1. Key issues
2. Intellectual property

The impact of free trade agreements on intellectual property standards in a post-TRIPS world

The Impact of Free Trade Agreements on Intellectual Property Standards in a Post-TRIPS World

By Rafael Pastor

Introduction

We are living in a post-TRIPS (Trade-Related Aspects of Intellectual Property Rights) world. Almost every member of the World Trade Organization (WTO) has had to reform their intellectual property laws in order to meet the minimum standards of protection that TRIPS prescribes. [1]

When acceding to TRIPS most countries that are net-importers of intellectual property kept their hopes high in the sense that this unprecedented harmonizing treaty would assure an international minimum standard for intellectual property [2], but not a stepping floor for an ongoing international process of intellectual property rights (IPR) expansion. The latter is being achieved mainly by the use that the United States of America (USA) and the European Union are applying to bilateral free trade agreements (FTAs).

These North-South trade arrangements include IPR chapters that obligate the signing parties to implement higher IPR standards (TRIPS-plus). In most of the cases these FTAs are technologically asymmetric in the sense that they seem to be designed in the sole interest of countries that are net-exporters of intellectual property related goods, and thus, put an extreme weighty burden on countries that rely heavily on goods protected by IPR.

This discussion paper seeks to determine the impact that these FTAs are both having internationally and domestically on intellectual property regimes, and more specifically, the discontinuities and trends that this relation (IPR and trade) is provoking in developed and underdeveloped countries that are net-importers of products related to IPR. It also seeks to point out the strategic approaches that different countries have had when tackling this problematic matter [3]. In the concluding part it asserts that currently it is actually unlikely to be able to assess the economic impact that this higher intellectual property standard is triggering, but argues that FTAs have and will continue to eroded both the sovereignty of countries that are net-importers of goods related to IPR, as well as, could eventually impact several areas that are relevant for the common good of these nation-states, such as public health, education, indigenous culture, among others.

Brief historic overview of intellectual property

Historically intellectual property regimes have been heavily influenced by international law, and mainly by the fact that countries have gradually acceded to different multilateral conventions and agreements regarding this matter. The most relevant IPR agreements, prior to TRIPS, have been the Paris Convention for the Protection of Industrial Property (1883) and the Berne Convention on Copyrights (1886). The irruption of these treaties was a response to the lack of effective protection that local laws granted to foreign titleholders in countries with less strict IPR regimes. In this sense, these international efforts were aimed at preventing imitation and the free rider problem in jurisdictions with less efficient IPR regimes [4].

Both of these treaties are administered by World Intellectual Property Organization, which is an international organization that seeks “(i) to promote the protection of intellectual property throughout the world through cooperation among States and, where appropriate, in collaboration with any other international organization, (ii) to ensure administrative cooperation among the Unions” [5]. The objectives stated latterly are the essence of this multilateral agreement, which is strictly limited to IPR. WIPO-administered treaties are focused exclusively on intellectual property matters, but do not seek to regulate aspects of IPR that may be related to trade.

Furthermore, if we analyse the strategic goals of WIPO we can highlight that they set out as follows:

“(a) Promotion of an IP culture; on the one hand, to encourage creators and innovators to obtain, use and license IP rights and assets, and, on the other hand, to seek greater respect by the public for IP rights and assets. This will include making resources and expertise available to assist Member States in their own efforts to develop an IP culture through cooperation with governments, intergovernmental organizations and partners in private sectors.

(e) Further streamlining of the management and administrative processes within WIPO to intensify efforts to achieve greater efficiency as well as the initiation of improved monitoring and evaluation systems to examine the achievement of expected results.” [6]

After reading these strategic aims, it is fair to claim that WIPO’s efforts are all focused on promoting, not only a worldwide intellectual property culture but also balanced international intellectual property laws, which are a response of emerging needs and should be sufficiently flexible to accommodate themselves within the scope of each countries’ higher policy objectives.

