Intellectual property and wealth transfers in the Trans-Pacific Partnership

The 16th round of the Trans-Pacific Partnership (TPP) negotiations concluded in Singapore recently with few reports of progress on the remaining difficult issues, which will most likely be left to the end-game of negotiations.

The 11 Asia Pacific members negotiating the TPP are attempting to set rules for economic exchange that reflect commerce in the 21st century such as intellectual property, data flows, services trade, investor–state dispute settlement and supply chain management.

Some of those ’21st century’ issues are causing unease among members, but negotiations appear to be bogged down on some traditional 20th-century trade issues as well, such as agriculture and textiles.

A rush to complete the agreement may lead to end-game compromises being traded off at the political level and result in an agreement that is either full of exclusions or include measures that are damaging to some countries.

It is increasingly unlikely that the intended October 2013 deadline will be met, making it the third year in a row that an announced deadline is not achieved. That, and Japan recently announcing it will join the TPP negotiations, might be the only recent good news for the TPP.  A large agreement like this should not be rushed.

Some of the traditional trade issues that have been highly publicised are related to US market access which has yet to relax strict rules of origin for Vietnamese textiles (not allowing fabrics to be sourced from non-TPP members such as China), open up the sugar market (for which Australia is having a second go after failing in the Australia-US free trade agreement, AUSFTA) or remove border barriers to beef and dairy (which are of particular interest to New Zealand). Results of liberalising those trade barriers are well understood: Vietnamese clothing manufactures, Australian sugar exporters and Kiwi dairy and beef farmers benefit while American consumers benefit from cheaper clothing, sugar, beef and dairy, as well as a larger variety.

But not everything in the TPP will produce win–win, positive-sum outcomes for its members, and indeed, some aspects could be damaging to potential TPP members and the region more broadly. If not designed well, some parts of the TPP could be punitive for developing countries for not having developed-country institutions or standards (at this stage of development). Imposition of those standards or institutions does not necessarily mean that they are suited to the country-specific circumstances or that developing countries can leapfrog stages of development.

There is significant evidence that strengthening intellectual property (IP) rights provisions in trade agreements is negative sum and therefore globally welfare reducing. The United States and other developed countries are net exporters of IP, and so strengthened IP in the TPP will mean wealth transfers from less developed to more developed countries.

IP rights exist to give innovators incentive to innovate by protecting their right legally to collect monopoly rents on innovations for a given period. Yet there is a balance to be struck between the rights of the innovator and public welfare, since the weaker the IP rights are, the higher the potential benefits to social welfare, as the public benefits from cheaper access to that technology (a patented medicine, for example). Extending copyright or extending patent protections in trade agreements is a very different principle from lowering tariffs.

Such protections potentially involve significant welfare transfers across borders, between where innovations are generated and their international buyers or users of goods in which innovations are embodied, with unspecified (perhaps unknowable) effect on the generation of innovation.

So while the IP regime protects commercial interests, it is not clear that IP should be a priority in trade agreements and there is insufficient evidence that IP measures enhance welfare. For example, the United States is a net exporter of IP relative to Australia and so AUSFTA resulted in net wealth transfers to the United States from Australia. There is strong evidence that the IP regime in the United States is tipped too much towards the interests of firms that patent technologies and away from the socially optimal balance, and also evidence that strengthening IP protection not only fails to increase innovation but also might stifle it. A growing body of literature shows, empirically and theoretically, that strong IP protection and patent regimes help to protect incumbent producers maintain monopoly rents, thus causing less innovation, not more. Historically, patent holders have been able to hold up entire industries and there is evidence that most innovations happen outside of patent systems.

There is an effort to expand the IP privileges that US companies receive in the United States (and in some of its FTA partner countries) — including controversial features of US IP law — to the rest of the Asia Pacific region through the TPP and to lock that in as a global norm.

There is the added public policy issue that strengthened IP protection reduces access to generic medicines, both in terms of price and the time to market. There would appear little justification from a social welfare standpoint for including IP in trade agreements. It follows that any IP provisions should be subject to independent scrutiny and IP should not be included in trade agreements as a matter of course.

The TPP should be ambitious with market access issues and other areas where there is a clear-cut case of trade liberalisation leading to win–win outcomes. But member countries should be careful not to trade these wins off against measures like IP — particularly where there is little evidence that these measures will deliver good public policy.

March 31, 2013

Source: East Asia Forum