Trade, Intellectual Property Rights, and the World Trade Organization

07/19/2016

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Kamal Saggi

Of the eight rounds of multilateral trade negotiations sponsored by the General Agreement on Tariffs and Trade (GATT), the Uruguay Round (1986-1994) was the longest and the most far-reaching.1 It involved 125 countries and its coverage was unusually broad in that it included negotiations over trade in services as well as over rules and regulations pertaining to intellectual property rights (IPRs), areas that the multilateral trading system had stayed clear of since GATT’s inception in 1947. Negotiations over IPRs were driven by a deep-rooted sense of dissatisfaction in the United States (US) with the state of IPR protection in the global economy, especially with the widespread imitation and piracy occurring in major developing countries despite the existence of major international IPR treaties prohibiting such activities.2 Supported by the European Union (EU) and Japan, the US pushed hard to have IPRs included in the multilateral negotiating agenda of the Uruguay Round, the eighth and final GATT round. These multilateral IPR negotiations eventually culminated in the form of the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS), perhaps the most controversial multilateral trade agreement in existence today.
While TRIPS was preceded by several international IPR treaties, it was unique in that, from its inception, it was part and parcel of the single undertaking nature of the World Trade Organization (WTO). As a result, TRIPS became the first major international IPR treaty to be fully backed by a potent dispute settlement mechanism. Broadly speaking, TRIPS obligates all WTO member countries ñ regardless of their economic conditions and technological capabilities ñ to adopt and enforce certain minimum standards of IPR protection. But since most developed countries already had relatively high levels of IPR protection prior to TRIPS, the main practical effect of TRIPS was to force developing countries to align their IPR regulations with those of highly developed countries such as the US and Japan. Although TRIPS officially took effect on 1 January 1995, it did not require the mandated global adjustments in IPR regulations to occur immediately or equally quickly in all countries: while developed countries were given only one year to make their laws and practices TRIPS compliant, developing countries were given five years (until 2000) whereas the least-developed countries were granted until 2006, a deadline which was further extended to 2013 in general, and to 2016 for pharmaceutical patents and trade secrets in particular. Even so, within the developing world the Uruguay Round was perceived as having created a “development deficit” primarily because it yielded TRIPS. Policy-makers in major developing countries such as Brazil, India, and China were not the only ones opposed to TRIPS , there was widespread skepticism among academicians and other neutral observers regarding the expansion of the multilateral trading system into the sensitive realm of intellectual property. Indeed, it is fair to say that a shadow of skepticism hangs over TRIPS even today. From the viewpoint of a typical developing country, TRIPS seemed like a bad deal due to the expectation that strengthening local IPR protection would raise domestic prices by increasing the market power of IPR holders without having a substantial effect on the pace of global innovation since its own market constituted a relatively insignificant part of the world market. Furthermore, developing countries feared that, by restricting local imitation and reverse-engineering, stronger IPR protection would make it harder for them to technologically catch up with developed countries. There are two counter responses to these legitimate concerns. First, the argument for TRIPS rests on raising IPR protection throughout the developing world as opposed to doing so in any one developing country in isolation. Thus, what matters is the collective market size of all developing countries. In this regard, the facts presented in Table 1 are rather illuminating: from 1990-2013, the collective share of lower and upper middle income countries in global GDP increased from approximately 31% to 47% whereas that of high income countries declined from 68% to approximately 52% (WDI, 2015).4 It is difficult to believe that the level of IPR protection in half the world economy, which is roughly what developing countries collectively account for today, can be irrelevant for determining global incentives for innovation.

[Table 1 here]

The second frequently offered counter to the claim that TRIPS is not in the interest of developing countries is that stronger IPR protection in such countries would increase the incentive of Örms from developed countries to invest in their markets and to transfer technology to them, both via arms-length arrangements such as technology licensing and through intra-firm transactions between multinational firms and their subsidiaries. While detailed empirical evidence bearing on this issue is discussed in Section 7 of this chapter, the overall stylized facts pertaining to the global flows of foreign direct investment (FDI) seem fairly consistent with this position. As Table 2 shows, the developing countries share of global FDI inflows increased rather dramatically from around 17% in 1990 to just over 59% in 2013. At the same time, the share of FDI inflows of developed countries decreased sharply from just under 83% in 1990 to roughly 39% in 2013, a decrease of over 100% (UNCTAD, 2014).

