Tuesday, December 10, 2013

Trade And IP Protection

From the East Asia Forum (excerpt):

Trade held hostage to IP — it’s anti-development
Philippa Dee, ANU

Now that the intellectual property chapter of the Trans-Pacific Partnership has been leaked, our worst fears are confirmed — IP in TPP is OTT.

This would be bad enough on its own. What is less well recognised is that the trade liberalisation agenda is being held hostage to the IP agenda, and the result is inimical to development.

Intellectual property rights protection, as introduced into the last two Rounds of WTO negotiations, no longer guarantees that under a cooperative settlement everyone will be made better off….

…Arguably it is better for the world as a whole to have some IP protection, rather than none. But in my view it is highly unlikely that the TRIPS-plus provisions being pushed since will lead to global gains.

These TRIPS-plus measures are only a little bit concerned with providing additional incentives for new IP to be created that might not be otherwise. They are greatly concerned with expanding the ongoing transfers of economic rents from the consumers to the producers of IP that already exists (and hence needs no further incentives)….

As a general rule, I support free trade proposals. Unfortunately, some aspects of regional trade agreements are harder to justify, and this is one of them.

IP protection (e.g. copyrights, trademarks, patents) is essentially a time-limited guarantee of monopoly rights over ideas, works or creations. As with any such rights, consumers will suffer from legally proscribed choices and higher prices during the period the protection is active. The economic rationale for what appears to be a welfare reducing measure is fairly straight forward – without such rights, those ideas, works or creations would never exist in the first place.

IP rights therefore have a straightforward cost-benefit analysis – does the present value of the total future benefit to society from having such works, exceed the loss in consumer surplus during period IP rights are enforced? For the most part the answer is yes, even if for many creative works the monetary value is hard to gauge. What’s the value of a Rembrandt or a Warhol, for example. For others its a little easier to quantify – what would be the value for cure for AIDS?

But when we’re looking at the inclusion of IP rights into free trade agreements, the cost-benefit analysis has an extra layer of complexity, because most countries participating in free trade agreements already have IP rights protection.

We are therefore no longer looking at a yes/no question of whether works, creations, or R&D are pursued. We’re having to evaluate such rights at the margin – does the inclusion of additional IP rights protection induce greater production of intellectual property?

For individual IP rights holders, the answer is probably no. I don’t think there is a good argument for extending IP rights protection beyond the natural life-span of a human being. For corporate holders, the answer is a qualified yes – since extending IP rights increases the present value of the yield from collecting monopoly rents, there is an incentive to produce more.

However, such extensions also increase the welfare cost to society as a whole. What it boils down to is this: extending IP rights only make sense if the additional cost to society is less than the benefits accruing from greater innovation, creativity, and new products. Considering existing IP rights protection, that’s unlikely unless you’re starting from ground zero.

Emphasising enforcement of existing laws would probably be more beneficial, as extension or not, that’s what really matters. That would also be fairer to those countries which already enforce adequate IP rights protection, versus countries that don’t. Extending IP rights protection effectively penalises countries who play by the rules, because they will be the ones who will bear most of the welfare cost in any such agreement, while at the same time providing an incentive to those countries who won’t.


  1. Dear Hisham

    Another viewpoint on free trade and innovation: since free trade means less income for importing countries with many IP producers (eg America) in form of less import duty, it may lead to decrease in funding for R&D and innovation (eg decrease in government grant for medical research).

    Also, the flood of cheaper copied works (eg HTC Android phone) will be a negative on R&D for the affected IP holding companies (e.g Apple cope with less sales or bitter legal actions on global fronts by diverting funds away from R&D to marketing and legal fees)

    bearing those situations in mind, there is a rationale to tie free trade with additional IP protection.

    as for issue of extra welfare cost which I can only agree with price for medicines and medical equipments. perhaps it is more poignant to relook how the richest nations in the world aid the less fortunate. although whether we should tie in protection for the poor inside free trade agreement (eg more aid for countries to protect the poor and vulnerable) is the right thing to do, I dunno.

  2. It's not a straightforward argument, Hisham.

    Why would MNCs or SMEs want to invest in R&D, when the fruits of their labour are open to being mined by all, including those whose R&D expertise and funding is zilch?

    The prevailing argument of these "closet" socialists is that you go ahead and produce and I will get a free piggyback ride on the fruits of your labour.

    That is crappy logic, whichever way you look at it.

    1. @anon 3.06

      ...which is why I wrote:

      "Emphasising enforcement of existing laws would probably be more beneficial, as extension or not, that’s what really matters."

      In the absence of enforcement, extension of IP rights are toothless.

      In the presence of enforcement, IP rights are subject to conventional cost benefit analysis.

      Your argument is purely on the basis of ground zero - zero laws, and zero enforcement - in which case you are absolutely right.

      My argument in the post above is at the margin.

  3. You might have used too many words to say...

    marginal social benefit = marginal private cost


    1. @Jason

      And if I said that, how many people would grasp what I was trying to say? :D

  4. As someone with a background in IP in a jurisdiction which introduced TRIPS+ IP protections as a result of a US FTA, here's what I think:-

    1. You are absolutely correct that there is little immediate benefit in increasing rights without improving the enforcement of rights. However, do consider that from a political perspective it is easier to extend rights in an environment of lax enforcement, as extending rights in an environment of high enforcement would lead to a larger public backlash. Increasing enforcement later down the line would have the public seeing TRIPS+ protections as being the status quo, and not new law.

