Thursday, November 13, 2008

Economics: From Chemical Statistics

TORONTO, ONTARIO - A rule of thumb often used in Canada is that basically anything in the United States should be about one-tenth as large in Canada, since the population here is about one-tenth of that in the United States. For example, the gross domestic product of the United States in 2007 according to the International Monetary Fund, for example, was USD 13.8 trillion. So, one would expect that Canada's would be about USD 1.38 trillion, and sure enough the actual number was 1.43 trillion. (Canada's population is actually more like 11% of the US, about 33 million versus about 305 million, so actually the per capita GDP in the US was slightly higher than Canada, contrary to what the raw numbers and the one-tenth rule would imply, but they certainly would be considered similar.) So, when comparing raw (as opposed to normalized) figures from the two countries, it is generally assumed that there is a significant difference if the one-tenth rule isn't followed.

It was with this mind-set that I looked at the 7-July-2008 edition of Chemical and Engineering News some time ago which contained their annual "Facts and Figures" on the chemical industry worldwide for the year 2007. There are enough figures in this issue to make anyone's head spin, and the amazing thing is that they make even more available on-line to members of the American Chemical Society. Most of the tables that I chose to look at weren't terribly interesting until I focused on the trade balance tables.

The United States actually ran a surplus in overall chemical trade to the tune of USD 2.8 billion, for the first time since 2001. Canada, which is generally regarded to have a more resource-based economy, actually ran a deficit to the tune of USD 7.3 billion. Since Canada does have a greater tendency to sell raw materials (in this case, mostly petroleum) as opposed to finished products (like paints, fertilizers, and medicines), this was not necessarily surprising, but I wanted to look closer to see exactly what role petroleum might be playing in the figures.

What I found in the sector breakdowns was something I didn't expect to see. The single largest deficit in the US figures was "medicinals and pharmaceuticals" at USD 20.2 billion. That means that the United States imports USD 20 billion more in drugs from other countries than it exports; without that drag, its chemical trade balance would be nearly four times more positive. For Canada, the same largest drag was found--USD 4.9 billion in "medicinals and pharmaceuticals," accounting for more than two-thirds of the deficit. Apply the one-tenth rule, and Canada's deficit should have been about 2 billion--the deficit is actually about twice as large in Canada as it is in the US.

Why would that be? A look through the rest of the statistics revealed that the deficit is not being run with China (which itself has a deficit in "medicinals and pharmaceuticals"), Japan (which is about balanced), or the developing world. While India is a minor factor, the deficit is primarily with Europe. Nearly USD 25 billion more in drugs are entering North America from the European Union than are being sent eastbound across the Atlantic. The Europeans invested in value-added products, and the payoff is seen in the trade figures for the "medicinals and pharmaceuticals" sector.

But what about the difference between Canada and the US? Canada has not gone out of its way to protect brand-name drug manufacturers, instead favoring generic manufacturers. For whatever reason (likely economies of scale in larger markets), the brand-name companies are apparently choosing to manufacture drugs elsewhere and import them into Canada. Blog reader Bruce Millman pointed me to the web site of the Canadian Generic Pharmaceutical Association. While clearly a self-promotional site, some of the figures they tout are pretty telling. Brand-name pharmaceuticals account for CAD 15 billion in sales in Canada, while generic sales amount to only CAD 3.9 billion. However, the CGPA claims to be saving Canadians CAD 2.6 billion. Do the math, and that means that primarily-imported brand-name drugs account for about 70% of the volume of drugs sold and about 80% of the monetary value. With exports of generics from Canada to the US amounting to about CAD 2.6 billion, it's not hard to see that the Canadian deficit in this sector is coming almost exclusively from brand-name imports.

With Canadians paying lower prices for their drugs than their American counterparts as a result of the emphasis on generics, from a consumer perspective, there seems little reason to complain. The savings by encouraging generic drugs result in a trade deficit with respect to brand-name drugs, but overall savings are attained. Basically, a relative efficiency of the single-payer system is masking an underlying trade inequity that may not much matter in the macroeconomic picture.

A little curiosity and application of the one-tenth rule led to recognition of some interesting economic realities, but blog readers are will probably be glad to hear that my curiosity expired after looking at the chemical trade deficits.

Note: This posted was refined shortly after its original posting with additional information courtesy Bruce Millman

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