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THE
COMING TRADE WAR, Part 5
Intellectual property
rights: Bad TRIPS
By Henry C K
Liu
(For other parts in the series, click here)
 Property rights are a
social institution, not a natural phenomenon.
Intellectual property is an invention of the
knowledge-based economy.
Both free traders
and protectionists in the United States agree on
the need to protect US intellectual property (IP)
rights globally in general and in China
especially. Of course a protectionist regime has
less, if any, leverage at its disposal for
combating the violation of intellectual property
rights outside its borders. The Uruguay Round in
1986 produced the World Trade Organization (WTO)
Trade Related Aspects of Intellectual Property
Rights (TRIPS) agreement. It is supposed to be an
attempt to narrow the discrepancy in ways these
rights are protected in different countries around
the world, and to bring them under common
international rules. It establishes minimum levels
of protection that each government has to give to
the intellectual property of fellow WTO members.
In doing so, it attempts to strike a balance
between the long term benefits and inevitable
short term costs to global society at large.
Society benefits in the long term when IP
protection encourages creation and invention,
especially after the limited period of protection
expires and the creations and inventions enter the
public domain. National governments are allowed to
reduce any short-term costs through various
exceptions, for example to tackle critical
time-sensitive public health problems. The WTO
dispute-settlement system is designed to settle
international trade disputes over IP rights before
such disputes translate into political tension.
Yet ideas and knowledge are increasingly
important, even dominant, parts of trade. Because
technological underdevelopment in many countries
is traceable to the historical legacy of Western
imperialism, TRIPS can be viewed as condoning
hidden trade-restricting tariffs imposed on the
world by the technologically advanced economies to
perpetuate cultural imperialism. Prices of goods
that carry IP rights invariably enjoy astronomical
margins of profit over production cost. This high
margin is rationalized by the claim that most of
the cost of new medicines and other
high-technology products lie in the amount of
invention, innovation, research, design and
testing involved, not production cost.
The
current high margin is designed not only to repay
past research and development costs, but to
finance such ongoing costs to sustain an
uninterrupted future stream of inventions. This
means the technology gap between rich and poor
economies will be widened with time under TRIPS.
Only established drug mega-companies operating
with a de facto economic monopoly through
astronomical price markups can afford to develop
new drugs. With all the talk about the need for
competition policy, IP rights protection is
shaping up to be the most anti-competitive regime
in world trade. Further, in many advanced
economies, such research and development costs are
subsidized by government funding or tax
deductions, paid for by the general public. Yet
patent earnings seldom, if ever, flow back into
private bank accounts of individual taxpayers in
the form of tax rebates.
Films, music
recordings, books, computer software and online
services are bought because of the information and
creativity they contain, not because of the
plastic, metal or paper used to make them. The
cost of material and printing is a minuscule part
of the price of these products. The bulk of the
price goes to pay for advertising, distribution
and, only finally, fees for licensing IP rights of
the creators. Much of the revenue from IP rights
goes to middleman organizations rather than
original creators, weakening the argument that its
protection encourages invention.
How IP
rights are abused
Many products that used
to be traded as low-tech goods or basic
commodities now contain a higher proportion of
invention and design in their value - for example
brand-name clothing or genetically modified new
varieties of plants and produce. Creators are
given the right to prevent others from using their
inventions, designs or other creations - and to
demand payment in return for others using them.
These "intellectual property rights" take a number
of forms. For example, books, paintings and films
come under copyright; inventions can be patented;
brand names and product logos can be registered as
trademarks; and so on. Governments have given
creators these rights as incentives for producing
ideas that will benefit society as a whole.
But often, intellectual property rights
are abused to protect trade-restraining
monopolies. In such cases, both the definition of
intellectual property and the enforcement of its
protection can be unjust and oppressive. When
copies of Louis Vuitton bags of the same quality
can be sold at a fraction of the price of the
original at a profit, it is empirical evidence
that the profit margin of the original is
excessive. If the copies are of inferior quality,
then they are caricatures and arguably not a
violation of intellectual property rights. Fakes
that are sold as fakes do not qualify as theft of
the original. It is not illegal in any country to
sell copies of the Mona Lisa as copies. The reason
behind widespread IP rights violation is that
unjust and oppressive laws invite popular
resistance.
The extent of protection and
enforcement of IP rights varies widely around the
world according to varying stages of economic
development in different countries. As
intellectual property became more important in
trade, these differences became a source of
tension in international economic relations. New
internationally agreed trade rules for IP rights
are supposed to be a way to introduce more order
and predictability, and for disputes to be settled
more systematically before they translate into
political tensions. But they can also be viewed as
a new form of rule-based knowledge imperialism.
