The PBS and Understanding American Tariffs

Trump is naming today Liberation Day as he tries to rectify some of the imbalances that have occurred in the world that the US believes it has been unfairly burdened with – perhaps rightly. What the US at this point is failing to recognise is the huge financial benefit they have gained from being the world reserve currency and the imbalance this has created since achieving reserve status globally, allowing for the creation and strengthening of deep financial markets that arguably became stronger due to the reserve status. By having this depth, US businesses have gained value and access to capital, strengthening innovation and creating strong competitive advantages.

If the world wants to compete with this advantage the only option is to move away from the US dollar and invest in our own innovation and our own companies, and stop relying on the US to cover for the world. Looking at the PBS and the pharmaceutical industry in Australia we are relying too much on US innovation, research, and development. This undercuts their return on investment which may explain why Australia is being specifically targeted by the US.

What is the PBS?

The Pharmaceutical Benefits Scheme or PBS originated under the Pharmaceutical Benefits Act 1944 under the preceding Curtin Labor government. It faced significant opposition from the Medical Association at the time – seeing it ruled unconstitutional in 1945 due to limitations of Commonwealth powers. In 1946, a referendum was held to allow for constitutional change to the Constitution granting the Commonwealth the authority to provide pharmaceutical benefits. Following this, the Pharmaceutical Benefits Act 1947 was passed, marking the formal establishment of the PBS. The scheme began in a limited capacity and has expanded over time. The most significant change was probably under the Howard Government, led by Health Minister Tony Abbott, which saw the practice of negotiating directly with pharmaceutical companies. By directly negotiating with pharmaceutical companies Australians have enjoyed some of the cheapest drugs in the world – with other countries including Canada and Japan following our lead. 

This has led to a distortion in the market whereby the US, which accounts for 45% of pharma revenue despite having only 4% of the world’s population, bears disproportionate costs. Drugs like Ozempic cost around US$1,000 per month, whereas in Australia they cost around US$200 per month.

The PBS and Why it’s Being Targeted

Like it or hate it, innovation costs money and in the US innovation in medicine and pharmaceuticals is a booming industry, in Australia it’s a shell of what it once was. Due to the investment of companies in the US innovation and introduction of new drugs need a return on investment for them to come to market.

Pharmaceutical companies in the US assume no returns from Australia, with huge returns in the US. Basically, the US is subsidising Australian drugs by paying more for the same drugs. In Australia we always hear about the high cost of medicine in the US due to the deregulation of the health industry – this is why. It’s understandable why many Americans feel frustrated at countries like Australia paying much less for drugs which they appear to be funding due to our PBS scheme.

In order to bring innovation and development into any market there needs to be demand and return. 

Australia’s Reaction

The Albanese Government has hit back at the threat of tariffs saying

'I have very clearly indicated Australia is not negotiating over the Pharmaceutical Benefits Scheme. We are not negotiating over the news bargaining code. We will not undermine our biosecurity.' 

With one of his key commitments this election being to slash the maximum cost of prescription medicine to AU$25 for non-concession customers, could this be another undeliverable promise like the last election’s electricity price promise?

Unfair to Many

The trade tariffs seem unfair in Australia, especially as an ally we have relied on for so long, it feels as though they are turning on Australia. Ultimately if it wasn’t Trump it would have been a President in the not-too-distant future, World War II ended 80 years ago – alliances were bound to shift, especially under the unelected bureaucratic machine the world has turned into leaving the masses feeling helpless and unheard. Understanding why Americans are unhappy with their current deal goes a long way in understanding why Trump is pushing for tariffs. Imagine not being able to afford lifesaving drugs while other countries can buy the same drugs sold more cheaply by our own national companies. But missing how trade imbalances have occurred due to the world reliance on the USD allowing for an enormous competitive advantage for 60 years prompting a faster global shift away from the USD as nations prioritise domestic resilience. The process is just going to be very bumpy from here. As global confidence in the US dollar wanes and nations pivot toward self-reliance, gold and silver stand to benefit as enduring, non-sovereign stores of value in an increasingly uncertain economic landscape.