It is also relevant to bear in mind the fact that the Paris and Berne Conventions were capable of ensuring a certain degree of protection to IPR owners, but once globalization started kicking in seriously, the world economy witnessed a dramatic change. Knowledge and technology was being accessed and copied easily by people and companies from middle income countries, which saw no incentives in improving their IPR regimes, mainly due to their IPR importing status. Even though these treaties provided certain protection to inventors and authors, breaches of IPR became a common and beneficial trend for underdeveloped countries (specially in sectors like pharmaceuticals, entertainment, publications and information technologies), and thus, had a negative impact on the USA, Japan and Europe’s trade balances. These countries became aware that the Paris and Berne Convention were not effective enough because they did not contain a good enforcement system. Instead, they hold only optional dispute resolution mechanism, which according to article 29 of these conventions must be held before the International Court of Justice. [7]

As a consequence of the lack of enforcement embedded in the international intellectual property legal system, a strategic shift to a new and more effective IPR negotiating venue took place. The USA and European Union put all their efforts in convincing or pressuring underdeveloped countries to accept GATT’s competency [8] (trying to make them drop the lack of mandate argument) to deal with intellectual property. The venue shift was at the end achieved by the late 1980s, partly due to the USA’s threats of trade sanctions and their openness towards bilateral free trade negotiations after these threats were put on the table. [9]

The inclusion of intellectual property in GATT’s framework was finally achieved by putting this matter on the agenda of the Ministerial Conference which launched the Uruguay Round of Multilateral Trade Negotiations at Punta del Este (Uruguay) in September 1986. [10] The main outcome of the Uruguay Round negotiations was the emergence and foundation of the WTO, and consequently, Annex 1C of this multilateral trade system, which was called TRIPS (Trade-Related Aspects of Intellectual Property Rights).

TRIPS is by far the most relevant and encompassing effort to regulate IPR to a worldwide extent. It provides a strong pro-rights framework for any consideration of intellectual property policy, as well as increased the level of minimum standards for all members of the WTO, in several areas such as copyrights, trademarks, geographical indications, industrial designs, patents, plant variety, layout design of integrated circuits, and undisclosed information. It also demands severe reforms in underdeveloped countries in areas that are crucial for the public good, such as agriculture, education and culture. In this sense, TRIPS created new obligations for less developed WTO’s members, which had to reform or create their IPR legal system in order to protect product patents for food, pharmaceutical, chemicals, micro-organisms and copyright protection for software. Since TRIPS came in force, several academics and analysts have claimed that this treaty is beneficial for countries that are net-exporters of IPR, but risky for less developed nations, principally regarding strategic developmental issues like public health (access to medicine), food security, biodiversity, traditional knowledge and effective transfer of technology.

According to Peter K. Yu, there are four narratives regarding the origins of TRIPS. The first one is the bargain narrative, which views TRIPS as a consequence of a deal among developed and less developing countries. The former agreed to increase their IPR, whilst the latter to lower tariffs on textiles and agriculture, as well as accept the rules that ban unilateral sanctions via the mandatory dispute settlement process of WTO. The second one is the coercion narrative, which views TRIPS as an unbalanced trade international agreement, which was imposed on developing countries by developed countries (the were threatened by unilateral trade sanctions). The third narrative has called the ignorance narrative, which claims that developing countries accepted the terms of TRIPS mainly because they did not understand the relevance of IPR during TRIPS’ negotiations. The fourth discourse was coined as the self-interest narrative by Professor Edmund Kitch, who argues that less developed countries accepted TRIPS because it was in their self-interest to do so, mainly regarding the patent system. Kitch claims that patents alone do not come with all the necessary information to make technology work, and thus, are not cookbooks. He also states that the technology which developed countries need is unique and different from that of developing countries, as well as that poor countries ability to pay for royalties and prices of patented products is limited, and therefore, patents owners are also limited to charge for their inventions when it comes to developing countries. In this sense, TRIPS was in the self-interest of poor countries, mainly because the economic impact it produces is limited when it comes to them, due to the fact that at the end they pay less for patent use. Nevertheless, this argument does ignore that patent owners can decide to not transfer technology to less developed countries due to their lack of high purchasing power, and hence, can hinder their access to the technology they need, which becomes unaffordable to them. [11]

