The negotiations over a Canada-European Union trade agreement may be approaching the final stretch as both sides say they plan to wrap up the CETA talks by the end of the year. The parties have apparently reached agreement on roughly 75 per cent of the text, but the last quarter will require significant political compromise.

Canadian negotiators recently advised that there remains a sharp divide over issues such as investment rules, financial services, and taxation. Given the ongoing European financial crisis, these issues are particularly sensitive and will raise questions about how much risk the government is willing to assume in order to strike a deal.

The most contentious issue, however, is likely to be the intellectual property chapter. The revelation that provisions from the Anti-Counterfeiting Trade Agreement may sneak their way into CETA generated widespread headlines throughout Europe last month, with politicians and activists expressing exasperation at the clumsy attempt to secretly revive an agreement that was roundly rejected by the European Parliament.

Pharma fight

The Canadian opposition to the chapter will come from European demands for patent reforms that could result in billions in additional health care costs due to higher pharmaceutical prices. The pharmaceutical demands are one of Europe's top priorities, but Canada has thus far refused to counter the EU proposals, creating a stalemate that has dragged on for years.

Steve Verheul, the lead Canadian negotiator, said earlier this month that the pharmaceutical demands are unlikely to be discussed during the next two rounds of negotiations in September and October. Instead, the issue will be bounced back to cabinet, with the government ultimately making the decision on whether it is prepared to cave to EU demands with the trade agreement hanging in the balance.

The large pharmaceutical companies (known as Rx&D) insist that the reforms will increase research and development investment in Canada, yet past experience suggests that is unlikely to happen.

In the 1980s, the same industry lobbied for patent reforms that provided new rights and longer protections. In return, it promised to increase spending on research and development in Canada so that it would rise to 10 per cent of total sales by 1996. A new report from government's Patented Medicines Prices Review Board shows that not only has that goal not been achieved, but the research and development spending to sales ratio continues a decade-long decline, hitting its lowest level since the 1987 reforms.

According to the report (which is gathered from data supplied by the companies themselves), the research and development to-sales ratio for members of Rx&D was 6.7 per cent in 2011, down from 8.2 per cent in 2010. The Rx&D ratio has now been less than the promised 10 per cent for the past nine consecutive years and is approaching its lowest level since tracking began in 1988. 

Freeze reforms

From a global perspective, Canada fares very poorly, ranking ahead of only Italy as countries such as France, Germany, Sweden, Switzerland, the U.K., and U.S. all enjoy greater expenditures. In fact, the report notes that "several comparator countries, which have patented drug prices that are, on average, substantially less than prices in Canada, have achieved R&D-to-sales ratios well above those in Canada."

Given 25 years of mostly failed targets, the rational approach is to put a freeze on any further reforms at least until the industry lives up to its commitments. But with the agreement shrouded in secrecy -- the government has steadfastly rejected calls to release the draft text -- it appears that the major health care decision will be made behind closed doors with no public discussion, debate, or access to the official text.