There exist an inherent inconsistency and conflict
of interest for an industrial standard to claim
protection of intellectual property rights because
the condition for something being accepted as an
industry standard is that all in the industry can
use it freely. An industry standard that demands
payment of fees for its use is a monopoly.
The argument that protection of IP rights
is indispensable for economic growth has no basis
in history. The socio-economic and political
history of the United States was shaped by the
widespread piracy of a simple pattern held by Eli
Whitney (1765-1825) on the cotton gin, the
widespread use of which had immense socio-economic
and political repercussions.
Little cotton
had been produced in America prior to 1793. During
the colonial period, the main crop was tobacco,
but tobacco farming had ceased to be profitable as
a result of soil exhaustion. The tedious process
of separating short cotton fiber from the seeds
had to be done by hand and took too much time to
be profitable even in a slave economy. A few
planters grew a long-staple strain called Sea
Island cotton that was easier to separate, but
this only grows in coastal areas, not inland,
where only short-staple cotton can be grown.
Whitney's cotton gin made it possible to
grow short-staple cotton inland for profit. The
cotton kingdom then stretched quickly over a vast
area from Georgia and South Carolina westward as
far as Texas. With the growth of the British
textile industry, cotton growers in the US were
assured of a market for all they could produce.
But cotton growing was labor-intensive, which
perpetuated the south's slavery economy, which
until the arrival of the cotton gin was fading as
an economic institution because of a dwindling
need for cheap labor. Also cotton, unlike rice and
sugar, was a more democratic crop, being equally
profitable for large landowners with hundreds of
slaves and for small farmers with a couple of
hundred acres and two or three slaves. Right up to
the Civil War, half of the cotton in America was
grown by small farmers with fewer than six slaves
each. The widespread piracy of the cotton-gin
pattern created a socio-economic condition that
became one of the key causes of the Civil War.
Thus for the South, the civil war was in essence a
people's war against the big business interests of
the North.
In recent years in the US, the
judiciary and some highly placed government
economists have claimed that in the
knowledge-based economy, antitrust laws may
threaten economic liberty, turning antitrust on
its head. The US Appeals Court's decision
(District of Columbia circuit) on Microsoft in
July 2001 raised the issue with timely urgency.
The justices acknowledged that tying browsers
(Internet Explorer) or other add-on programs to
computer operating systems (DOS-based Windows) may
not be bad for economic freedom. The court, while
upholding a lower court's finding that Microsoft
had engaged in unlawful monopolistic acts, said
broadly that it was unclear how the "current
monopolization doctrine should be amended to
account for competition in technologically dynamic
markets". And given these conditions of
uncertainty, courts must demand "considerable
experience with certain business relationships",
such as software packages that bundle services
together, before jumping to the conclusion that
they are unlawful. The court said that in the
future, all cases of tying involving platform
software (upon which other computer programmers
build) should be judged by a higher standard of
proof.
I have detailed the Microsoft
ruling previously (A monetary coup d'etat,
Dec 17, 2004). The court concluded, amazingly,
that in the end the goal of US competition law is
not to promote competition for its own sake but to
promote efficiency. This was a very peculiar
attitude for a US court, for the whole US argument
against monopolistic planned economy is its
alleged inefficiency.
For neo-liberals,
the only time a monopoly is good for the consuming
public is when the entire industry has become
uneconomic by deregulation, such the rail
industry. Unfortunately, this is becoming
commonplace in energy, air transportation, health
services, telecommunications and the entire new
economy. There are no data to support the
contention that Microsoft bundling has been good
for consumers. It has been good only for
Microsoft. Microsoft has spent more than US$3
billion in recent years settling lawsuits by
rivals, including a $1.6 billion deal with Sun
Microsystems Inc in 2004 and a $750 million truce
with America Online, now part of Time Warner Inc.,
in 2003. In a settlement announced on June 30 this
year, IBM will get $775 million in cash and $75
million worth of software from Microsoft to settle
claims still lingering from the federal
government's antitrust case against Microsoft.
Cultural imperialism and creative
destruction
The Agreement on TRIPS, the
subject of Annex 1C of the agreement establishing
the World Trade Organization, is the latest
translation of cultural imperialism into economic
imperialism on a global scale. The Schumpetrean
"creative destruction" that US Federal Reserve
chairman Alan Greenspan tirelessly celebrates is
increasing distorted from the specific idea of a
better mousetrap to the systemic appropriation of
the broad notion linking mice to traps.
