The TRIPs Agreement: Balancing Rights and Wrongs. 

By: Kevin K. Ho

2 3  A P R I L  2 0 0 1

The recent movement by certain WTO members to protect intellectual property rights out of ‘moral’ interests and to foster ‘innovation,’ has not yielded increased world economic welfare as WTO literature has argued. Rather, by requiring developing countries to comply with the GATT/WTO’s comprehensive protection regime under the Trade-Related Aspects of Intellectual Property Rights (TRIPs) Annex of the 1994 Uruguay Round GATT, the world economic system will instead see a redistribution of rents from developing countries to developed countries at the expense of the general economic welfare in those developing countries. It was only very recently that issues in intellectual property –the goods produced through research, development and innovation— became a GATT-related issue. It is only with recent advances in technology and with a shift of production patterns favouring developing countries that allowed a greater dissemination of industrial information. This dissemination allowed developing countries to be more efficient at imitating products produced in developed countries. Perceiving a threat to future profits and potential harm to further technological innovation, the developed countries, led by the United States and the EU, sought greater intellectual property (IP) protection by linking IP with trade issues at the 1994 Round. They did this out of domestic political pressure and from their overwhelming comparative advantage in knowledge-based production. Seeking to further trade concessions in agricultural and commodity-related areas from the developed countries, developing countries signed on to the TRIPs. Consumers and producers in developing countries mainly shoulder the resulting global welfare loss from the TRIPs agreement. The amount of rents transferred from developing countries to developed ones, some would argue, is directly equal, making this a very odd facet of the GATT; institutionally redistributing rents from the poor to the rich. These losses are due to the loss in domestic economic activity associated with shutting down imitation production, and are also due to increased replacement product prices developing country consumers face with increased protection on behalf of developed country producers. However, depending on the elasticity of demand for the products involved, developed countries may also face reduced consumption by developing country consumers as well. The potential revenue loss may outstrip the gains from IP protection.

It based on these observations that one could say that the TRIPs agreement is counter to the multilateral liberalisation of world trade over the past 50 years. Economist John Beath calls TRIPs a ‘second-best attempt’ at balancing the competing trends of advancing greater social welfare and at providing incentive for innovation. This tension was at the heart of the debate in 1990s and this paper will argue that the balance has leaned towards producers ever since and that the ‘burden’ of the TRIPs has been unfairly shouldered by developing countries. To start though, a definition of intellectual property needs to be established. Beath, perhaps, does it best:

 

Every new product or process has an idea as its origin. If this idea can be defined in some way it becomes intellectual property and can be bought and sold. Rights in such intellectual property can be protected by various legal forms such as patents, registered designs, trademarks and copyrights.[1]

 

For this paper, I shall focus mainly on patents especially with the emphasis on pharmaceutical products, computer technology and copyrighted recordings. Critics may contend that protecting trademarks is an ancillary topic — why would protecting an apparel logo matter when apparel manufacturers enormous profits in the first place – the argument runs. Others would respond by saying that consumer trust and safety are ensured by protecting a brand image. This paper will not address these subjects at any greater length than to acknowledge their existence in this debate. Also, the creative literary work covered by copyrights is generally accepted as a convention. Rather, as this paper will highlight, it is with the larger issue of social welfare –both in terms of public health issues and national economic health issues — that the debate over TRIPs becomes much more difficult. 

Whether or not the TRIPs agreement presumes to increase global welfare or not may be rendered moot if it can be proved that TRIPs is a new form of trade protection as many authors cited in this paper assert. Therefore, in order to understand TRIPs and its implications, this paper seeks to use a shorthand to consider the problem – the 3 C’s: causes, content, and considerations. The first section, ‘causes,’ will highlight how American pressure groups convinced U.S. trade negotiators that previous attempts at IP protection were a ‘failure’ and how they pressured the U.S. and the EU to use their superior bargaining positions to tie trade issues with IP protection. Within the ‘content’ section, selected articles of the TRIPs agreement will be highlighted to demonstrate that there are indeed several contradictions within the document itself and to also highlight, at the very least, that the document invests a considerable amount of enforcement powers to combat IP infringement by WTO member countries. Finally, the ‘considerations’ section will provide an analysis that is contingent on the premise that the TRIPs agreement is a ‘non-bargain’ according to criteria set forth by turn-of-the-century economist Vilfredo Pareto. Pareto argued that there is an optimum point that offers the greatest amount of satisfaction to all members of an economic system, but this point will never be reached because of the actions a few members of the system. Pareto theorised how an economic elite would actively seek to reaffirm their own position in a given economic system by creating barriers and institutions that would “endeavour to obtain positive rents” no matter what the real aggregate costs were to the rest of the system. The international economy is such a system and the ‘causes’ section will highlight how IP became tied with trade, the ‘content’ section demonstrates how the TRIPs became a welfare-distorting institution and the ‘consequences’ section will explore the costs to the rest of members in the system.

