In April 2018, the Trump administration accused 36 countries of insufficiently protecting US intellectual property rights. One seemingly unlikely addition to the US Trade Representative’s (USTR) ‘priority watch list’ – joining the likes of China and the UAE - was Canada.

Joining the bench

This is the first time Canada has been on this list, whereas China has occupied it for 14 years. Recent tariffs imposed on China – across 1,300 goods with an estimated value of $34 billion – reveal just how serious the situation could now be for Canada.

With the decision to move Canada from the lower-level watch list, the US has made a clear statement that it perceives the country as a threat to its innovation. Canada’s alleged poor border control and low pharmaceutical prices have been cited as the US’ main concerns. US pharmaceutical companies have long complained that generic versions of drugs protected by US trademarks and patents are imported from Canada at cheaper prices.

Easy medicine

Prices for new patented drugs are set by Canada’s Patented Medicine Prices Review Board. The agency was set up to protect Canadians from excessive drug prices, and the board sets prices against a basket of reference countries that does not only take the US into account.  As a result, many brand-name drugs are much cheaper in Canada than in America. 

The US/Canada border is more than 5,000 miles long and most of this is unprotected.  The risk of these drugs returning into the US in volume and at a lower cost is considerable.  This could hurt US pharmaceutical companies that have invested in creating expensive new treatments and expect to be rewarded for doing so. It is easy to see why this might bother the US government. 

Canada essentially has two possible routes to respond to the US – strengthen its borders to combat the risk of drugs moving to the US, or engage in a similar tariff war as the US and China are currently embroiled in. The country may find that the first solution is impossible and the second is unpalatable. Canada is the second largest trading partner for the US – beaten only by China.  Yet, according to the US Census Bureau, Canada exports $18 billion more to the US than vice versa.  Any kind of trade war with the US will hurt both countries but on balance Canada probably has more to lose. 

Ultimately Canada may need to weigh its desire to provide low cost drugs to its people against the demands of US pharmaceutical companies and increasingly the US Government. What is certain is that the country will not wish to remain on a trading watch list with its closest neighbour for long.