Policy Update 081

Role of IPRs in trade policy and global economy

University of Colorado

1. What are IPRs and why are they important?

The phrase Intellectual Property Rights (IPRs) refers to a collection of policies that governments use to try to correct problems in markets for technology and knowledge. There are many problems, but just to summarize the primary ones, the first is if I invent something but I don't have exclusive rights to sell it, someone else might copy it very easily, and that means there is not enough incentive for economies to invent or innovate. And another way of looking at that, and what is more important in my opinion, is that you have to have incentives to put these new products and technologies into markets. What IPRs do is to provide the basis for markets to sell these technologies.

IPRs come in many forms; the primary one is patents. Those are rights given to an inventor of a new technology or a new product to be the exclusive producer, importer and seller of the good or technology for a period of time, typically 20 years. The situation is a little different for pharmaceuticals because of the time it takes to approve marketing of new pharmaceuticals. But patents are the one that we're most familiar with. Copyrights of course provide much longer periods of protection, typically for the life of the author and another 70 or even 100 years. Those are given to the acts of creation, such as movies, recorded music, books or magazines, and there is a very important difference between patent and copyrights. A patent is protection for an idea. If I'm the first to invent the idea and I receive a patent, then no one else can use that idea. A copyright is designed to protect an expression of creation, not an idea. If I take a beautiful photograph of Mount Fuji, I can copyright the photograph but that doesn't mean that I can prevent you from going and taking your own photograph of Mount Fuji. Copyright is much thinner protection which is why it lasts so much longer. But in both cases, the fundamental balance that economies and governments are trying to make is to incentivize the development of new products, but at the same time to encourage those products to be put on to the market, because if they're not put on the market, then resources were wasted for no good reason. The third general kind of IPRs is called trademark: of which there are various kinds. For example brand names and geographical indications are closely related rights. Trademarks protect particular expressions of a company's logo or its name or names of its specific products and services. The reason they exist is because you want to give consumers and users a guarantee of who actually produced the good, or who licensed the good to someone else to produce it. If you didn't have trademarks or various versions of trademarks, then you wouldn't know in a market if a product was legitimate or not. They are extremely important especially in the developing countries who are trying to innovate new products. It's a solution to what we call in economics ‘the lemons problem.’ ‘The lemons problem’ says if you don't know who produced the products, then the bad products will drive out good products. Trademarks are the policy to try to deal with this kind of problem. Then the fourth category, which is not clear if it's an IPR or not, is trade secrets and confidential business information. A trade secret is not an exclusive right and it doesn't last for any particular period of time. It's a secret that you have within your company that you take active steps to keep confidential. But if somebody independently figures it out without cheating or engaging in unfair competition, then you lose the trade secret.

Those are the four main areas and they each exist to address a particular problem related to information and creation in markets. Do they work well? Mostly I think they do. The alternative is to let governments do the invention, the innovation and put things on the market and I think you know it is not often a sensible solution. The real advantage of IPRs is that they're neutral, by which I mean if you're the first, you get it, and if you're not the first, you don't. It is market based competition rather than government-mandated winners and losers.

Regarding the importance of IPRs, they are important in that they fix the problems that I have mentioned so far. But I think they are also important in terms of providing markets for transferring technology overseas, which is the area I work in. It is also important for working out the protection for new firms to come up with new products in developing countries. It is the case that famous trademarks like Toyota or any that you might think of from U.S. and Europe get copied a lot in developing countries. But the bigger losers in those countries are local firms that are trying to develop new legitimate product because as soon as they build a brand of any quality, they get seriously counterfeited and that's just a huge drag on their growth prospects. It's the one thing I'm really confident of in all of the research I've done in developing countries. If you were going to be advising a low-income country on the type of IPR regime they really need, it would be trademarks.

2. You were actually one of the first researchers to mention the U-shaped relationship between per capita income and patent protection. Does that relationship still apply today?

