As food and oil prices rocket all over the world, consumers are getting a crash course in economics:  when demand increases, prices increase.  Although food and oil dominate the headlines, life’s other essentials also obey this cast-iron law, including healthcare, which is threatening to bust government budgets all over the world. 

As with food, part of the solution lies in opening up trade and competition.

The OECD estimates that world average healthcare expenditure in 2007 accounted for 9% of GDP, up from just over 5% in 1970. 

The US now spends more than $2 trillion per year on healthcare, eight times the amount in 1980. US healthcare costs are currently increasing by twice general inflation, a general trend in rich countries.

As populations grow older and more demanding, these inflationary pressures will increase.  Politicians are finding cashed-strapped voters increasingly unwilling to stump up the large amounts of tax needed to fund government health systems, forcing them to deny treatments to patients in a bid to constrain costs.

In the USA, healthcare costs have become a major issue in the presidential election. The last decade, by contrast, has seen very low inflation for other goods, partly because of a massive increase in global trade. 

The arrival of China and India as major new exporters has meant that most countries have been able to import goods cheaply, keeping prices down.

While the role of free trade in driving down prices and driving up quality has long been accepted by economists (and, to an extent, politicians), healthcare has been one area in which there has been almost no international trade.  It is time for this to change.

Communications technology makes it increasingly easy for hospitals to outsource services such as diagnostics to laboratories overseas, cutting costs and treatment time.

Patients can also get treatment overseas where costs are lower.  Open-heart surgery in India, for instance, costs only one sixth of the price in the USA, including travel, accommodation and medicines.  A hip can be replaced in Thailand for only one eighth of the cost in the United Kingdom. 

If only 10% of US patients went abroad for 15 types of treatment, US patients and insurance companies could save $1.5bn a year, including travel costs.

Patients are already voting with their feet:  in 2006 alone, Singapore treated 500,000 foreign patients, India treated 600,000 and Thailand around 1.2 million.  Other favourite destinations include Malaysia, South Africa and Cuba.

While the benefits of free trade in health are clear for rich countries, developing countries also stand to gain.  Most obviously, there are opportunities for much-needed investment of foreign capital.  Medical tourism alone could bring India as much as $2.2 billion per year by 2012, according to a study by management consultants McKinsey and the Confederation of Indian Industry.

These financial opportunities would also give developing countries’ medical staff a far greater incentive to remain at home, reducing the debilitating "brain drain.” 

As more money came into the health sector, some of the burden on government healthcare would be removed.

Despite the significant benefits, only two developed countries have ratified a World Trade Organization agreement on trade in healthcare--Iceland and Norway.

While developing countries such as Gambia, Jamaica, Malawi and South Africa are prepared to liberalise, wealthier countries seem bent on protectionism.

This reluctance is largely down to lobbying by interest groups in developed countries. Public sector unions seek to protect their members and industries from foreign competition. 

Activist NGOs ideologically oppose trade in healthcare, claiming that only governments can ensure "equity” and "universal” treatment--although public healthcare in most of the world fails patients miserably.

This is a massive wasted opportunity.  Free trade in healthcare could help rich countries keep the lid on healthcare inflation while helping poorer countries attract investment and skills and retain valuable medical professionals.

For this to happen, developed countries must encourage insurers to cover overseas treatment and open up their medical sectors to international competition. 

Developing countries need to standardise their qualification and licensing requirements in order to attract customers and improve skills.

Healthcare doesn’t have to go the same way as food prices.  Rich and poor countries should ignore the siren calls of protectionism and liberalise their healthcare for the good of patients everywhere.  Health tourism can be healthy for everyone.

Fredrik Erixon is Director and Lucy Davis a Trade Policy Analyst of the Europe Centre for International Political Economy (ECIPE), a world-economy think-tank based in Brussels