Causes: The TRIPs in context.

The TRIPs agreement is a multilateral treaty that requires its signatories to establish minimum standards to protect the rights of an inventor, patent holder, or artist who has created a process, artistic expression, or any other work that falls under two categories of either copyright or industrial property. Such protection is expensive and detrimental to consumers the world over, but even more so in developing countries. Interestingly enough, the TRIPs is an annex of the latest GATT/WTO Round, meaning that it is tied to and implicit to GATT membership. When considering the question of why developing countries would sign on to such an agreement the question becomes even hazier. Therefore, countries were, at worst, compelled to accept the TRIPs if they wished to accrue the generalised trade preferences under the rest of the GATT agreement. At the very least countries were not aware of the severity of the TRIPs when they signed onto it. According to Bayne[2], accepting every facet of the 1994 GATT Round was essential for continued membership in the trade club. Very few countries, Bayne asserts, realised that the TRIPs agreement would be as comprehensive as it is and nor did they realise that it would take effect as soon as it has. While that view may give developing country negotiators less credit than due, Nigerian economist T. Ademola Oyejide offers a more edifying view.

Oyejide provides some insight as to why African countries of the non-aligned movement signed onto GATT negotiations in the first place. Oyejide’s contention is that it was determined the GATT was the best place for African countries to pursue an open international trading system that institutionally allowed for differences amongst its members, both in terms of implementation timetables and so-called S&D conditions – “special and different.” She continues by arguing that by 1990 many African countries had adopted an “outward-oriented trading policy” that was independent of each other and that each needed to secure external trade links and market access schemes, such as the Lome Convention and other concessions by the EU, to continue this development path. Indeed there were significant concessions granted to African countries under the 1994 Round. For African countries, Oyejide contends, having tangible agreements was much more important than the uncertainty that non-GATT status would provide.[3] Although Oyejide wrongly overlooks IP becoming a pervasive social welfare issue, saying that African countries shared a “basic interest” in IP protection, she highlights the problem that has since emerged from the 1994 Round in her discussion of the African negotiating position.

 

The paucity of Africa’s human and material sources and its limited knowledge-base in relation to many of the issues being addressed in the negotiations are serious binding constraints on the regions ability to secure a full appreciation of the implications of the issues and the proposals being discussed in various negotiating groups.[4]

 Obviously, failure to be a part of the GATT/WTO is, in and of itself, a detriment to a country’s trade position and leads to further diminished terms of trade, but what’s worse in the case of IP if it is determined that the given country is also violating ‘accepted’ IP standards, then the country is subject to severe unilateral trade-based retaliation by the U.S.

Economists Trebilcock and Howse attribute to the recent strengthening of patent protection by industrialised countries is due to the growing competition and production capabilities of developing countries. Indeed, as early as 1986, developed countries, led by the United States, charged that previous international IP regimes like the Paris and Berne Conventions were not comprehensive enough in their protection of patents and trademarks. They also charged that the international organisation designed to deal with IP issues, the World Intellectual Property Organization (WIPO), was a weak organisation whose rulings were only advisory and membership voluntary.

In his analysis of the TRIPs, Maskus uses various data to arrive at his conclusions about the non-welfare enhancing nature of the TRIPS. His data is especially revealing when it becomes apparent how much of an interest the U.S. had in extending IP protection. Maskus cites figures that reveal that in the 1980s the U.S. was “the overwhelming net global supplier of technology.”[5] The need for IP protection in a knowledge-based service sector economy —perhaps — can be justified on a domestic level as it is in the U.S. Indeed, economic activity associated with the U.S. IP-core industries (including media, computers, advertising, publishing, and other audio-visual industries) has been estimated by the RIAA at $60b within the U.S. and contributing at least $260b to the global economy.[6] According to his figures from 1987 and 1989, the U.S. had an enormous advantage in technology-related balances, with no equal rival, even when combining all the other countries he cited. Figures that Maskus cites reveal that the U.S. has a positive balance of $8.5b the technology trade, while the nearest competitor, the U.K. had $200m.[7] The U.S. dominates in almost every activity that is knowledge-related. For example, in the recording industry, UNCTAD estimated that over 4 billion copyrighted recordings were being sold around the world in 1998, generating $39b in total revenue. However, the report also estimated that pirated recordings were generating another $5b in revenues. This was deemed to be too much of a loss by the developed country-based record industry. Something, it was argued, needed to be done. The comparative advantage was so heavily skewed towards the U.S. and the EU. However, the losses incurred by illegal imitation were perceived as too great for comfort.

