Are Intellectual Property Rules the “New Protectionism” or are they the Necessary Policies to Promote Innovation in the Knowledge Based Economy?

Protectionism, the fostering or developing domestic industries by protecting them from foreign competition through duties or quotas imposed on importations has existed in many different forms, ranging from mercantilist practices in the sixteenth century to dirigiste and isolationist economics of the twentieth century. Today the level of protectionism has declined as a result of organisations such at the WTO and the EU fostering common approaches to trade and policy developments. However, despite this countries will still attempt to use new and existing levers of influence to strengthen their international positions and their domestic companies. One emerging form of modern protectionism is the strengthening of intellectual property, the ownership of ideas and control over the tangible or virtual representation of those ideas. Encouraged by developed economies such as the United States and the EU, intellectual property rules benefit their policies, as the new rules extend the length of exclusivity that companies or individuals have over new ideas. Despite claims that the structure encourages new research and innovation the rules favour larger companies and liberal economies compared to smaller companies and less developed economies.

In many developed countries following the Second World War the overriding principle was to have an industrial policy, usually heavily reliant on the public sector in order to encourage the development of ‘national champions’, companies with enough expertise and scale to be able to compete well on the international markets. These values had been reflected in the protectionist measures which some countries had employed, such as France giving generous loans and subsidies to key industries. However, the growing web of trade agreements, such as the Treaty of Rome in 1957, which put restrictions on subsidies left France “saddled with huge coal, steel, shipbuilding and automobile companies that were absorbing public funds but which had substantial overcapacity and could not produce as cheaply overseas.”[1] This resulted in France increasing its pressure on its European neighbours in the 1990s to increase its level of standards in many areas in order to reduce their competitive advantage as a result of lower producing standards and a firmer policy on agricultural imports to the EU to protect its agricultural base.

The WTO’s Agreement on Trade-related Aspects of Intellectual Property Rights (TRIPS), a binding international agreement that sets new universal standards on how countries grant and protect intellectual property (IP) helped to change the global climate of patents and the right to access information.

The Previous System

Prior to the strengthening of the patent system, “society looked to high technology for a model of how to innovate, not the only or necessarily the best model of how to innovate, not the only or necessarily the best model, but a model that certainly worked. The model was based firmly on the notion that innovation was dependent on the free flow of information.”[2]

This was part of the belief that information should be disseminated as much as possible, as even though the free rider takes the benefit of information without having to pay for it society gains, as the producer of information does not lose the information. This emphasis places the innovator above the inventor, as the benefit to society of a new breakthrough being used widely is greater from society’s point of view than if an inventor solely made use of it. For example, Drahos, and Mayne considered that the more producers who know how to produce a therapeutic drug the better, as the producers would have to compete on price in order to sell it. [3]

There have been varying uses of free riding throughout economic history, with countries ranging from Switzerland and the United States not having patent law until the 19^th century to some countries which still maintain some degrees of free riding. [4] This is because free riding enables countries to ‘imitate’ in order to catch-up with other countries economically. For Trebilcock and Howse there is “nothing suspect or unreasonable with the preference of many developing countries for a relatively lax system of intellectual property rights.” [5] One example of the was Japan, which practised an imitation policy highly successfully after the Second World War.

As matters of intellectual property originally tended to relate only to domestic innovations the institutions tended to reflect national preferences. For example, Canada was able to develop a highly successful generic drugs industry in order to guarantee value for money healthcare for its citizens as a result of promoting competition in the pharmaceutical industry.

Also, as R&D often was publicly funded it permitted for greater cooperation between countries on major scientific projects, as the benefits of findings were likely to benefit all.

Calls for Greater IP Protection
Since the 1980s traditional industrial policy, whereby governments subsidized various industrial sectors to promote national economic development, had been severely criticized. Its practice became “increasingly less viable both for reasons of budgetary restraints and for fear of trade counterveil measures by other countries.” [6] This combined with the growing popularity of libertarianism and the belief in the free market over public investment created louder concerns for reform of intellectual property rules, particularly from the business community. However, Doern feels that the decline of traditional industrial policy and the emergence of trade related policies are traceable with hindsight but they do not yield a simple casual path for intellectual property for IP institutions.[7]

This relationship between society and businesses has altered since the 1980s, with the intellectual property balance being tilted in favour of businesses in order to allow growth. A major argument from the business community was that there was a new need to protect inventors. It is argued that today’s inventors are different from yesterdays, as the time and cost necessary to make new discoveries was greater than in the past and that, consequentially they required a greater return to justify and further encourage research. As a consequence patents, a form of subsidy to inventors from society in exchange for new knowledge was extended.

