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Email this citationCIAO DATE: 05/02
LDCs and the TRIPs Agreement: Impact and Response
Nora S. Kahn
Research Associate, Council on Foreign Relations
2002
The World Trade Organization (WTO), erected on the shoulders of the General Agreement on Tariffs and Trade (GATT) in 1995, greatly increased the role of multilateral institutions and agreements in governing world trade and the actions of nation states. The WTO addresses multilateral agreements on trade in services, food safety regulations, dispute settlement procedures, and other Uruguay Round topics. A central feature of the agreement is trade related aspects of intellectual property (TRIPs), which requires all WTO member countries to meet minimum international standards for protection of intellectual property rights (IPR); the TRIPs agreement also requires WTO members to have equitable and effective enforcement procedures in place to handle disputes on claims of IPR infringement. There are special provisions in TRIPs to assist developing and least-developed members; Transitional Arrangements allow developing and least developed country members a four to ten year hiatus, during which they are not required to comply in full with TRIPs provisions. In addition, the agreement expects developed country Members to promote the transfer of technology to developing and least-developed members.
Despite these provisions, the costs that Least Developed Countries will accrue implementing the TRIPs Agreement far outweigh its immediate benefits. The fundamental flaw in the agreement is that it asks countries to protect intellectual property rights before it is in their interest, as non-innovators, to do so. While the agreement attempts to compensate LDCs for this by promising increased trade and foreign direct investment, such increases are not likely in the countries that would be most injured by the loss of piracy. There are pro-active steps that LDCs can take to limit the damaging effects of TRIPs, and these should be implemented carefully and quickly.
TRIPs and the Logic behind Patent Protection
Patent protection prevents new products and processes from being copied or performed by any party not so authorized by the inventor. The TRIPs Agreement restricts the unauthorized duplication of Patents, Copyrights, and other forms of intellectual property such as Trademarks, Geographical Indications, and Industrial and Layout-designs. The agreements ensures protection for "any inventions, whether products or processes, in all fields of technology, provided that they are new, involve an inventive step and are capable of industrial application." (TRIPS, Article 27) Both domestic production and export of unauthorized products is prohibited.
The logic behind patent protection is that inventors can recoup the development costs of an innovative product only if that product is protected from replication by unauthorized actors. This is particularly true in sectors like pharmaceuticals, computer software, and biotechnology, where products are costly to invent but easy to copy. As globalization brings new products to an ever-wider array of world markets and as the threat of piracy of IPR extends to those markets as well, the TRIPs agreement ensures protection of intellectual property in all WTO member countries. This provides holders of intellectual property with greater security that their assets will be safe from copy and resale by unauthorized producers. By its logic, TRIPs, is intended to increase trade in goods that have a high content of intellectual property by increasing security for IPR holders.
The Connection between Intellectual Property and Economic Development
In the past, individual nations determined their level of IPR protection in accordance with their level of innovation. Countries with strong innovative capabilities favor strong IPR protection in order to retain profits and induce future investment. Alternatively, countries with just budding innovative potential have an interest in being able to freely acquire the fruits of others' development efforts. They maintain weak IPR protection so that they may utilize piracy in the course of their development. For example, Japan's patent system "was designed to encourage industrial development by emphasizing technological acquisition from abroad, the system was developed with the interests of a technology follower in mind. The Japanese regime significantly limited patent scope and breadth. For example, pharmaceutical patents were not provided until the 1970's." (Maskus 143) Not only Japan, but most of the now industrialized countries used piracy in the course of their development, providing patent protection only once it met their economic needs as innovators. "For example, The United States progressively increased the strength of its patent system and protection for trademarks and trade secrets from the 19th century to the 20th century. The demand for protection rises with economic development and with technological change and entrepreneurship." (Maskus 144) Middle-income countries like China, Korea, Brazil, and Malaysia utilized weak IPR protection and piracy to develop strong local firms and markets; today their innovative capacity is rising and these nations are already increasing IPR protection. The LDCs, however, do not have the innovative ability to warrant strong IPR protection; in fact, they would benefit more from weak IPR laws that would allow them to acquire and adapt technology from abroad. While high-income countries issued 3,517 patents in 1998, low-income countries issued only 1,114. (WDI 2001) The TRIPs agreement forces LDCs to implement IPR laws before they are developmentally ready. By preventing piracy, the LDCs are blocked from what has historically been a major avenue towards economic growth for the LDCs.
