There is nothing Canadians cherish more than a chance to criticise their larger neighbour to the south. Sometimes the Canadian lust for one-upmanship is so great that it brings to mind the Mastercard ad campaign: "A chance to feel superior to the US? Priceless".

Still, it is not always easy living next door to the US, especially during a presidential campaign. Consider what this week is becoming campaign theme number one: the reimportation of US-made drugs from Canada. This idea is hard to grasp, especially as policy: US citizens buy drugs from Canada that were mostly made in the US to start with. Nonetheless, John Kerry is pushing for it. Republicans like it. And the positions they take will determine the future of one of the centrepieces of Canada's "I'm different" culture: its subsidised healthcare.

This is a story that starts with Canada and its decision to set itself two challenging goals. The first is to be a market-based country. The second is to be a social welfare state. Reconciling these goals is nearly impossible, as recent experience in Europe has shown. But Canada persists. One reason it does so is the aforementioned desire to set itself apart from the big, selfish, free-market US.

Nowhere is the Canadian difference more stark than in the area of health. The US relies on the private sector to insure its workforce; it provides a healthcare programme for the elderly, Medicare, but until recently there was no drug coverage for that age group. Canada rejects the market solution, following Britain and serving citizens with publicly funded doctors and hospitals.

On drugs, Canada has sought to balance a respect for patents and property (its capitalist side) with its desire for low prices and its dislike for pharmaceutical companies, which it views as price gougers.

Ottawa's thuggish compromise is to demand a lower price point from drug manufacturers for the Canadian market - and to threaten to strip away patent protection if the manufacturers don't give them those prices.

The drug companies, many American, have lived with this. After all, Canada accounts for only 2 per cent of the global drug market, compared with 37 per cent for the US. The whole arrangement - the healthcare, the drugs and the compromises - has meant enormous costs for Canada. Relatively few Canadians choose to become doctors and, of those who do, a significant number emigrate. Canada has fewer doctors per capita than Germany, Belgium, France, the UK and Poland. Modern technology is too expensive for the public sector, so Canadians have access to fewer MRI machines and CT scanners than citizens of many other developed nations including Germany and France. Waiting lists for treatments by specialists average 18 weeks.* In the drug department, innovation has slowed.

Still, people cling to their illusions and Canada might have done so forever but for granny - US granny, that is. American senior citizens discovered that Canadian drugs were cheaper and began travelling over the border by Greyhound bus to purchase them. With the rise of the internet, suddenly Americans were ordering drugs from Canadian vendors by the thousands.

A consumerite media covered this as a free-market choice, rarely mentioning why Canadian drugs are cheaper. That was disingenuous: engaging in opportunistic arbitrage that exploits a price-control regime is different from buying on a truly free market. But politics nearly always trumps economics, and cheap drugs from Canada is proving a winning idea. Mayors from US towns and state governors are striking individual deals to buy cheaper drugs in Canada.

On Thursday, in a speech delivered in Evanston, Illinois (a town more Canadian than American in its culture), Mr Kerry assailed George W. Bush, saying that the president "stubbornly refuses to allow the importation of drugs while the prices are going steadily up".

And now even the Bush administration appears to be succumbing. Mark McClellan, who heads the Food and Drug Administration, last week softened his formerly iron opposition to reimports. Suddenly the possibility that the US might pass national legislation to formalise reimports becomes real.

Of course, the moment reimportation dents their all-important US market, the drug companies will simply stop giving Canada lower prices. Canada will then face a choice. Accept the higher prices (yet another challenge to its social commitment) or weaken patent law - not a good thing for a modern market-oriented country to do - and sell generics and copycats.

A happy free-market observer might once have theorised that the first choice, the higher prices for Canada, would be a good thing in the long run, ending Canadian free-riding and promoting innovation.

But that argument became hard to make as of last year, when the US Congress - again, with elections in view - passed its own law creating a new Canadian-style entitlement for the elderly: government-funded drugs. In other words, the US is putting unprecedented pressure on the Canadian system even as it is moving to emulate that system. On this one at least, you have to feel for the Canadians: they live with the consequences of Bush v Kerry, but they don't get to vote on them.

* Fraser Institute, Canada (www.fraserinstitute.ca)

© Copyright 2004 Financial Times