    2. You are also correct that, analysed on its own, it is difficult to argue one way or another that current rights provide insufficient incentives to IP producers. Academic posturing aside, the measurement of the benefit of new IP rights on the margin cannot be done. Nevertheless, although free trade is not zero sum, do consider that exporters of physical goods (i.e. most of the developing/newly industrialized world) benefit more than importers from free trade. Viewed from the US' perspective as primarily an importer of physical goods and an exporter of IP, extending IP rights could be justified as simple quid pro quo for relaxing trade restrictions.

    3. Unless proof of bribery or corruption is produced, we should assume that negotiations are at arms length and are purely in the self-interest of each negotiating country. As mentioned earlier, free trade is not zero sum. The extension of IP rights should therefore not be viewed in isolation, even if on their own they are unjustified. The debate should be on whether we are getting enough benefits from the TPPA to offset the harmful effects from the extension of IP protections.

    Note: I disagree with your argument that individuals do not need IP protections lasting beyond their natural life span. Many individuals assign their works or intend for them to be inherited. Purchasers of IP rights need some guarantee that their IP won't just disappear instantly when the 80 year old creator gets a heart attack.

    1. @anon

      Some good points here, though I have to disagree overall with both points 2 and 3.

      "...do consider that exporters of physical goods (i.e. most of the developing/newly industrialized world) benefit more than importers from free trade"

      This statement makes zero economic sense. The whole point of free trade is that both parties benefit, via producing based on their respective comparative advantages, a principle that has been accepted and proven over the past two centuries. The viewpoint that only exports are "good" is pure 18th century mercantilism.

      But if the basis of the argument for point 2 is false, so is the argument for point 3.

      On the last item, my thinking is that 80 years is a good practical limit, not that IP rights should be deprecated when the creator dies. The moral arguments for extending rights beyond that is however pretty weak.

    2. I agree that both parties benefit, which is why I said that free trade is not zero sum. Nevertheless, my argument is on two fronts, which is that:-
      1) All countries would benefit from free trade in the long run, but a developing, exporting country derives more IMMEDIATE benefit than an importing country, because it is already exporting based on its existing industries. On the other hand, an importing country whose local industries get killed by cheaper imports needs to restructure first in order to find a comparative advantage elsewhere, and this may be a politically painful process. Also, while both parties to an FTA always stand to benefit, the benefit does not always accrue to both parties equally considering the size of respective markets. IMHO these factors are being used by the US to extract concessions.
      2) The idea that each country should benefit based on their comparative advantages is undeniable, but the US' has found its comparative advantage in producing IP. How can the US properly reap the benefits of its comparative advantage if its IP is stolen (or less valuable perhaps) in IP importing nations?

      I agree that 80 years seems like plenty for copyright, and I misinterpreted what you meant by natural lifespan, but consider the following:-
      1) Unlike for patents, copyright only protects the expression, not the idea. You are free to copy all the ideas and inventions in a work as long as you do not copy too closely the prose, plot and style. You can write your own book about an orphaned boy wizard who gets transported to a magical world and JK Rowling can't touch you unless you call him something like Larry Trotter.
      2) Unlike for patents, there is usually no necessity to copy anything except for selfish purposes. Most valuable copyright are for artistic or entertainment products anyway, which are not necessities but rather luxuries. (e.g. I do not want to pay for that song). Where there is a good reason to copy, the proper response is to slot that reason under a fair use / fair dealing exception.
      3) Copyright does not prohibit independent creation which resembles the original work, unlike patents. Copyright infringement only occurs if there is proof of outright "copying", which is plenty morally reprehensible.
      4) Designs for industrial use are not protected by copyright, and are only granted around 10+ years protection at most.

      With all the restrictions on copyright, there really isn't any moral reason to allow copying either. :P

    3. @anon

      Again, you're proceeding from a false premise, in this case that exports necessarily reflect comparative advantage, which is not necessarily true. Trade liberalisation might equally have negative effects on exporters, not just importers.

      In any case, focusing on the production side is only half the story. Consumers on both sides benefit immediately from lower prices and greater choice.

      Second, the presence of a deficit or surplus in the trade balance does not imply lack of exports or imports, or say anything about comparative advantage:


      The US is running a monthly trade deficit of about US$40b this year. Out of that US$60b is the goods deficit, and US$20b is the services surplus. But goods exports are also averaging US$130b a month. It's not as if the US lacks export sectors of its own.

      A related point is that the data shows net income flows from IP (royalties and license fees) are relatively minor - a matter of US$10b inflow a month less US$3b outflow a month, for a surplus of just US$7b a month.

      This probably understates the true situation, as many IP rights holders (e.g. Apple) do not repatriate income back to the US for tax reasons. But that brings to question US motives for pushing for greater IP protection, since the country does not really benefit in terms of jobs, income or tax revenue.

    4. BTW, good info on the copyright stuff, thank you