's executive order, which appears a bit confusing, also has implementation problems: Already during his first term, Trump's attempts to reduce pharmaceutical spending failed both in Congress (where Republicans rejected the idea of ​​the MFN clause) and in court, when judges struck down a similar measure in the final days of his term.

As much as Trump's measure may prove ineffective or even harmful, the problem of drug prices in the US is real and is inflating the spending of the federal health programs Medicare and Medicaid. And it is an issue that has historically been felt more by the Democrats than the Republicans. The Biden Administration , with the Inflation Reduction Act , had already introduced a negotiation mechanism with pharmaceutical companies for access to Medicare with the aim of reducing prices. The tool introduced by Biden is another lever that Trump will be able to use with Big Pharma, together with other tools such as tariffs and the ability of the federal administration to authorize drugs or block mergers and acquisitions. It is therefore likely that, as happened with the tariffs, the final outcome will be an agreement with pharmaceutical companies that will not have the devastating effects on the market, investments and research that the executive order just signed could produce.

But this could have unpleasant consequences for Europe: prices could rise here. Because Trump's seemingly bizarre claim that the US subsidizes Europe's lower prices is not far from the truth. According to recent studies, average prescription drug prices in the US are 250% higher than in the 32 OECD countries. Spending on research is also higher in America: According to a recent OECD report, public spending on health research is 0.21% of GDP in the US, 0.07% in Europe, and 0.04% in the rest of the OECD.

This means that the United States actually subsidizes the global pharmaceutical market. Economists Kate Ho (Princeton) and Ariel Pakes (Harvard) have tried to measure this implicit subsidy. Assuming the same global turnover of pharmaceutical companies (also because a decrease would lead to a reduction in investment in research and development, with harmful effects for humanity), the two economists have set a single international price for the main drugs. And they asked themselves how prices in individual countries would move with respect to this reference price. The results are clear: the United States would pay on average 54% less than now, while all other countries would spend from 28% (Canada) to 225% (South Korea) more than the current price. Italy is at the top of the list: it would spend 163% more.

Although Trump's executive order on pharmaceutical spending seems to be an internal issue, it has repercussions on the rest of the world. And especially on Europe. In some ways, it is a situation analogous to the request to increase military spending: America is by far the country that spends the most in NATO, while Europe has benefited from the Atlantic Alliance's security guarantees while paying much less. The United States - whether governed by Trump or by the Democrats, each in its own way - is now telling Europe that it must rebalance the burden: they no longer want to bear the cost of "common goods" alone, be they defense or pharmaceutical spending.

More on these topics: