The government of Manitoba has embarked on an ill-advised industrial policy that will not only put Canadians’ health at risk without improving employment or economic growth in the province, but also violates the principles of free trade as well.

The policy in question is the government’s encouragement of Internet-based, mail-order pharmacies that send lower-priced Canadian prescription drugs to American patients in violation of U.S. law.

A few years ago, American politicians in northern border states figured that an easy way to garner seniors’ votes was to put the voters on buses and take them to Canada to fill their prescriptions at lower prices than they could get at home. These politicians could then stand by the buses and crow that they were protecting American seniors from price-gouging by the multinational pharmaceutical industry.

Entrepreneurial Canadian pharmacists saw that the potential American market for mail-order prescriptions was much larger than just those who could drive across the border, so they started businesses that now sell about $1 billion a year worth of prescriptions to Americans.

Unfortunately, there is one big problem with this business model: the folks who actually make the medicines are absolutely opposed to it. Prescription drugs are priced lower in Canada than the U.S. for a number of reasons. The depreciating Canadian dollar and reduced buying power of Canadians (and our governments, which pay for almost half of the country’s prescriptions) mean that we cannot pay the same prices as our American neighbours. As well, a host of regulations in both countries drives a wedge between relative prices.

Most Americans are either insured or wealthy enough to pay for their prescriptions, but some do struggle to pay. Remarkably, U.S. rules generally prevent drug-makers from selling discounted medicines to these people because they would then have to give the same discounts to government drug plans, which comprise about 21 per cent of the U.S. market. Canada’s international pharmacies carved out a niche providing this discount service. Now, however, some U.S. politicians think that they can impose Canadian prices on all U.S. drug sales. The governor of Illinois is the latest to demand Canadian-priced medicines for his state’s employees. Although the White House is enforcing the law that gives manufacturers the ability to manage their international distribution, the House of Representatives has passed a bill voiding contracts that drug-makers negotiate to ensure that medicines shipped to Canada only end up in Canadian patients’ hands.

So, we should not be surprised that drug companies now realize that this tiny Canadian market (less than two per cent of global pharmaceutical sales) is about to destroy their business in the U.S., which accounts for about 37 per cent of global sales and even more of the profits. A handful of research-based drug-makers have already announced plans to cut off supplies to wholesalers and pharmacies that divert medicines intended for Canadian patients to ones across the border.

Drug manufacturers would normally have no interest in reducing the supply of medicines to Canadian patients. Therefore, good Canadian public policy should ensure that our laws enforce terms-of-sale requiring that medicines sold in Canada be used by Canadian patients. In the absence of such laws, the drug companies will have to err on the side of undersupplying Canada. Each time another American governor or congressman advocates changing the current American law that restricts this ’grey market’, this understandable reaction by the drug-makers becomes more likely.

Furthermore, free trade implies that companies from around the world can compete against each other with minimal government interference. When the Manitoba government interferes with the incentives that motivate the willingness of drug-makers to supply Canada, it violates this principle, now widely accepted as beneficial by Canadians.

Canada already has a shortage of doctors, nurses, and high-tech diagnostic equipment. The last thing we need is a shortage of prescription drugs. For the peoples’ health, the provincial government must change its policy on Internet-based, mail-order pharmacies.