My answer is yes; it does a little bit but not very much. First, the U-shape comes from the idea that actually the poorest countries generally have stronger legal protection, especially for patents and trade secrets, than do the countries of the next income group up and emerging economies like China and Brazil. The rationale behind this observation as a matter of economics is that if you are a really poor country, you do not really have much of domestic innovation or industry that can imitate foreign products. But what you do have is the need to give your consumers access to international products. So there is a reason to have some modest level of IP protection in order to have access to new products. However, as you grow and become more capable of developing new products or imitating existing foreign products or domestic products, the interest in protecting against imitation diminishes; because imitation can be a way of learning technology at a very cheap price. And the truth is, historically it's hard to find examples of countries that did not take advantage of imitation-even Japan, Korea and the U.S. But again as you continue to grow, and the market gets bigger and more complicated, interests in protecting IP do emerge.

In terms of law, the answer to the question "Does the U-shaped curve still exist?" is no. Because the TRIPs agreements at the WTO and the TRIPs Plus agreements have, in essence, forced the middle income countries, the ones at the bottom of U-shaped curve, to push their IP protection up a lot. If you're an American IP owner and you know that China, Mexico and Thailand have the local capacity not only to download a copy of your software but also to develop new versions of it, that's where you want the American government to lobby for protections. You do not care much about copyrights and patents at least-developed countries simply because there is no threat in countries like that. It will be perfectly legal to copy products in those countries but there is no market. So the force of the legal changes at the WTO primarily has generated, instead of the U-curve, an almost linear curve. The least-developed countries have the lowest protection and there are certain countries like China and India that have dramatically increased their formal legal protection to the point where the Chinese system, if you try to measure it with an index, is not very different from America's system. That is the big part of the answer where I say no, and the small part of the answer I say yes is that enforcement is still a problem. If you try to measure enforcement, I think you would probably still get something like a U-shape because there are countries that have strong laws on the book but they might not enforce them, or enforce them selectively in favor of the domestic firms.

3. How much is enough for protection of IPRs? To what extent do some forms of IPRs represent non-tariff barriers?

There are various aspects of IPR laws that do make production and design of new goods in poor countries more costly. For example, if an international company takes out a patent in a middle income country and enforces it, it becomes more costly for the domestic firms to produce similar versions of that product, which could be exported. Also in most industrialized countries like the U.S., EU and possibly Japan's IPR systems, a patent owner can ask the government to prevent an import of particular goods if that import is infringing the domestic IPRs such as patents or copyrights. And those laws are so strong that they can be abused. For example, a firm could claim that a product imported from a foreign country is violating its patent even though it is not violating the patent that the company owns in that exporter's country, simply to block the import while the matter is being investigated and gain an advantage in the market in that time. In that sense, there is a need for creating a balance among stakeholders, in relation to how strong and broad the scope of IPRs to be provided, versus what limits they should contain that will promote innovation as well as fair competition. This is rather a difficult matter.

In the case of the U.S., the protections for patents are excessively strong in the sense that patents are too broad and they make it too easy for domestic patent owners to abuse the system. In recent years, the Supreme Court has come to a similar view. In a series of decisions, they have significantly reduced the scope of American patents. For example, one limitation in the scope of patents is something called parallel trade, which originates in the so-called exhaustion doctrine regulating at what point a product with IPRs can be resold without the permission of the original rights holder, i.e. when the IPRs are exhausted. Exhaustion principles vary across products (cars with trademark or some other protected technology can be resold but software cannot) and countries. The U.S. has long supported companies by preventing some products produced in other countries by that company from being re-sold within the U.S. by different parties in order to protect the producer company's pricing interests. However, in two court cases (a copyright case about textbooks and a patent case about printers) in the last five years, the Supreme Court has decided that this is anti-competitive and the exhaustion doctrine should not prevent parallel import of these products into the U.S. This may cause significant changes in the near future, particularly in the pharmaceutical industry, where there are large price differences between products sold in the U.S. and the same product in Canada and Mexico.

Another example is the abuse of preliminary injunctions where a firm immediately forces another firm to stop selling products that may infringe the firm's IPRs. Due to the legal precedent, these preliminary injunctions were almost always immediately granted in the US to any complainant, meaning that it was relatively easy for a company to interfere with the operations of another company. In a recent case between eBay and MercExchange, the Supreme Court vacated the practice of an automatic preliminary injunction and required a demonstration of a public policy reason for granting an injunction. Again, we can see that it is the matter of finding a right balance. Since some practices of IPRs may be abused by firms to expand market power, it is necessary to have competition policy to address this issue.

