03--Ch. 3--37-134 8/16/06 8:24 AM Page 37 3 Trade-Related Aspects of Intellectual Property Rights Making Trade Policy The inclusion of intellectual property rules in the international trading system was a watershed event. Negotiated during the Uruguay Round, the 1994 Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) significantly broadened the reach of the trading regime. Prior to TRIPS, trade rules generally focused on “don’ts”—telling coun- tries which practices to avoid or scale back. For example, General Agree- ment on Tariffs and Trade (GATT) members were told to eliminate quo- tas, to reduce tariffs, to avoid discriminating among GATT members (by mandating most favored nation, or MFN, status) and against foreign goods (by mandating national treatment), and, finally, to avoid standards and technical requirements that unnecessarily restricted trade. Provided that countries respected these don’ts, they remained free to adopt or reject any domestic policies they wished. For example, many countries chose not to enforce intellectual property rights—a perfectly acceptable policy under the GATT system. International Trade Meets Intellectual Property: The Making of the TRIPS Agreement and International Trade Meets Public Health—Patent Rules and Access to Medicines are edited and revised versions of the cases with the same names originally written for the Case Program at the Kennedy School of Government. For copies or permission to reproduce the unabridged cases please refer to www.ksgcase.harvard.edu or send a written request to Case Program, John F. Kennedy School of Government, Harvard University, 79 John F. Kennedy Street, Cambridge, MA 02138. 37 Institute for International Economics | www.iie.com 03--Ch. 3--37-134 8/16/06 8:24 AM Page 38 Depth By contrast, the TRIPS agreement requires countries to “do” something. World Trade Organization (WTO) members are obliged to adopt policies that protect intellectual property in areas such as patents, trademarks, and copyrights. Though countries remain free to provide even more protec- tion than TRIPS requires, the agreement sets minimum standards. These minimum standards represent a significant reduction in signatories’ au- tonomy of national policy. Such policy constraints are binding because the Uruguay Round Final Act established a strong mechanism for dispute set- tlement that applies equally to TRIPS and the other rules governing trade in goods and services. In short, all WTO members are required to adhere to TRIPS, and those who fail to do so will suffer consequences. The advocates of TRIPS rules achieved remarkable success: a far- reaching agreement in a forum that would work to ensure compliance. But the success of the TRIPS campaign has given rise to controversy. Some critics argue that intellectual property rules have no place in a trade agree- ment. Others worry about the implications of TRIPS for public health in developing countries. Issues relating to indigenous knowledge have also been controversial. Many observers also point out that TRIPS set a prece- dent by expanding the scope of issues covered in the WTO, opening the door to the inclusion of even more issues, such as labor and environmen- tal standards. Coverage The corporations supporting TRIPS made their case for trade policies en- forcing intellectual property rights (IPRs) in moral terms. A failure to re- spect intellectual property (IP) rights, they argued, is tantamount to theft. But the analogy between IP and other kinds of property is not precise. For example, property rights are generally permanent, while patents and copyrights generally expire after a specific period. In addition, the time granted for exercising a patent differs from that granted for a copyright. Therefore, probably the most important policy question regarding such rights is not moral (whether they should exist) but practical—their opti- mal duration. The economic case for protecting intellectual property rests on the ten- sion between encouraging the efficient use of knowledge, on the one hand, and providing the appropriate incentive for its creation on the other. Knowledge is a classic public good. Its benefits are “nonrivalrous”—that is, the use of knowledge by one person does not detract from the ability of others to use it. Thus, the additional cost to society of using knowledge is zero. If there were nothing more to learn, the most efficient action would 38 CASE STUDIES IN US TRADE NEGOTIATION, VOL. 1 Institute for International Economics | www.iie.com 03--Ch. 3--37-134 8/16/06 8:24 AM Page 39 be to eliminate IPRs and make all knowledge available without charge. But our knowledge is not complete, and setting its price at zero would eliminate any financial incentive to seek more. One way to deal with this problem is to subsidize knowledge creation, and indeed most basic re- search is funded by national governments. But other mechanisms may also be required. Through intellectual property rights such as patents, an inventor is rewarded for his or her discovery for a