Supporters of this felt that the monopoly of longer patents is less of a problem than it would have been in the past because “as alternative strategies proliferate, there are fewer and fewer products with inelastic demand curve that allow companies to raise their prices arbitrarily to earn monopoly returns.” [8] Thus, as there is increased choice there is less opportunity for patent holders to abuse their position. However, this pure version of perfect competition fails to stand up to the light in many situations. As a result, the US Government has cut its support for research and development. What used to be a fifty - fifty split in investment has now become one third - two thirds split in research expenditures. [9]

Increasing Intellectual Property Internationally

America and later Europe have been the major standard bearers in extending IP and creating global standards globally. This was a response to create a framework to encourage international trade, through creating a stable framework for trade in goods, services and knowledge for companies. However, the framework’s unitary style and free-market language create significant disadvantages for the developing worlds and their businesses.

Until the 1980s America was content to share its innovation with the world, partly to counteract the threat of the Soviet Union but also because “Americans believed that the rest of the world would not be able to catch up with American ingenuity,” as while foreigners were copying the last generation of technology Americans would be inventing the next. [10] However, the economic growth of East Asian companies and their increasing abilities to compete both in terms of manufacturing and research has put pressure on American competitiveness.

Following bilateral agreements with Hungary, South Korea, Singapore and Taiwan the US Government learned that “while exhortation alone was ineffective, linking trade and intellectual property protection could get desired results.” [11] As a country with a $12,455,825 million GDP[12] the United States has been able to exert its influence on others using its market size to get concessions for protecting its IP. This has been used to cement its strength as the largest pharmaceutical manufacturer and computer software manufacturer in the world.

During the Uruguay Round the United States pushed for increased levels of IP, with a flat twenty year time period for all patents. This agreement occured without any African country present at the earlier rounds of negotiation, despite the importance of such a decision. It resulted in the linkage between trade and IP being tightened through amending the Trade and Tariff Act in 184 and 1988. As a result, America “is able to retaliate swiftly with trade sanctions in the event that targeted countries fail to adequately protect its intellectual property.” [13]

Effects on Businesses
The economic consequences affect all types of businesses, as agreements such as TRIPS raise the barriers to entry for all companies, making it difficult for new or smaller companies to establish themselves. However, this is especially the case for developing countries, as they tend to have less powerful businesses, especially in high knowledge industries.

In the past, companies were willing to share their technology because it did not seem to be the source of their success and could not be sold for much anyway. [14] However, as a result of lengthening the time period of IP to twenty years there is a considerable benefit to enforcing and claiming rights of patents. For example, Texas Instruments, once liberal in its cross-licensing arrangements with competitors, has become particularly litigious. Its most profitable product line is now patent royalties. For example, the company’s licence income from $30 million in 1990 to nearly $1 billion in 2000 (Rivette and Kline, 2000). [15]

Previously, businesses who developed a product would first attempt to move quickly in producing it in order to get the ‘first mover advantage’ and gain economies of scale so significant that other companies would be put off entering the market. However, as a result of the new system large companies are becoming less willing to share their inventions with others, as they have such a large period of monopoly they have a greater incentive to use their internal resources. As a result there is less dissemination of knowledge, as there is no incentive for companies because they can sit on the patent. Today, 73% of private patents were still based on knowledge generated by public sources such as universities and non-profit or government laboratories. Thurlow felt that this was enough to suggest that secretly held knowledge does not generate the next generation of technology. [16]

The flat twenty year intellectual property time period was introduced by negotiators as an expedient, as the time it would take to introduce separate industry agreements would be time consuming and perhaps preferential to certain industries. However, as a result the flat time period it has greatly distorted many markets. Simple economic logic suggests that these periods of protection “ought to vary greatly by field or sector, depending on varying cost structures, investments, and payback periods.” [17]

As a result, some industries have a greater incentive to produce patents, as the benefit of a patent exceeds the length of the monopoly period given. The table below highlights the fact that even though many patents are being issued it does not mean that the technology being developed would not have come about if the IP protection period was shorter.