Therefore, by the time the 1986 Punta del Este Declaration, harbinger of the 1994 GATT Round agenda, the United States was already indicating that it would use its bargaining power as the world’s largest economy to push for increased patent and copyright protection that was tied with trade. Subsequently, when the 1994 Round did commence, the U.S. did indeed use its bargaining position to link the reduction of trade barriers to IP protection issues. Specifically, Maskus and economist Arvind Subramanian each independently identify three interests that pushed the U.S. government for greater international IP protection. They were the high-tech sector that included bio-tech companies, pharmaceuticals, computer and software makers. Luxury apparel and consumer good makers wanted to protect their brand images. The entertainment sector wanted to protect against infringed use of their products. The high-tech sector wanted to see greater and stringent standards of patent protection created on an international level that were roughly congruent to domestic standards they were accustomed to in the U.S. and the EU. The apparel and entertainment interests wanted to see greater enforcement procedures that would discourage further uncompensated use of their brands and products. 

While Maskus and others merely state that the developed countries were concerned at the weakness of the WIPO, Subramanian takes a more damning tone in regards to the WIPO:

 

Underlying this perceived failure in [the] WIPO was a tacit admission that at least within the field of IP there was no possibility of striking mutually beneficial deals between the major importers [i.e., developing countries] and exporters [i.e. developed producers]. Or, in other words, developing countries did not on balance perceive increased IP protection to be in their interests….

 But as Subramanian and others have pointed out developing countries faced little choice when developed countries linked trade with intellectual property.

 

The Uruguay Round was seen as an offering the possibility of tradeoffs between topics on the negotiating agenda so that countries that saw themselves as making concessions in one area could seek countervailing benefits in another.[8]

 

Associating trade with IP is one thing, but added to this association was what Subramanian calls the “conspicuously invisible ghost” of national policy retaliatory instruments such as U.S. Special Section 301 of its trade code – hence referred to as Special 301 in this paper – that assured a positive outcome for the IP lobby at the expensive of developing countries.

Indeed, economist Nigel Grimwade chronicles the history of the association of IP with trade issues and categorizes it as a tit-for-tat scenario especially beginning with the passage of the 1974 U.S. Trade Act and its Section 301 retaliatory language and the amendments in 1988, that made 301 even stronger, hence “Super Section 301.” The provisions provide mandatory and unilateral trade action against countries that fail to provide ‘adequate and effective’ IP protection. Indeed, it charges the U.S. Trade Representative to seek out violators and to bring cases against them. Therefore, when the TRIPs Agreement started to emerge by 1994, developing countries therefore faced two unsavoury options. Grimwade offers:

 

Through the Super 301 provisions, the US threatened any country that did not offer adequate and effective IP protection with denial of market access. The implication was that, if developing countries were not prepared to negotiate a TRIPs agreement through the GATT, they would face withdrawal of previous [trade} concessions under Super 301 [action} to force an agreement on a bilateral basis…. Super 301 worked like a big stick wielded at the developing countries to force them to negotiate.[9]

 

Indeed, various countries have been targeted for such trade action. An examination of the case list of the USTR over the past decade yields a tremendous number of ‘self-initiated’ investigations into “certain acts, policies and practices” of governments, most prominently India and Thailand for perceived violations in the area of pharmaceuticals (Thailand Pharmaceuticals 1991, Case No. 301_84, and India’s Practices Regarding Patent Protection for Pharmaceuticals and Agricultural Chemicals 1996, Case No. 301_106), and the general IP violations with China and Honduras as example (China Intellectual Property Rights 1994, Case No. 301_92, and Honduran Protection of Intellectual Property Rights 1997, Case No. 301_116).[10] In each case the USTR made an assessment and decided to take one of three options, terminating the case, continued monitoring, or decided to impose retaliatory penalties. The unilateral nature of this type of assessment and enforcement will be addressed later in this paper, but needless to say having the prospect of being subjected to this type of threat, developing countries were generally more inclined to accepting the TRIPs.

Meanwhile the U.S. and the EU argued that the developing countries utilised their comparative advantage of cheaper labour and lower production costs to directly imitate, reverse engineer, and produce imitation products that based on those from the developed countries. With special attention paid to pharmaceuticals then, the U.S.-EU argument continued that this imitation was ‘unfair’ to the innovators in the developed countries who were, for all practical intents and purposes, were having their work expropriated without compensation. This line of argumentation was dismissed by many, including Subramanian who dismisses this line by pointing out that developing country imitation was relatively small as this type of production primarily took place in small countries whose imitation had (and still has) no effect on the larger global market. He notes:

 

Furthermore, developing countries individually and even collectively account for a small fraction of global sales in products for which R&D is considered to be important, underscoring the likelihood that patent protection in their markets will have no significant effect on global R&D.[11]

 

Clearly, then it is not apparent that the espoused reasons of the U.S. and the EU stand up to scrutiny. Naturally, the reality of the matter is that developing countries really had no choice but to accept the TRIPs language, despite the arguments the developed countries put forth, the reality remains that they tend be counter the founding intent of the GATT system. More evidence of this can directly be seen with a survey of the document itself.  

