Living standards in the United States increasingly depend on the competitiveness of industries that compete internationally, particularly those that succeed by producing new innovations. The life-science sector, which includes pharmaceuticals, biotechnology, and medical devices, is one of those industries. It is also an American success story: Our country captures more than 40 percent of the world’s major patents in both pharmaceuticals and medical devices. But as I describe in a new report written for the Information Technology and Innovation Foundation, the continued health of the U.S. life-sciences sector is at risk because a growing number of foreign competitors are making determined efforts to gain global market share, often using unfair tactics.
The importance of the life-science sector for the U.S. economy is difficult to overstate. It employs more than 1.2 million U.S. workers, with average wages ranging from $124,400 in pharmaceuticals to $86,200 in medical devices. And unlike U.S. manufacturing, where the number of jobs has fallen over the last 15 years, the number of life-science jobs has been steadily growing.
U.S. pharmaceutical firms invest more in research and development as a share of value added — 43.8 percent — than any other industry. In fact, they invest a higher share than any other nation in the world, accounting for more than half of all private-sector pharmaceutical research and development among countries in the Organization for Economic Co-operation and Development. This is one reason the American life-sciences sector is highly competitive, and helps explain why the U.S. is home to the most company headquarters and its researchers develop the most new drugs and devices.
But other countries, including China, Ireland, Singapore, India, and the United Kingdom, are quickly gaining ground. They are doing so with policies aimed at increasing the competitiveness of their life-sciences industries. Some of these efforts, such as greater investment in research and better intellectual property protection, benefit the cause of life-sciences innovation globally. But other policies harm both the global quest for innovation in drugs and devices and the U.S. economy.
India and several other countries, for example, maintain high tariffs on some medical devices. Exporters to China must deal with regulatory delays, routine violations of intellectual property rights, and rampant counterfeiting. Perhaps more surprising, the International Trade Administration recently concluded that pharmaceutical innovations have effectively become un-patentable in Canada. These practices and more hurt U.S. companies by closing off export markets.
The trend is one reason why the U.S. trade deficit in life sciences has been growing. In pharmaceuticals, the United States ran a deficit last year of $56.2 billion; in medical devices it was more than $4 billion. A compounding factor has been the widespread practice of governments around the world to use their monopsony power to negotiate artificially low prices. Because some revenue is better than no revenue, U.S. companies have little choice but to accept these deals. But the forced discounting drives down export values, which drives up the U.S. trade deficit.
This manipulation of the trading system could be responsible for around 40 percent of the pharmaceutical industry’s trade deficit. Moreover, by not paying U.S. firms for the full cost of the drugs that they use, other nations are dramatically slowing the global pace of life-sciences innovation, because lower revenues limit the industry’s ability to conduct the research necessary to discover the next round of new treatments.
Any effective U.S. life-sciences innovation policy needs to make leveling the global playing field a top priority. This means taking more forceful action to address unfair trade practices that harm the industry and the jobs it supports. Here are three good places to start:
- Penalize nations that engage in life-sciences mercantilism by removing them from the Generalized System of Preferences, which eliminates duties on thousands of products entering the United States from 120 countries and territories.
- Ensure the existence of strong intellectual property protections for life-science products, including biological drugs, in all new or renegotiated trade agreements.
- Increase pressure on foreign nations to stop free riding on the United States when it comes to life sciences and innovation by increasing payments for drugs.
Better trade policy, while necessary, won’t be sufficient to preserve the competitiveness of America’s life-science industries. We need stronger policies at home, too.
The White House should establish an interagency life-sciences competitiveness council to ensure that all agencies, including the National Institutes of Health, the Food and Drug Administration, the United States Trade Representative, and the Department of Health and Human Services, take U.S. life-sciences competitiveness issues into consideration in everything they do. These efforts could include negotiating lower trade barriers, streamlining regulations, and more effectively spurring the commercialization of federal research.
Further tax reform is also needed, as the recent tax reform bill was a mixed bag for the life-sciences sector. On one hand, it lowered the corporate tax rate and moved away from applying the U.S. tax rate to worldwide income. On the other hand, it diminished the research and development tax credit and reduced the orphan drug tax credit, which gave companies a 50 percent tax credit for the cost of developing drugs for rare conditions.
Because the industry depends on scientists and skilled technicians to produce the innovations that serve as its life’s blood, there needs to be a serious effort to expand and improve the country’s science, technology, engineering, and mathematics (STEM) workforce. Congress also needs to expand NIH funding which, at the beginning of 2018, was still $11.6 billion below its 2003 level as a share of the country’s gross domestic product.
Finally, Congress needs to pass policies that slow the steady rise in the cost of health care so companies, including startups, have confidence in their ability to recover development costs. Without reforms that increase the efficiency of the health care markets, government and private companies will have an increasingly difficult time affording current benefits, let alone new treatments. There should be no doubt that aggressive policies to impose price controls on drugs will mean less life-sciences R&D, fewer new drugs, and reduced U.S. competitiveness.
After two decades of tough global competition, the U.S. has lost capacity in many core industries. It would be a tragedy if it lost its advantage in the life sciences, too, given the sector’s importance to the U.S. economy.
Joe Kennedy is a senior fellow at the Information Technology and Innovation Foundation, where he focuses on economic issues. The institute is hosting an event on Wednesday, May 9, to discuss policies needed to sustain U.S. leadership in the life sciences.