Arguments in Favor of LDC compliance with TRIPs
Proponents in the WTO claim that TRIPs will cause long-term dynamic growth in the LDCs and provide a development path that is preferable to piracy. The implementation of TRIPs will encourage local firms to innovate since their products will not be copied and reproduced without consent. Protection of intellectual property will also lead to greater trade, Foreign Direct Investment (FDI), and licensing agreements by outside firms that will no longer have to take costly steps to deter imitators. TRIPs will subsequently increase the flow of goods to LDCs. Proponents argue that trade, FDI, and licensing agreements will replace piracy and become primary building blocks.
It is argued that the implementation of TRIPs will first and foremost raise the quality of FDI in the LDCs. In LDCs, FDI generally occurs when a subsidiary of a multinational corporation sets up shop in a host developing country, where it employs local workers to produce intermediary parts of a product. It is argued that FDI raises the knowledge, technology, and productivity of local firms that receive spillover effects through the migration of labor from workers trained by foreign multinational corporations. FDI is favorable to foreign multinational corporations because they profit off the lower wages, limited regulations, and tax breaks offered by the host country. In the past, countries that practiced piracy were given access only to low-level foreign technologies. However, the implementation of TRIPs could encourage foreign multinational corporations to use high-level technologies in the LDCs, which would in turn spillover to local firms. Eventually, investment and patent disclosure would lead to broad sharing of new information, and local firms would begin to develop and patent goods destined for their own markets. Traditionally, this is the stage at which most countries implement strong IPRs.
TRIPs is also expected to increase the likelihood that licensing agreements will be undertaken between multinational corporations and local firms. In a licensing agreement, a local firm produces and sells an entire product, in contrast to simply producing a particular part, and pays the patent holder a pre-determined royalty. Historically, licensing was very risky and expensive in countries that did not have the legal infrastructures to handle commercial disputes over contracts, fees, and royalties in a fair and expeditious manner. WTO dispute settlement procedures, which require countries to maintain a certain level of legal protection and enforcement, alleviate this concern. This will likely increase the number of licensing agreements, which when compared with FDI, generate greater capital investment, technology spillovers, and wealth for the host country.
Why Pro-TRIPs Arguments Are Unrealistic
Before accepting arguments that TRIPs will cause long-term dynamic growth in the LDCs, we must answer two critical questions, 1) will FDI and licensing agreements increase, and 2) will this increase have development-inducing effects? The first error TRIPs model for development makes is its initial assumption that the implementation of TRIPs will be sufficient to increase trade and FDI in the LDCs. While trade will undoubtedly decline for countries that don't meet the obligations of TRIPs, compliant countries will not necessarily see increases. FDI allocation is primarily based on 1) market size, costs, openness, and taxation, 2) infrastructure, FDI stock, and degree of industrialization, 3) risk, such as the rule of law and exchange rate variability. (Lesser p. 17) While achieving compliance with TRIPs may well improve openness, risk, rule of law, and perhaps costs, a countries markets size, infrastructure, and degree of industrialization will remain unchanged. Without strength in these base factors, implementation of intellectual property protection will not increase the inflow if FDI. For example, in 1994, 55% of all FDI flows to developing countries went to China, Mexico, Malaysia, and Brazil, all of whom have relatively strong markets and infrastructure. (Primo Braga & Fink 544) In contrast, the LDCs, which we know lack these factors, receive less than 1% of foreign direct investment. (WIPO Press Release PR/99/19) To further illustrate the link between base factors and FDI, in 1998 high-income countries received 482 billion in FDI net inflows, while low-income countries received only 13 billion. (WDI 2001) Therefore, contrary to the argument that FDI will develop these building blocks to development, the reality is that these are necessary pre-conditions to receiving FDI; IPR alone will not open the floodgates.