 

Content: The TRIPs Language.

Looking at the document itself, contradictions start to emerge. Several articles seem to be in conflict with each other and with the overall stated intent of the GATT. Deardorff highlights these concerns by holding that being able to find clauses about “property” and “protection” in the GATT is “surprising.”

 

As it name suggests, intellectual property ‘protection’ is a surprising issue for the GATT to be dealing with in another way. That is, on issues of commercial policy, the GATT’s mission has always been to prevent, or at least to circumscribe, countries’ efforts to ‘protect’ their domestic industries. Now, in the TRIPs area, the GATT is being called upon to extend protection, not restrict it…

 

Further on in his discussion, Deardorff then puts forth the standard argument of IP protection as in incentive for innovation, but moves quickly to dismiss those arguments:

 

…One could also take the view that the GATT’s mission has been to promote the free international flow of goods in trade, and that if that mission is indeed extended to intellectual property, it should also promote the free flow of international ideas. From that perspective, again, the goal of the Uruguay Round negotiations in restricting this free flow may be viewed as perverse.[12]

 

Of course, Deardorff concedes that a certain level of IP protection is needed, but his analysis is contingent that small countries should be exempted from IP protection. Regardless, other economists are far more sceptical. Trebilcock and Howse call the judicial portions of the TRIPs (Articles 44.1, 45, 46 and 50.3) a “massive intrusion into domestic legal systems.”[13]  They concede that the TRIPs provides that domestic law is to prevail in disputed judgements, but nonetheless the strong intent of the document is quite clear. The pair also asserts that the TRIPs represented substitute global legislation. Indeed, keeping such facets already discussed, like U.S. Special 301, the TRIPs agreement may have seemed an acceptable compromise. To keep the arguments clear, it becomes is useful to examine the actual language of the agreement.

 

Article 1
Nature and Scope of Obligations

1.        Members shall give effect to the provisions of this Agreement. Members may, but shall not be obliged to, implement in their law more extensive protection than is required by this Agreement, provided that such protection does not contravene the provisions of this Agreement. Members shall be free to determine the appropriate method of implementing the provisions of this Agreement within their own legal system and practice. (Emphasis added)[14]

 

The language here states that all members must comply with all the provisions of the agreement and, if they want have more stringent measures than called for by the TRIPs, but that they must adhere to all the provisions listed. However, looking at a few articles further, the language becomes more conciliatory. 

 

Article 7
Objectives

The protection and enforcement of intellectual property rights should contribute to the promotion of technological innovation and to the transfer and dissemination of technology, to the mutual advantage of producers and users of technological knowledge and in a manner conducive to social and economic welfare, and to a balance of rights and obligations. (Emphasis added.)

Article 8
Principles

1.    Members may, in formulating or amending their laws and regulations, adopt measures necessary to protect public health and nutrition, and to promote the public interest in sectors of vital importance to their socio-economic and technological development, provided that such measures are consistent with the provisions of this Agreement.

 

2.        Appropriate measures, provided that they are consistent with the provisions of this Agreement, may be needed to prevent the abuse of intellectual property rights by right holders or the resort to practices which unreasonably restrain trade or adversely affect the international transfer of technology.

 

 

Under Article 7 and with a consultation of the rest of the WTO website, the implied intent of the TRIPs is to promote economic activity “to the mutual advantage of producers and users” of intellectual property. As previously stated, the overwhelming producer of such goods and products is the U.S. and the EU to a limited extent. Balancing the interests of producers and users becomes a more difficult matter when considering the burdens that this agreement creates. The “appropriate” and “consistent” measures Article 8 calls for and requires the diversion of domestic resources to implement the TRIPs but this discretion allows for local laws to be enacted which can conflict with the TRIPs, as will be later shown with an example from South Africa. Setting up an administrative structure to handle long-term enforcement of patents, copyrights and trademarks is costly and requires the diversion of a qualified technological elite away from other domestic activity.

Many observers have noted that TRIPs enforcement procedures stretch down into municipal legal systems from a ‘higher’ multilateral level – a contradiction in and of itself. Rather than lowering trade barriers though, like the GATT agreements call for, the TRIPs has governments stopping local economic activity and committing local resources to do so for no apparent local good. The language that deals with the harmonisation of enforcement standards of IP-justice is sweeping.

 

PART III — Enforcement of Intellectual Property Rights

Article 42
Fair and Equitable Procedures

Members shall make available to right holders civil judicial procedures concerning the enforcement of any intellectual property right covered by this Agreement. Defendants shall have the right to written notice which is timely and contains sufficient detail, including the basis of the claims. Parties shall be allowed to be represented by independent legal counsel, and procedures shall not impose overly burdensome requirements concerning mandatory personal appearances. All parties to such procedures shall be duly entitled to substantiate their claims and to present all relevant evidence. The procedure shall provide a means to identify and protect confidential information, unless this would be contrary to existing constitutional requirements.