4. What are the roles of IPRs protection in trade and investment?

In the context of international trade, when the TRIPs Agreement was negotiated and put in place in 1995, many viewed applying IPRs in developing countries as giving international companies tools to raise their prices or limit selling quantity in these countries. However, many researchers have pointed out that these views were too limited and that IPRs are pro-trade and pro-technology transfer in middle- and high-income countries. When developing countries that are somewhat capable of R&D engage in IPR related reform, international companies do sell more high-tech products and invest more, not only in production, but also in R&D activities in these countries, which results in more technology transfer. Technology transfer is costly often due to language barriers, infrastructures and many other factors, but in the context of IPR, the ability to enforce a contract is key, because without that confidence, companies would never allow any significant technological transfer. This is even more important for top tier technology transfer as well as building R&D facilities. In middle and high income countries, the abundance of educated and skilled labor force and a population with an increased income base and demand for differentiated products make them attractive to large firms, the decision to transfer technology or invest in R&D cannot be made without the IPR and contract enforcement systems being in place.

5. How is TRIPS-Plus different from TRIPS?

Although TRIPS may not provide strong enough protection for the IP interests in the U.S. or EU, it provides a baseline of protection that emerging countries really like, which is exactly where we are now. I think that the TRIPS is static and is not going to change in any serious ways. This is generally true for the WTO, because interests have diverged and there have been no globalized efforts to reform it. TRIPS-Plus started from the U.S. almost at the same time as TRIPS and has been going on until today with the EU joining the trend. These TRIPS-Plus or PTAs are very complicated with chapters related to not only tariff but also regulations on banking, finance, IP, investment procedures, state owned enterprises and so on. In the context of IPR, the IP-chapters require standards that are often more protective, sometime much more protective than those in TRIPS. In particular, protections are stressed for two industries: pharmaceuticals, including agricultural and industrial chemicals, and ICT, because they both contain new technology that were not available during the time of TRIPS such as the genetic technology, the internet, artificial intelligence, etc. It is likely that different groups of countries will push for different levels of protection and there will be different blocks of IPRs.

6. How does the internet change the way IPRs are protected?

The internet has changed the way that IPR was regulated in a number of ways. I will mention a few fundamental but quite obvious points here. First, it accelerated the expectations on protections against digital copying. It is one thing to try to protect against copying physical media such as DVDs, CDs. It is another thing with digital content being sold across borders on the internet, where one can easily download, change and upload these contents. These are new aspects that have been included in TRIPS-Plus agreements, including regulations on authorization to download and upload content as well as technical measures to detect wrong-doings. In fact, recent trade agreements have made unauthorized data downloading a criminal act, which is a little controversial even in the U.S.

Second, counterfeiting has become easier on digital platforms, where products are often misrepresented as real. Some estimates are that depending on the type of product, up to 30% of products on Amazon sold in the U.S. from other countries like China are counterfeit. While consumers may benefit from cheaper prices, small businesses may get hurt. On top of that, many of these products are shipped in small packages, which makes the cost of enforcement higher. This also has important implications for firms on how to manage supply chains to make sure that their inputs are legitimate.

Third, it makes the internationalization of R&D activities possible within and across multinationals, including universities and research institutes. The global distribution of R&D means that any gains in efficiency utilize the time differences among different world regions, which brings more countries into the knowledge economy. Of course, the data generated that way has to be transferred in digital forms and encrypted. It is hard to imagine that involved parties would place their servers in countries without much protection of property rights or strong enforcement of contracts.

7. How should IPRs be applied in the context of data protection?

Methods of protecting data files shipped across borders in terms of IPR depends greatly on what type of data we are referring to. If it is data files that involve elements of creativity when they were initially performed such as music or movies, copyrights are appropriate elements of protection. If developing countries want access to these contents, they need to have protection for copyrights. These regulations are nothing new and are already regulated, but the new thing is that since it has become easier to copy, law enforcement needs to be strengthened correspondingly. Other types of data are those which are publicly available, but to make them useful to people, some private companies aggregate them. In this case, copyrights are not appropriate because if that's the case, even the government will not be able to access data that are publicly available in the first place; weather data is one such example. But we also want to preserve the rights of these companies so that they are able to create interesting aggregations of data, so the appropriate measure would be trade secrets, which is becoming standard in this area.