The Benefits of TRIPs are Elusive
The said development inducing consequences of TRIPs should not overshadow the various costs involved for LDCs. Developing countries often bid for FDI by offering tax free zones, cheap labor, host financed infrastructure improvements, and host financed start up costs. These offers reduce profit for the host country, which winds up subsidizing foreign corporations that are not required to give anything back to the host country, or to remain in the country for any length of time. This bidding over FDI occurs because developing countries believe it will have financial and developmental spillover effects. However, a foreign firm's decision to invest in a LDC does not necessarily mean that technology will transfer to the host country's firms, workforce, or market. "Gershenberg (1987) finds evidence of only minor labor mobility from multinationals to Kenyan firms: only 16% of skilled workers that left multinationals left to join local firms." (Lesser p.2) This is a clear sign that the said benefits of FDI are not reaching the host country.
Economic Costs
Increased FDI can actually damage fragile LDC economies by hurting local firms, forced to compete with multinational corporations. "If FDI enters the economy in sectors where there are competing domestic firms (or firms already producing for export markets), the very act of foreign direct investment may take away investment opportunities that were open to domestic entrepreneurs prior to the foreign investments." (Agosin 3) Further economic damage will result when local businesses that employ pirating techniques are forced to shut down, resulting in a loss of jobs and capital. Critical to note, is the tremendous expenditure that LDCs must make to implement the legal infrastructure required by TRIPs. An UNCTAD study determined that, "For the least developed countries in particular, however, the legal and administrative changes required in their TRIPS regimes could entail significant expenditure and have social implications. For instance, the report indicates that in order to comply with the Agreement over the transition period, Bangladesh will need to spend US$250 000 in one-time costs for legislative drafting and over US$1.1 million in annual costs for judicial work, equipment and enforcement measures over that period. This latter sum does not include the substantial training costs." (UNCTAD Note to Correspondents No. 9) TRIPs will deal tremendous blows to LDC economies and markets with little guarantee that adjustments will induce long-term growth.
Market Costs
The TRIPs agreement was written with the needs of innovators, patent holders, and their respective firms in mind. One cannot ignore the fact that to date the developing world does not patent. From 1994-1995 less than 5% of worldwide patents granted to 'residents only' belonged to developing countries. (Braga & Fink 544) "Because ownership and exports of intellectual property are concentrated in the hands of firms in a few developed economies, the effect of TRIPs will be to shift the terms of trade in their favor, away from intellectual property importers." (Maskus 181) TRIPs will force LDCs to purchase imported goods that local firms used to supply through piracy, transferring monies abroad that were formerly spent at home. In addition to being forced to import more, "Developing country governments are concerned that protection of IPRs will be used as a non-tariff barrier to imports as their producer exporters become increasingly competitive with developed country producers." (Abbott 620)
TRIPs will prove injurious not only because of the damage that it will do to local firms and the LDC's terms of trade, but also because of the market power that it will give to foreign monopolies. Of monumental importance is the fact that when local pirating firms are shut down, foreign monopolies will have no competition. The fear in many LDCs is that prices, especially in critical areas like pharmaceuticals, will rise to levels where the general public cannot purchase them. The unaffordability of AIDS drugs in Africa is a prime example of a case where critical pharmaceuticals are priced beyond the reach of the public, whom do not have access to cheaper pirated versions. In countries like India, competing local firms that obtained pharmaceuticals through piracy have created a thriving market of affordable drugs. Once TRIPs eliminates the availability of inexpensive pirated drugs, foreign monopolies will be able to raise prices as high as they desire. While there are natural sources of competition that people will turn to if prices rise too high, replacing pharmaceuticals for homeopathic remedies for example, people will pay tremendous amounts before they reach that point. Since demand for many imports will be inelastic in the LDCs, there is fear that foreign suppliers will limit their exports in order to create shortages and raise prices. Under the assumption that TRIPs cannot and will not be reversed, the LDCs need to examine options for reducing the agreement's harmful results.