On first examination Article 42 seems straightforward. Both sides are entitled to counsel, and are to be informed by written notice with the dispute handled in local courts but the question is more fundamental than that. The presence of a legal system and qualified attorneys seems to be assumed, but for countries wishing to join the WTO, the burden of a creating a legal system becomes all the more so under the TRIPs Annex. Trebilcock and Howse find the following passages particularly compressive.

Article 45
Damages

The judicial authorities shall have the authority to order the infringer to pay the right holder damages adequate to compensate for the injury the right holder has suffered because of an infringement of that person's intellectual property right by an infringer who knowingly, or with reasonable grounds to know, engaged in infringing activity.

Article 46
Other Remedies

In order to create an effective deterrent to infringement, the judicial authorities shall have the authority to order that goods that they have found to be infringing be, without compensation of any sort, disposed of outside the channels of commerce in such a manner as to avoid any harm caused to the right holder, or, unless this would be contrary to existing constitutional requirements, destroyed. The judicial authorities shall also have the authority to order that materials and implements the predominant use of which has been in the creation of the infringing goods be, without compensation of any sort, disposed of outside the channels of commerce in such a manner as to minimize the risks of further infringements. In considering such requests, the need for proportionality between the seriousness of the infringement and the remedies ordered as well as the interests of third parties shall be taken into account. In regard to counterfeit trademark goods, the simple removal of the trademark unlawfully affixed shall not be sufficient, other than in exceptional cases, to permit release of the goods into the channels of commerce. (Emphasis added.)

 

 

These articles represent the meat of the document. The provisions of passing judgment and enforcement of IP violations are strong and clearly substantial, as many analysts have pointed out.

Yet another contradiction that many have noted is when there is a dispute over IP between countries. The GATT agreement sets up the Dispute Settlement Body that is not only the preferred dispute settlement mechanism, but is in fact the only method that can pass judgement and assign fault concerning trade issues.

 

ANNEX 2: UNDERSTANDING ON RULES AND PROCEDURES GOVERNING THE SETTLEMENT OF DISPUTES[15]

Article 23

Strengthening of the Multilateral System

 

1.       When Members seek the redress of a violation of obligations or other nullification or impairment of benefits under the covered agreements or an impediment to the attainment of any objective of the covered agreements, they shall have recourse to, and abide by, the rules and procedures of this Understanding.

 

2.      In such cases, Members shall:

 

(a) not make a determination to the effect that a violation has occurred, that benefits have been nullified or impaired or that the attainment of any objective of the covered agreements has been impeded, except through recourse to dispute settlement in accordance with the rules and procedures of this Understanding, and shall make any such determination consistent with the findings contained in the panel or Appellate Body report adopted by the DSB (Dispute Settlement Body) or an arbitration award rendered under this Understanding;

 

(b) follow the procedures set forth in Article 21 to determine the reasonable period of time              for the Member concerned to implement the recommendations and rulings; and

 

(c) follow the procedures set forth in Article 22 to determine the level of suspension of concessions or other obligations and obtain DSB authorization in accordance with those procedures before suspending concessions or other obligations under the covered agreements in response to the failure of the Member concerned to implement the recommendations and rulings within that reasonable period of time (emphasis added.)

 

The language is clear, but considering the extensive use of U.S. Section 301 in the past decade, the existence of the DSB language as related to IP makes no difference at all. Therefore, like the entire agreement itself, the TRIPs enforcement and the GATT dispute settlement mechanisms represents a series of competing ideas that try to balance greater social welfare, but does a poor job at doing so.  

Consequences of the TRIPs.

When taken in a larger perspective it should become clear that the TRIPs is supposed to be based on equity and individual protection. However, in economic terms, whenever intellectual property is protected, it generates rents that are earned in a system where there was previously a scarcity of a product or process that required innovative intellectual and knowledge-based talent. Therefore, in the natural cycle of innovation and its effects on the market, this scarcity becomes filled with this new product. Eventually prices should fall from initial introduction of a product as producers become more efficient at production. However, consumers face a price-distortion when a patent protection system is introduced. A long-term patent or copyright unnaturally extends the period of high prices (to twenty years under the TRIPs regime). Consumers lose. As stated earlier, balancing the point between overall social good and harm is therefore the heart of the TRIPs debate. Producers want higher rents, consumers want a continuous flow of new products at lower and lower prices. The contrast in interests is readily apparent. Lower consumer prices can be achieved through increased producer competition or by imitation, both cases see marginal production costs reduced, but in the later, no compensation is rewarded to the original innovator. Providing a patent is basically providing a monopoly over an industry that is supported by the theory that it will lead to further innovation. However, the ‘correct’ and/or optimal amount of time that patent is granted for is unknown and the aggregate harm done to consumers is also unclear.