Inventions that would not have been developed in the absence of patent protection (%)[18]

Pharmaceuticals 60

Chemicals 38

Petroleum 25

Machinery 17

Fabricated Metal Products 12

Electrical Equipment 11

Primary Metals 1

Office Equipment 0

Motor Vehicles 0

Rubber 0

Textiles 0

The lack of mini-patents, which would provide shorter, less expensive and less rigorous forms of protection has disadvantaged smaller companies. This results in smaller and medium sized companies being unable to compete on a level footing with larger companies.

Small companies are in a lose-lose situation in regards to IP as even if they have a patent it may not guarantee them any security. In situations where rival companies start using a technology or process smaller companies may be unable to afford or have the human resources to mount a legal challenge against the offending company.

Patents do not confer any wealth. The amount spent on securing and enforcing patents does not add any value to an idea. With cases lasting four years or more, costs can go from between $2 million and $10 million per case, resulting in companies spending as much time in the courts as they are in the laboratories. [19]

Jorde and Teece argue that ‘legal scholarship and judicial action (in the US) have been slow to recognise the primary importance of innovation to the competitive process. [20] For example, corporate patent attorneys have started scrutinizing their companies’ patent portfolios and have become more reluctant to give R&D managers the go-ahead on a new idea or business for fear of duplicating a patented product. [21]

The law community suggests that anti-trust cases will help clarify any misunderstandings through test cases. However, any judges decision will merely reflect previous judgements and will be unable to take account of any economic or political realities of agreements regarding IP.

Effects on Developing Countries
As a result of longer periods of agreements and tougher enforcement of IP protection there has been an increase of foreign technology transfer as a consequence of companies being less concerned about their technology being copied. However, it is difficult to envisage whether this would have happened regardless. The main concern is that the developing world has had a system imposed on it that forces it to pay the developed world for technology that it morally should be discounting the effects of patents.

As mentioned previously, most countries have gone through stages at which they ‘free ride’, borrowing technology from abroad and using it to develop the economic infrastructure until there is domestic pressure to protect domestic innovators. Agreements such as TRIPS have removed this path which had previously allowed countries such as Japan and America to become prosperous, widening the gap for many countries to economically reform.

For example, the United States has 3676 scientists and engineers in R&D per million compared to Rwanda’s 35 scientists and engineers in R&D per million. [22] It is unlikely that a company would seriously consider relocating to Rwanda just because it was offering a fifty year period of IP protection. Consequentially, it seems unfair to burden a country with regulations and demands that it will struggle to comply with and affect it greatly.

This is especially so given the fact that the patent infrastructure is based more on the developed worlds needs for consumerism, with emphasis on cheap entertainment goods rather than poorer countries needs to cheap medicine for malaria.

No case is this more apparent than the pharmaceutical industry which has now become purely business orientated and seemingly unable to make moral or investment decisions. Take for example the pharmaceutical industries shock at South Africa’s attempts to introduce cheap drugs to deal with the AIDS crisis merely because it would be seen as the thin edge of a wedge of reduced prices or generic goods for other countries.

The pharmaceutical industry has every right to attempt to be profitable. However, the infrastructure put in place appears to knowingly put in place a system whereby the industry maximises its costly investment in developing and testing drugs on both the developed and developing countries of the world. In the case of poor countries inability to develop new drugs for themselves or generic drugs legally this would be a case of abuse of control and overly protectionist policies of developed nations.

Similarly, its market decision making results in greater resources being devoted to solving the crisis of hair loss over the crisis of HIV because developed countries will provide a more profitable marketplace.

Conclusion

The benefits of agreements such as TRIPS seem to be highly one way, reinforcing the dominant position of countries such as the United States and economies such at the EU. Measures to encourage research are helping to create a situation where inventors are given too great a control over the innovation process. This seems to benefit predominantly Western and East Asian companies without offering poorer companies the benefits beyond the chance of increased foreign investment if they toe the line. The lack of power is highlighted by industries such as pharmaceuticals being able to set the level of investment and price on goods without any form of accountability. However, intellectual property is not the ‘new protectionism’, as new battle lines such as over how we reduce the growth of carbon emissions are creating more current forms of government competition. Despite this, the new rules are a major disadvantage that works against the least well off in the developing world.