In
the United States, the self-proclaimed bastion of
democracy, the creative destruction of economic
democracy through the rule of law is in full
force. Not only do the poor economies not have a
fighting chance under TRIPS, even the people in
the advanced economies are quietly put in
technological servitude by the new patent regime.
The notion that an individual should be granted
permission to stake a personal claim on a nation's
natural resource (such as gold, oil and other
mineral rights) is undemocratic enough, but now
intellectual property rights are defined way
beyond any reasonable personal efforts, such as
writing a book or a symphony (covered under
copyrights), to thoughts while shaving that really
amount to wholesale robbery from the public
domain. On a corporate level, IP rights have
become an economic weapon of mass destruction,
preventing creativity from ever seeing sunlight.
US annual revenue from patent licenses now exceeds
$100 billion, which is larger than the
foreign-exchange reserves of most countries.
Through TRIPS, US patents gain global status
without the burden of sharing patent fees with
other governments.
Patents originally were
intended to protect the lone inventor, the
pioneering genius in a garage, against the
predatory exploitation of big companies. In
today's reality, the opposite is usually the case.
As basic industries such as electricity,
telecommunication and broadcasting developed in
the 20th century, the great corporations learned
to create arsenals of interrelated patents to use
as sword and shield by systemic patent. A recent
advertisement campaign of Mercedes-Benz in the
Wall Street Journal was built around a theme that
there is only one Mercedes, the car with
10,000-plus patents. Patent battles have become a
strong catalyst for mergers, reducing competition
in many domains. The largest corporations, with
gigantic patent portfolios, routinely enter into
cross-licensing agreements with their largest
competitors. Companies without portfolios of their
own have to pay cash, representing a hidden tax
within the high-tech economy. And the costs are
skyrocketing. Revenues in the United States for
patent licenses were about $15 billion in 1990;
eight years later they had soared to more than
$100 billion. In 1999, IBM alone took in well over
$1 billion from licensing and received a record
2,756 new patents. MSFT's revenue would dwindle by
80% if its patent and copyrights were suddenly
invalidated. A Boeing software engineer has
patented a basic method of correcting the century
in dates stored in databases and sent a
threatening form letter to 700 of the United
States' largest corporations (including the New
York Times) demanding one-fourth of a percent of
their total revenues, on the assumption that they
probably have used the same method.
The
four key elements in the issue of fair value in
global trade are IP, technology, information and
pricing. In classical exchange theory, price is
determined by cost and demand, which under free
trade conditions will reach equilibrium to provide
the optimum price and the largest sales. But free
trade is a myth, and the US is the leading
opponent of it in practice while being the leading
proponent of it in rhetoric.
The rationale
for IP protection is that it is needed to
subsidize the coming stream of new technology. But
as the Microsoft antitrust case demonstrates, IP
inhibits new technology more than is generally
recognized. The same is evident in medical drugs.
The only arena where this inhibition does not
exist is in military technology, where the
technological imperative still governs at the
expense of price sensitivity.
The role
of developing nations
The fundamental
criterion for a free market is the equal
availability of information to all participants.
When information is packaged and sold as
commodities, free market becomes the casualty.
When two economies of uneven stages of
technological development trade bilaterally, the
concept of countervailing trade surplus in favor
of the less advanced economy is simple justice.
Otherwise it would be structural economic
imperialism. More and more developing nations are
finally taking this view in their trade
negotiations with more advanced countries.
As for intellectual pirating, this is a
serious and controversial issue. The reason it is
so widely practiced by most less advanced
economies is that there is a widespread view that
the current intellectual-property-rights regime is
not fair to latecomers. China is only the latest
to join the club. The US as a young nation
participated fearlessly in intellectual piracy
until it became technologically matured. The same
is true with Japan, Korea and Taiwan. Europe was
notorious for its brazen theft of early technology
from other cultures. To be fair, China should be
entitled to claim retroactive IP rights on the
compass, gunpowder, paper-making, silk production,
printing, etc, for a period of 50 years starting
now, to compensate for its loss due to the absence
of an international IP regime during its epoch of
high inventiveness. The Arabs should be
compensated for Arabic numerals, without which
modern mathematics would not develop.
When
a law is unjust, it invites widespread violation.
How about an international affirmative-action
program for IP, or IP amnesty for the
underdeveloped Third World for 50 years? It would
speed up global development, and the advanced
economies would also benefit more than they would
lose as a result.
Next:
Trade wars lead to shooting wars
Henry C K Liu is chairman
of a New York-based private investment
group.
(Copyright 2005 Asia Times
Online Ltd. All rights reserved. Please contact us
for information on sales, syndication and republishing.) |
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