Trebilcock and Howse question the merits of extending patent protection from the standard 15 in many domestic systems to the TRIPs prescribed 20-year term. They argue that it would only “make sense if the welfare gain from the added incentive to innovation outweighs the welfare loss from deterring competition with respect to imitations of the technology.”[16]  As many authors have pointed out, this is simply not the case. Indeed, in his discussion of costs and benefits of IP protection, Deardorff offers the premise that extending IP protection to the majority of the world’s countries is not efficient. He bases this conclusion by saying, at least on a global welfare level, that the costs of extending IP protection exceed the benefits from it. However, Deardorff agues that IP protection could be acceptable if the distribution of the costs involved was more uniform, but as concluded, extended IP protection does not yield this equal distribution of costs.[17] Instead, as many have pointed out those at the bottom of the system shoulder the costs disproportionately. Deardorff elaborates on the costs to consumers by highlighting the monopolistic protection that TRIPs offers producers.

 

All of those goods which were available on the unprotected market previously will now be subject to monopoly pricing, and this will cause their consumption to be reduced to a suboptimal level. As is usual in the case of monopoly pricing, the loss to these (foreign) consumers exceeds the gain in monopoly profits to the supplier, and the difference is therefore a deadweight loss for the world as a whole….

 

Implicitly, then there is also the conclusion that there is a transfer of rents involved as well.

 

That effect is the transfer of welfare from foreign consumers to domestic monopoly-inventors, and it is equal to the monopoly profits earned in the presence of patent protection on foreign sales.[18]

 

Therefore, the model that economist Vilfredo Pareto derived is relevant when considering the TRIPs. Pareto’s theories state that the optimum allocation of resources in a system is not possible because those better off in the system will work harder to maintain their superior position. Although Pareto’s system was confined to a local system, it can be enlarged to the global economy. The producers are the developed countries that constitute the economic elite in the system, with the United States at the fore. The bottom of the Pareto system are the developing countries – mainly in Latin America and Asia. Despite the move to create greater trade liberalisation that allowed developing countries to exploit and compete with their respective comparative advantages, it has been shown the TRIPs agreement is very much the distorting institution Pareto warned about that would change the global economic system to favour developed countries in favour of, in this case, the producers of intellectual property.

The overall ‘benefits’ associated with the trade preferences associated with GATT membership are often cited as the reason that entices developing countries accept the welfare-reducing portion of the GATT as Oyejide addressed Nonetheless, many of the authors consulted for this paper refer to the TRIPs as a Pareto-non-bargain meaning that the value of the trade concessions awarded to the developing countries may not outweigh the costs of IP protection. Further, in his sociological works, Pareto argued that those in better-off positions would work to ensure their positions and for their own aggrandisement in whatever way they could.[19] Appropriately so, as the only benefits Trebilcock and Howse attribute to the TRIPs agreement is the protection that fosters greater innovation that only increases the profits of producers while shutting out developing world imitation economic activity. Pareto on the subject.

 

91. The entrepreneurs always press for increases in the prices of the goods they produce, and in that they are pursuing their own interest because these increases certainly obtain an advantage for them during such length of time as is necessary to arrive at a new position of equilibrium. Each one, moreover, imagines that he enjoys all the advantage of the increase in price of his own good, without seeing the partial offset which will follow the increase in price of other goods. It is the same for property owners who endeavour to obtain positive rents. In general the workers are indifferent to these price movements because they do not have immediate repercussions on wages; they think that only the ‘capitalists’ have to be concerned about these price changes. As a result, they do not resist those which, in the last analysis, will be harmful to them, and they do not promote those which, in the last analysis, will be advantageous to them.[20]

 

45. …even in our social organization, producers benefit from the use of variable prices; and since they cannot do it directly, they endeavour to do it indirectly by expedients which can only very roughly approach the solution which would give maximum ophelimity (the power to give satisfaction to members in a system) (emphasis added.)[21]

 

In his discussion about the population of this system, Pareto states that while laws and customs once separated humans into classes have been broken down by the rise of democracy, wealth still allows richer elements to “beat back competitors” from economic advancement. The implications of class creation and separation are clear.[22] Indeed, the TRIPs has been criticised as a self-serving agreement that divides the world into two classes of haves and have-nots. However, the data and critics have pointed out that even with rife IP infringement developed countries do not need to press for protection because imitation country output is negligible. Subramanian states “with the small country assumption, TRIPs is more accurately seen as an exercise in rent creation and rent shifting rather than as an attempt to enhance global R&D.”[23] Indeed, most ‘violators’ are small countries, or are ones where profits are low anyway due their emerging market status. Indeed citing the recording industry as example, developing countries import just a fraction of the records that developing countries trade with each other.