By Jonathan McHugh

First written in May 2007

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[1] Peter Hall, Jack Hayward and Howard Machin Developments in French Politics (The Machmillan Press Ltd) 1994. p175

[2] S. MacDonald Exploring the hidden costs of patents p.26

[3] P Drahos and R. Mayne Global Intellectual Property Rights: Knowledge, Access and Development (London: Palgrave, 2002) p4

[4] P Drahos and R. Mayne Global Intellectual Property Rights: Knowledge, Access and Development (London: Palgrave, 2002) p4

[5] B. Doern Global Change and Intellectual Property Agencies (Pinter) 1999 p. 7

[6] The Canadian Intellectual Property Office p61

[7] B. Doern Global Change and Intellectual Property Agencies (Pinter) 1999 p. 35

[9] L. Thurow Needed A New System of Intellectual Property Rights Harvard Business Review

[10] L. Thurow Needed A New System of Intellectual Property Rights Harvard Business Review

[11] S. Sell Power and Ideas North South Politics of International Property and Antitrust (State University of New York Press) 1998 p. 183

[12] International Monetary Fund, (World Economic Outlook Database) September 2006;

[13] S. Sell Power and Ideas North South Politics of International Property and Antitrust (State University of New York Press) 1998 p. 183

[14] L. Thurow Needed A New System of Intellectual Property Rights Harvard Business Review

[15] S. MacDonald Exploring the hidden costs of patents p.29

[16] L. Thurow Needed A New System of Intellectual Property Rights Harvard Business Review

[17] The Canadian Intellectual Property Office p. 121

[18] The Canadian Intellectual Property Office p62

[19] S. MacDonald Exploring the hidden costs of patents p.29

[20] Cited from The Canadian Intellectual Property Office p. 63

[21] S. MacDonald Exploring the hidden costs of patents p.32

[22] P Drahos and R. Mayne Global Intellectual Property Rights: Knowledge, Access and Development (London: Palgrave, 2002) p2

Protectionism In Europe: The Effects Of Economic Integration On Domestic and International Barriers To Trade

The threat of continuous war coupled with the economic poverty of post war Europe forced European state leaders to look at newer methods of increasing wealth and guaranteeing political stability over the continent. The result was the European Union, an economic block without barriers to trade and capital, dispelling the ethnocentricity of the past and replacing it with cooperation. However, the removal of protectionism within Europe was not smooth, with states having to dramatically alter their economic and political processes in order to benefit from the reforms and save their industries from the tidal wave of free trade. However, protectionism does still exist, albeit with other trading blocks. National preferences also exist, and affect how Europe negotiates trade agreements with other nations.

Protectionism grew as a result of centralised governmental authority eroding the freedom and profitability of international traders. This peak of governments’ cross border dominance was the sixteenth century use of mercantilism, the belief that a country’s wealth increases through acquiring as much gold as possible through high import tariffs and export subsidies. This helped to protect domestic trade from a mercantilist neighbouring country, although this would be reciprocated by other government’s retaliating through raising their import tariffs and subsidising their exporters so that their country could improve its level of trade. Although mercantilist practices have declined over the following centuries as a result of academic criticism and political events its ideas still lived on, with European states having a history of preferring to open up new markets across the world using military means to establish colonies, rather than trade with each other.

The most significant catalyst for the weakening of this protectionist attitude emerged from the First and Second World Wars. The years of devastation and bloodshed forced world leaders to re-examine their visions of how it was possible to increase economic wealth and guarantee economic stability. As a result politicians opened their doors to business and academics creating new, unprecedented economic, political and social models.

One of the most significant and obvious examples of this is the European Union. The Economic Coal and Steal Community in 1951, whereby France and Germany sharing their coal and steel resources in order to guarantee political and economic interdependence became a blueprint for future political and economic cooperation. This culminated in the Maastricht Treaty of 1993, creating the European Union, which removed all internal barriers to trade and free movement of capital. Europe has now become the greatest experiment into the possibilities of economic cooperation through its open markets and a model for other continents such as the Pacific region, which is making tentative steps to examine the possibilities of economic integration as a result of the evident benefits of increasing international business through one larger trade block.

