Should the U.S. ban re-importation of medicines produced by U.S. manufacturers and then sold in other countries? This issue has arisen again as part of the health care debate, and it does not have an obvious answer.

The problem is that price controls on pharmaceuticals in countries like Canada cause prices for some drugs to be much lower abroad.  The difference is often large enough to generate a substantial incentive for re-importation.  This lowers profits for the U.S. manufacturer and reduces the incentive to develop new drugs.

If patent protection is important for innovation, then it seems to make sense to ban re-importation given the price controls imposed by other countries.

Yet I think the situation is more complicated.

First, the pratical issues involved in banning re-important are daunting.  To reduce the flow materially, the U.S. would have to ramp up scrutiny at border crossings and inspect a substantial fraction of packages delivered across borders.  More broadly, any attempt to impede trade in one product is likely to inhibit trade more generally.

Second, drug companies can reduce the risk of re-importation by refusing to sell their products in countries that insist on excessively low prices.

My hunch, therefore, is that U.S. policy should enforce patent protection within our borders, but if patent owners sell their products overseas, they assume the risks of re-importation.  I make no claim this policy is "optimal," but I suspect it is better than the alternative.

This position is even more compelling if in fact patent protection is not necessary to generate a reasonable amount of innovation.  David Levine at Washington University makes exactly this argument.   I am not yet convinced David is right, but he raises good objections to the claim that patent protection is benefical overall.