Table 1

Music and Trade, 1988-1997

1.1     Developed market economy (DMEC) exports of recorded music

(In thousands of U.S. Dollars)

 

Trading Partner	1988	1997
DMEC: World	3,943,505	13,342,635
DMEC: DMEC	3,360,896	11,135,601
DMEC: Developing Countries	326,418	1,859,258

1.2     Developed market economy (DMEC) imports of recorded music

(In thousands of U.S. Dollars)

 

Trading Partner	1988	1997
MacWorld	4,300,382	12,454,049
DMEC: DMEC	4,151,389	11,676,323
DMEC: Developing Countries	133,593	684,663

 

Source: UN Comtrade Database.[24]

 

The data clearly shows trade in recordings with developing countries is relatively low at 5 percent of total world activity. Therefore, the case for patent protection in these markets becomes less compelling. As Grimwade states, and the Pareto-based analysis would suggest, the effects of the TRIPs can be seen as more of a rent-preserving and distribution issue than anything else.[25] Grimwade cites U.S. and EU figures from 1990 estimating IP-related losses to developing countries at $43-61b. Naturally with IP protection, developed countries stand to gain those billions of dollars back. Therefore it can be seen that overall global welfare goes down when protection is increased. However, many of the exponents of the TRIPS argue that technology transfer and foreign direct investment (FDI) in developing countries by newly reassured developed countries will increase. Indeed, many others like Everson, state that the correlation between TRIPs implementation and increased FDI is a weak one. In his analysis Maskus also addresses the supposed benefits of increased IP protection, and goes to dismiss increased technology transfer and increased FDI arguments.

 

Again, however, there is little evidence on which to base expectations in this regard (increased technology transfer to developing countries due to greater local government protection). In fact, strong IP protection alone is not likely to be a decisive factor in a foreign firm’s decision to engage in FDI or to license technology. That decision depends more readily on the capacity of the recipient country to absorb and successfully to exploit the technology.[26]

 

Indeed, Trebilcock and Howse state that the evidence of greater FDI in newly IP-protected countries “sketchy and anecdotal.”[27] When it comes to recordings, apparel and other consumer products the point of shutting down cheap local production is primarily a price issue that inconveniences consumers. However, when it comes to the consumer’s medical well being the debate naturally leans towards the cause of grater social good. Trebilcock and Howse attack the TRIPs as one might expect Canadians to. After all, they are both professors at the University of Toronto. In addition to the previous arguments, the two reveal their hand when they say that the TRIPs agreement was a major victory to U.S. pharmaceutical companies. They highlight their argument by offering the Canadian example of being forced to extend patent protection from 7-10 years to 20. This extension prevents local production of generic equivalents to expensive American-made medications. This imitation production was the backbone of the socialised Canadian healthcare system. While Canadians may complain about paying more for drugs, they can oftentimes do it. However, this is not the case for the majority of the rest of the world.

AIDS and HIV are the most cited example of the great social costs of pharmaceutical IP protection. Africa is home to 70 percent of the world’s HIV-infected victims. Of the 25 million people infected with HIV, the virus that leads to AIDS, in sub-Saharan Africa at the end of 2000, 4.8 million were in direct need of treatment, according U.N. estimates. Of those 4.8 million, only 30,000 had access to the expensive drug cocktails that have extended lives for patients in the West. According to figures that Rowe cites, only two percent of Kenya’s AIDS sufferers only two percent can afford the costs of expensive drug treatments. AIDS already kills 500 a people a day in that country.

More facts and figures make the case for reducing IP in favour of greater social good all the more compelling. Despite the fact that pharmaceutical companies are responding to pressure from human rights groups to reduce prices for treatments, the numbers are still bleak. In one region of South Africa, Hlabisa, where one of every three adults is HIV-positive, it is estimated that of the 40,000 people who are HIV-positive, only about 11 can afford reduced price anti-AIDS treatments.[28]  This is just one region in a country with 4.7 million HIV-infected people. Even given reduced prices, the South African government would have to spend $800-1000 per year per person for the cheapest patented drug treatments. It is tantamount to the South African government spending its entire $250m annual budget entirely on medicines and nothing else. Others point out that this figure does not even include the additional costs of medical training involved with the treatment regime. Clearly, it can be seen that a non-Pareto bargain exists here, even with concessions from producers, and the losers of the system end up dying from their diminished position

Therefore, developing countries are already trying to resist the TRIPs agreement, as a recent case in South Africa demonstrates. As recently as February 2001, developing countries stepped up their public relations campaign by offering their imitation drugs to charities. Cipla, an Indian producer of generic drugs, offered to sell its drugs to Doctors Without Borders at deeply discounted prices. The South African government took more direct action and passed a provision in 1997[29] that enables the government broad powers of producing, or importing cheaper versions of anti-AIDS drugs still under patent. Naturally the pharmaceutical industry, represented by the Pharmaceutical Manufacturers Association of South Africa, i.e. Merck, Glaxo-SmithKline among others, has sued over the law and contends that the policy destroys patent protections. The case still remains to be decided, but the issues surrounding it are the very same ones that make the case of balancing public good and private innovation so difficult to solve.