certain length of time, after which the knowledge can be used without charge.1 Countries obviously differ in their ability to contribute knowledge. At one extreme, developing countries may have a strong interest in encour- aging the diffusion of existing knowledge but little concern about stimu- lating the creation of new knowledge—and thus little interest in protect- ing intellectual property. In more technologically advanced countries, however, the need for new knowledge is generally much greater. Such na- tional diversity may well warrant different national patent policies. But because knowledge spills over national borders, a case can also be made for allowing inventors to capture some of the international benefits of their discoveries. Otherwise, countries would have an incentive to free ride on the discoveries of others and the world would spend too little on knowledge creation. On this argument, the provision of international IPRs would add to international innovation. Yet making knowledge expensive might limit its diffusion, even as the ability of innovators to operate abroad without fear they will be copied might encourage diffusion. There- fore, the overall net impact of international IPRs on global welfare is theo- retically ambiguous. But even if international IPRs are desirable, they may not belong in trade agreements. To be sure, the existence of such rules will affect what is traded. Producers of software, for example, will not be able to export their products and earn profits if foreign countries do not enforce IPRs and prevent other companies from copying the software without paying royalties. In this sense the failure to enforce IPRs, like a ban on imports, acts to inhibit trade and is therefore viewed as a trade barrier. However, a country that does not recognize such property rights will not grant the producers of such software the right to any returns. Moreover, as writ- ten in the WTO rules, TRIPS actually affects more than trade. Although the agreement’s name is “Trade-Related Aspects of Intellectual Property Rights,” countries are expected to enforce such rights throughout their own domestic economies. IPRs could therefore alter the returns earned by domestic producers in purely domestic transactions. 1. A second question in economics is relevant here: the relationship between monopoly and innovation. The prospect of having a monopoly might induce more innovation, but holding a monopoly could reduce the incentive to innovate. Providing a temporary monopoly re- duces the dangers that a firm will rest on its laurels. TRADE-RELATED INTELLECTUAL PROPERTY RIGHTS 39 Institute for International Economics | www.iie.com 03--Ch. 3--37-134 8/16/06 8:24 AM Page 40 Winners and Losers Granting IPRs internationally has distributive implications, transferring income from knowledge users to knowledge producers. Indeed, its wel- fare consequences differ dramatically from those of trade. Under compet- itive conditions, both exporting and importing nations benefit from trade liberalization. IPRs, however, tend to create net winners and losers. Its dif- ferential impact makes IP a particularly controversial issue, especially in the area of pharmaceuticals. Given this alignment of winners and losers, the introduction of TRIPS rules that heavily benefit high-technology corporations led to concerns about how power is distributed in the WTO. Though some developing countries saw IPRs as a mechanism for encouraging foreign investors to bring the latest technologies to their markets, most viewed the rules as re- flecting the continuing dominance of firms based in developed countries. Enforcement The motives of those seeking to introduce IP into the WTO were clear. If the Uruguay Round had focused only on IPRs, with the attendant creation of winning and losing countries, obtaining a binding multilateral agree- ment would have been difficult. But because the Uruguay Round dealt with a number of trade issues, the losers could be compensated with concessions in other sectors (such as the elimination of the Multi-Fiber Arrangement [MFA]). In addition, its dispute settlement mechanism made the WTO an attractive forum for IPR supporters. Countries found violat- ing TRIPS could face the loss of benefits in other areas. But inclusion in the WTO could boost the adoption and enforcement of many other systems of rules—as proponents of competition policy initia- tives and of labor and environmental standards recognize. Indeed, a pop- ular argument has been that if the trade rules provide intellectual prop- erty protection for companies, then they should also protect workers and the environment. For this reason, some see the inclusion of TRIPS as a dangerous precedent, fearing that the trade regime may become too over- loaded to function effectively. Other observers see TRIPS as quite different from labor and environ- ment standards, arguing that the failure to provide IP protection consti- tutes a genuine trade barrier by depriving innovators of the ability to reap gains from trade.