However, this has not been without costs. Protectionism is one of the most valuable tools that a government can potentially employ. The removal of these economic aids revealed gaps in European members’ economic policies. For example, France had experienced successful post war growth as a result of its dirigiste economic model of planned investment in heavy industry in order to create ‘national champions’ that could carry “the banner of France into world markets,”[1].

However, following the gradual reduction of trade barriers after the Treaty of Rome in 1957 France was left “saddled with huge coal, steel, shipbuilding and automobile companies that were absorbing public funds but which had substantial overcapacity and could not produce as cheaply overseas.”[2] A hangover of misallocation resulted in France not having enough medium sized and small companies to compete effectively enough with more dynamic European traders. The French model, which had been the guardian of traditional industry and the backbone of French social security was abandoned in 1983 by the Socialist Mitterrand Government, as “their policy was unsustainable economically”[3] The political instabilities created as a result in economic shifts from removing protection may also help explain France’s reluctance to allow for the EU’s tariffs on agricultural goods to be reduced, as France considers its agriculture to be the rock of French culture.

The Member States of the EU share a common tariff to external countries. Although limiting autonomy of individual countries, such as the UK in its attempts to retain stronger trade links with its former colonies there are obvious benefits to a unified policy. The combined economic size of $12,918,581m[4] makes it more effective at negotiating with foreign countries and achieving more acceptable conditions, albeit possibly at the expense of other nations.

As a trading block the EU is keen to maximise its interests. Although seeing the principle of free trade as important and worth promoting measures are in place with specific barriers to encourage FDI within the EU. For example, the import tariff for automobiles is sufficiently high to force American and Japanese car manufacturers, who would otherwise have a cost advantage to relocate many of their production facilities within the EU. This is because policy leaders consider that the benefits of maintaining a car manufacturing presence in Europe whether foreign or European owned outweigh the economic effects of higher costs and reduced supply for European consumers.

The problem for EU policymakers is how to work out when they should and when they shouldn’t use protective measures to save European industry. A contemporary problem is whether or not the EU should erect barriers to protect the European shoe making industry. European shoe manufacturers have had their profits eroded as a result of cheaper imports coming from Asia making it difficult to trade, with some companies struggling to break even. Some manufacturers have accused countries such as China of ‘dumping’ their goods on European markets through selling their goods below manufacturing costs in order to wipe out competition in the long run. This particularly affects the Southern European countries, where most of the factories are located.

However, as many have pointed out textiles are not a priority of China and it is highly unlikely that they would bother coordinating a strategy for such a mature market. The Danish Minister for Economic and Business Affairs highlighted the lack of real proof and highlighted how the domestic market was attempting to ‘capture’ EU regulators. He cited that with a 40% tariff on shoes the average cost of shoes would rise from €67 to €87, a 25% increase. He also felt that the fact that the European traders would gain €100m a year whereas European consumers would lose around €975m, a year as a result of higher shoe costs and consequentially it was not in Europe’s interests for there to be a tariff, despite the fact that this could result in a decline of shoemaking in the EU.[5]

Even though Europe does not have trade barriers to encourage free trade and movement in capital it would be churlish to assume that protectionism is dead in Europe. Protection and national interests still exist but the scope has become narrower for policymakers. Government leaders can not influence their own protection barriers but countries such as France will still endeavour to put agriculture first and Southern European countries will still lobby for tariffs on shoes, despite knowing that it will be to the detriment of most Europeans. However, the absence of trade barriers has created an unprecedented period of peace in Europe, as countries are given more incentives to cooperate rather than compete with each other.

This report was written by Jonathan McHugh in April 2006

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[1] Peter Hall, Jack Hayward and Howard Machin Developments in French Politics (The Machmillan Press Ltd) 1994. p171

[2] Peter Hall, Jack Hayward and Howard Machin Developments in French Politics (The Machmillan Press Ltd) 1994. p175

[3] Schmidt VA The Politics of Economic Adjustment In France and Britain: When Does Discourse Matter? (Journal of European Public Policy) 2001. p253

[4] http://en.wikipedia.org/wiki/European_Union (apologies for use of currency)

[5] Financial Times, February 20, 2006