 

“Copyrights or Copywrongs?” Conclusion

Indeed the vast majority of analysis by economists runs against the justifications put forth by the WTO in its defence of TRIPs. The standard argument of increased IP protection offering developing countries greater foreign direct investment and increased technology transfer has proven weak. This paper laid out how the  U.S. and the EU had an enormous comparative advantage in knowledge-based technological innovation. It was also seen the developing countries wishing to gain the other benefits of the GATT/WTO acquiesced on intellectual property protection. That, and the fact the U.S.’ trade policy made refusal of the TRIPs an unsavoury prospect. Grimwade highlighted how the U.S. used its vastly superior bargaining position to associate IP with trade liberalisation to make the resulting IP convention virtually compulsory. The document itself is a series of ideological contradictions, oftentimes the justifications for stringent IP protection become muddled with reference to protecting consumers. Only the infringement enforcement provisions of the TRIPs are resolutely clear. The sources consulted for this paper characterise the TRIPs as one of the most intrusive and comprehensive documents that interferes greatly with municipal legal and economic activates. Trebilcock and Howse liken it to international legislation with a stronger-than-usual mandate to interfere with domestic legal systems. But moving on to considering the document, it can be seen that developing country imitation activity is relatively small compared to developed country activity. The TRIPs fits Pareto’s definition of a welfare-reducing institution imposed by the producers within a system, as the ‘causes’ section point out. However, the real social costs of IP protection are quite substantial especially since those at the bottom of the system no only lose out economically but may also end up dying from their diminished economic position. The economic losses of having a huge segment of Africa’s population succumb to AIDS without any treatment is truly frightening both in human terms but also in economic terms as well. It can be concluded, then, that in many social areas that increased IP protection is harmful and should not be applied, while on other more mundane consumer areas like apparel and retail goods, that the case is sounder.

© MMI. Kevin K. Ho

Works Consulted:

 

Birgitte Andersen, Zeljka Kozul-Wright and Richard Kozul-Wright. “Copyrights, Compensation and Development: The Case of the Music Industry.”  UNCTAD Discussion Paper No. 145, Jan 2000, pp. 1. Accessed 6 March 2001 at http://www.unctad.org/en/pub/a145-00.en.htm

 

John Beath. “Innovation, Intellectual Property Rights and the Uruguay Round,” in World Economy September 1990, Vol. 13, No. 3, pp. 411-425.

 

Henri E. Cauvin. “Access to AIDS Drugs at Issue in South African Trial,” in the New York Times. 5 March 2001. Internet Edition. Accessed 25 March 2001 at http://college1.nytimes.com/guests/articles/2001/03/05/829279.xml.

 

Alan V. Deardorff. “Should Patent Protection Be Extended to All Developing Countries,” in World Economy September 1990, Vol. 13, No. 3pp. 497-508.

 

Nigel Grimwade. International Trade Policy. London: Routledge, 1996

 

T. Ademola Oyejide. “The Participation of Developing Countries in the Uruguay Round: An African Perspective,” in World Economy September 1990, Vol. 13, No. 3, pp. 427-444.

 

Vilfredo Pareto. Manual of Political Economy. Kelley, New York, 1971, (English translation) Droz, Geneva, 1927 (French Edition).

 

Pareto, Vilfredo.” Encyclopaedia Britannica. http://www.britannica.com/bcom/eb/article/0/0,5716,59910+1+58449,00.html?query=pareto Accessed 13 February 2001

 

Traci Philips. “Copyrights and Wrongs,” in Foreign Policy January-February 2001. Electronic Edition, accessed on 7 Feb. 2001 at http://www.foreignpolicy.com/issue_janfeb_2001/gnsjanfeb2001.html#phillips.

 

Bruce R. Scott. “The Great Divide in the Global Village,” in Foreign Affairs January-February 2001, Vol. 80, no. 1, p. 160.

 

Arvind Subramanian. “TRIPs and the Paradigm of the GATT: a Tropical, Temperate View,” in World Economy September 1990, Vol. 13, No. 3, pp.509-521.

 

Rachel L. Swarns. “AIDS Obstacles Overwhelm a Small South African Town,” in the New York Times. 29 March 2001. Internet Edition. Accessed 29 March 2001 at http://college1.nytimes.com/guests/articles/2001/03/29/838675.xml.

 

Michael J. Trebilcock and Robert Howse. The Regulation of International Trade, Second Edition. London: Routledge, 1999.