Tools for Successfully Navigating TRIPs
The most hopeful ways to mitigate the harmful effects of TRIPs are through loopholes that have been built into the agreement. As mentioned earlier, TRIPs requires WTO member countries to have equitable and effective enforcement procedures in place to dispute and rule on claims of IPR infringement. While this legal infrastructure will allow patent holders to take action against infringing firms or actors, it will also provide the structure for competition policy, which will allow LDCs to tailor TRIPs to their own needs. Through competition policy, "It is possible to select from a menu of IPR standards and limitations with a view toward promoting certain economic and social objectives." (Maskus 176) The first step that LDCs should take in implementing competition laws is to protect their own innovators and natural resources by ensuring that opposition proceedings be held prior to the granting of patents. Of monumental importance is the ability to exclude certain inventions from patent eligibility through competition laws. According to TRIPs, patents can be prohibited in the interest of national defense, protecting the environment, in discoveries of nature, and in maintaining public order. If applied appropriately, competition policy will be able to limit monopoly practices and speed the rate at which patented goods are freed for public use. Competition policy gives each country the discretion to determine the breadth of information and processes covered by a patent, as well the patent's duration after the minimum 20 years. Although competition policy cannot allow piracy, it can protect reverse engineering and non-patent holder's ability to invent around patents. Once patents are granted, competition laws are able capable of guarding against monopoly behavior by prohibiting patent pooling among horizontal competitors and sole distributorship laws. Laws can also be put in place to help licensed producers in the LDCs retain profits by prohibiting tactics such as price fixing and grant back conditions. While competition policy reduces monopoly related damages caused by TRIPs, compulsory licenses help LDCs gain access to patented materials that are needed to maintain social well-being.
Compulsory licenses can open doors to badly needed pharmaceuticals, foodstuffs, and processes critical to maintaining public health, particularly in times of crisis. Compulsory licenses can also be granted for non-commercial purposes such as research, scientific experiment, and teaching, which could lessen the gap between patentable innovations and the LDCs. "TRIPs recognizes the legitimacy of using compulsory licenses to achieve goals related to health and nutrition of other social purposes and to discipline competitive abuses of patents rights, but it significantly restricts their use. Governments must negotiate beforehand with patent owners, can issue only nonexclusive, temporary (in principle) licenses meant for the domestic market only, and must rescind the licenses when the conditions that triggered their use disappear." (Maskus 21) The United States and other developed countries have severely restricted the ability of the LDCs to use compulsory licensing, stalling attempts their attempts to gain cheap access to AIDS drugs. Debates over compulsory licenses erupted in the fall of 2001, after the United States declared a compulsory license for CIPRO, a drug used to treat Anthrax. LDCs made tremendous progress at WTO meetings in Doha, where they were assured patent rules would not stand in the way of producing or importing generic drugs in the face of a health epidemic. Through the implementation of effective competition laws and compulsory licensing LDCs have the potential to limit the damaging effects of TRIPs. Damage control alone, however, will not lead to the development of LDCs. One possible stepping-stone to the development of the LDCs is parallel imports, which were intentionally left out of the TRIPs agreement.
"Parallel importing is where a product sold more cheaply in one country is imported into another without the patent holder's permission. Countries' laws differ on whether they allow parallel imports. The TRIPS Agreement simply states that governments cannot bring legal disputes to the WTO on this issue." (Doha WTO Ministerial 2001: Briefing Notes) Parallel imports ensure that generic goods can be imported from countries where a patent has expired or was never issued. This provides LDC consumers with alternatives to TRIPs created monopolies, eliminating their risk of being denied critical goods. "Where the prices of pharmaceutical products are lower in a foreign market, for instance, a Government may decide to allow importation of such products into the national market, so as to allow offer of drugs at more affordable prices. Such measures may be beneficial to prevent anti-competitive practices on behalf of patent owners who offer their patented products at unreasonably high prices in the domestic market. In this case, patent owners would compete with other legitimate products: given that their exclusive rights would be exhausted, the interests of the patent owner would not be damaged." (WTO Dev. Country Group Paper) Parallel imports benefit the product exporter, as well as the importer. Producers in the LDCs, where production costs are generally the lowest, should be able to undercut the sales of licensed producers who operate in countries where production and therefore prices are higher. Permitting parallel imports benefits consumers in high priced areas, who receive cheaper goods, and producers in low priced areas, who increase their sales. This reduces international price distortions. Protection of parallel imports prevents low-priced goods produced in developing countries from discrimination based on IPR protection.
The TRIPs Agreement will not, and should not, be revoked. However, it is essential that the LDCs to take proactive steps to reduce the Agreements potentially damaging side effects on economic development, and market access. This responsibility is not theirs alone, and the WTO requires that the developed world contribute technological, legal, and developmental assistance toward the ultimate goal of improving fostering development and innovation in the LDCs.
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