[Table 2 here]

Since prior to 1990 an overwhelming share of annual FDI inflows typically went to the developed countries, it is useful to briefly consider how the allocation of the global stock of FDI has evolved over time. Table 3 presents this information. As can be seen from Table 3, over the time period 1990-2013, the share of global stock of FDI residing in developing countries has increased by roughly 12% so that over 36% of the global FDI stock now lies in the developing world.

[Table 3 here]

Figure 1 provides a rather striking comparison of how fast trade in technology has grown relative to trade in goods and services during 1980-2013. Since the absolute value of global exports of goods and services is much larger than the payments of royalties and licensing fees in any given year, this figure compares an index of global royalty payments with an index of global exports (both as a percentage of world GDP and with the 1980 value of both indices set to unity). As is clear from this figure, while the index of global exports grew by only about 20% or so from 1998-2013, the index of global royalty payments more than quadrupled over the same time period.

[Figure 1 here]

When measured by the payments of royalties and licensing fees, much of the global action in technology transfer is still within developed countries and occurs within the boundaries of multinational firms: estimates vary but in a typical year over 80 percent of global royalty payments for international transfers of technology are made between subsidiaries and their parent firms. In recent years, technology transfer to developing countries by multinationals has increased quite sharply: from 1990 to 2009 the share of developing countries in global technology payments doubled from approximately 13% to 26% (UNCTAD, 2010). Furthermore, in recent years, multinationals have also begun to shift more of their R&D activities to the developing world. For example, in 2009 Japanese multinationals allocated 38% of their R&D activities abroad to developing countries, a dramatic increase from 6% in 1993 (UNCTAD, 2010). The massive changes in the share of global GDP, royalty payments for technology licensing, and the allocation of global FDI (both in terms of flows and stocks) summarized in Tables 1-3 and Figure 1 show that, as a group, developing countries have become a much larger part of the world economy than ever before. It stands to reason then that their collective policy choices regarding IPRs are likely to have significant implications not just for their own welfare but also for that of the rest of the world. Motivated by this overarching issue, this chapter surveys the international trade literature that addresses some fundamental questions regarding the effects and determinants of the strength of IPR protection in the global economy: Do the incentives for patent protection of an open economy di§er from those of a closed one? If so, why? What is the rationale for international coordination over national patent policies? Given that WTO member countries differ dramatically with respect to technological capabilities, what incentives, if any, do lagging countries have to enforce TRIPS? To what extent do empirical studies support the major arguments for and against TRIPS? Can the structure of TRIPS ñ both in terms of the core obligations it imposes on WTO members and the flexibilities that it provides them with respect to exhaustion policies and the use of compulsory licensing — be reconciled with existing models of IPR protection in the global economy? Given that the WTO is primarily concerned with international trade (and the GATT exclusively so), perhaps it is best to get one fundamental question out of the way early: are IPRs trade-related? Broadly speaking, a patent-holder can profit from its proprietary technology in foreign markets via two distinct ways. One, it can explicitly trade in its patented technology by licensing it to independent foreign agents or to partly/fully owned foreign subsidiaries via FDI. Two, instead of transacting in technology, it can choose to export the product embodying the technology. Under the first option, technology explicitly exchanges hands internationally whereas in the latter channel only the product does so. Thus, in a fundamental sense, IPRs are trade-related because they can affect not only the process of technology transfer via licensing and FDI but also the pattern of international trade.8 Existing empirical evidence discussed in sections 7.1 and 7.3 demonstrates that these channels are indeed operative in the real world. At the outset, I should note that the chapter discusses only a selected portion of the vast economic literature on IPRs, i.e., the part that addresses questions pertaining to those aspects of IPRs that are explicitly trade-related, where “trade” is broadly interpreted to include both international trade in goods/services as well as FDI. In other words, models and empirical studies that focus purely on domestic IPR issues are discussed only to the extent that they are necessary for gaining a clearer understanding of the literature on trade related aspects of intellectual property. There exists a rich and vast literature in industrial organization investigating a wide range of issues related to innovation and the patent system.9 Because this literature focuses almost exclusively on closed economy models, I have chosen not to discuss it in this chapter. This decision reflects not only my own interests and comparative advantage, but also the overall theme of this Handbook. Even so, given the immense size of the literature on trade and IPRs, I have been forced to make some hard choices about what to leave out. Rather than reducing length by focusing on a narrow set of issues, I have tried to be relatively broad in my coverage of the relevant questions while simultaneously favoring relatively recent contributions.
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This paper was originally posted here.