Personal data is the newer issue and in a real sense is not an IPR issue. Still there are questions related to who owns the data and whether they have monetary value or not. For example, many people provide their information on Facebook but it is not fair to say you are providing Facebook with ownership with this data because there is nothing creative in Facebook gathering your data. On the other hand, even though there may be some monetary value to the data, if Facebook has to pay to use them, it will incur massive transaction costs and it will shut this market down. I think in this case, it is correct to give companies access to users' data, but for users to be able to control how it is used to some extent. For example, they should reserve the right to prevent the data from being used by a particular party if it is used for illegal or immoral reasons or in ways that threaten privacy. . It is similar to the situation where you should be able to access your health records or your educational records. I also think that you should be able to tell Facebook to remove your content if it has had affected you negatively. However, due to the lack of the creative aspect to collecting data, these issues are not really related to IPRs.

8. What is your advice from the IPR perspective in policy making related to development of digital economy?

Every country generates data and countries have to figure out what is the best regulatory system in the context of a global economy. Different countries have different preferences about IP and privacy, and it's an extremely complex issue. I was not able to read about the Osaka Track other than just descriptions of it online but I can tell you that the Prime Minister Abe is right that the key is trust. Trust has to extend across borders and if we don't have that, the whole market will be stunted.

As far as IP is concerned, that is really about making sure that you're protecting and enforcing the rights to transfer data that do involve acts of actual creation and invention. But most of this is about making sure that your firms' and consumers' households' data is protected in terms of privacy subject to whatever policy preferences exist in the country and consistent with the global economy. There are always tradeoffs. For example, in terms of national security, should governments be able to tell companies like Facebook that you cannot encrypt the data in the way that they can't read? I can't answer that question because that's an issue for many agencies to collaborate. I myself have my own preference but other countries see it in very different ways that are almost irreconcilable. So what can we do? I think it is debatable and should be fully argued but I think the Europeans in essence have the right approach. They are a little overly strong, in my mind, about the privacy rules at the origin but in terms of international data flows, they're perfectly willing to allow data of European users to be stored anywhere in the world, so long as those servers are protected in a way that is consistent with the European privacy laws. That is something new in global trade rules and it is a recognition that for purposes of building trust in the long run in the global data system, the privacy rules of the origin country have to be respected in the destination country. I think that is important because otherwise you are still going to have countries saying that the data has to be stored in and processed under domestic servers and that is a big pain for global companies.

OECD has set the guidelines that I actually think are well worth reading and understanding and building a system on. Basically what they say is you have to have your own understanding about what people want in terms of privacy laws and that requires a national conversation. Once that is clear, then the international flow of data should not be impeded so long as you can achieve agreement with other countries, and this may only apply to a company-to-company basis, that the data used abroad are protected in a way that is broadly consistent with your own expectations. Otherwise I do not see any solution to this problem. Today we have two big data blocks with the U.S. and Europe, and China is planning to construct the third one, but that is going to be very fragmented and very costly. The vast majority of developing countries do not have the technical capacity to defeat the massive economies of scale that big platformers have. Many of them might opt into the American system just because of efficiency. But if the majority of developing Asia believes China is going to the regional or global leader, then they might decide to follow their version of the system.

But IP is not really relevant to this because it is much more about encryption, privacy and being open to data flows but subject to your own preferences. As far as the Asia-Pacific region is concerned, the CPTPP is the most advanced IP-related trade agreement so far and it includes significant understandings with respect to data flows. The CPTPP someday might come back as the original TPP, including the U.S. I think ultimately the natural trade dynamics of the region would require the U.S. to renegotiate and establish something like TPP because it will address many of these issues internationally. The decision of the Trump Administration to pull out of TPP was a mistake from the point of economics and international relations in this region since TPP was there for America to establish its leadership in this part of the world.

November 1, 2019

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