Nevertheless, a lot of water must still run under the TRIPS’ bridge in order to clearly assess the pros and cons of this international arrangement and be able to completely and fairly lean towards one of the narratives described above. There seems to be no clarity on the eventual outcomes that may be reached after completely revising the implementation mechanism of TRIPS regarding IPR, initiated at the Doha Ministerial Conference, which has nonetheless encountered serious negotiating stumbling blocks and stiff resistance from the USA and others, including Canada and Australia. [12]

Consequently, the history of intellectual property can be roughly divided into three periods. The first one is featured by an absence of international protection, the second one by the creation of Paris and Berne Conventions, and the third one by the linkage made between IPR and trade, and hence, the emergence of TRIPS. [13]

As stated earlier, TRIPS imposes to all members of the WTO a minimum, relatively high, standard of IPR. But this standard far from being a ceiling, has been viewed by the USA, the European Union and Japan as a stepping stone to impose a stronger and more expansive worldwide intellectual property system to assure their control over the knowledge economy [14] and as a means to eradicate the economic impact of piracy.

Jagdish Bhagwati, a highly regarded economist and free trade advocator considers that IPR should have never been included in the WTO agenda. He claims that:

“Intellectual property protection is not a trade issue; and the WTO ought to be about lowering trade barriers and tackling market access problems that will often go beyond border measures to internal regulations: a thorny issue”. [15]

In this sense, TRIPS can be considered a successful strategic accomplishment that imposes and ensures a high minimum IPR standard in every country that wants to benefit from the WTO multilateral trade system.

Understanding the nature and role of Intellectual Property

One of the main problems that our post-TRIPS world is facing lies in coming up with a consensual definition for IPR that suits the realities and necessities of every member in the international community. Intellectual Property encompasses a broad scope of rights [16] that are clustered in a modern legal institution which intends to stimulate innovation and creation by offering the prospect of a monetary reward that allows a titleholder to recover investments in research and development (R&D) and possibly make a profit, as well as, exclusive rights to prevent third parties from making commercial use of the knowledge without authorization. [17] Hence, IPR titleholders benefit from dual advantage, they are not only entitled to own and sell their innovations and creations, but also to control their use after the first sale, creating an intellectual monopoly not only over the product or process, but also over they manner in which they are commercialized after being incorporating into the free circulation of goods in the market.

Furthermore, intellectual property protection is inherently the result of a trade-off between incentives for innovation and creative endeavour, on the one hand, and both economic efficiency and distribution of income, on the other. Intellectual property favors the former at the expense of the latter, and an enlightened policy would strike a balance between these opposing objectives. [18]

Taking into account the aforementioned, it is reasonable to assert that intellectual property is a legal creation that is provided in order to meet certain goals that aim mostly at fostering innovation and creativity, as well as, improving the wellbeing of people in societies. IPR did not always exist as we know them today (prior to the creation of the modern nation-states), and hence, do not correspond to rights that transcend our social contracts (states) and are not inherent to the dignity of our human nature. Human beings are entitled by their nature to certain rights, such as the right to life, liberty, security, private property, among others, that should never be violated. However, intellectual property can be considered a sui generis kind of ownership, which is not an end in itself, but more a means to promote individual growth, but also and more importantly societal well being [19]. Moreover, the latter can be confirmed if we bear in mind the following facts:

• Humanity was capable of surviving and developing for centuries without the existence of IPR, and in those days innovation was mostly fostered and protected through trade guilds. Traditional knowledge is a good example of how innovation has been nurtured and transmitted from one generation to another, without any official legal protection.

• Not all innovations and creations are a consequence of IPR protection, and hence, these rights are not the sole source or triggering force of innovation. Developed countries introduced product patents quite lately. France did it in 1960, Germany in 1968, Japan in 1976, Switzerland in 1977, Italy in 1977, Sweden in 1977 and Spain in 1992. The latter confirms Julio H. Cole’s (professor of Economics at Universidad Francisco Marroquin from Guatemala) view on the effect of patents on innovation. He argues that:
“...it would be short-sighted to attribute technical progress entirely to technological innovation per se. But even discounting the important role of education and other improvements in the quality of the labour force, to attribute the residual effect entirely to a certain type of technological innovation (patented inventions) would be like attributing the effect of education entirely to formal instruction imparted in schools-another common error. The fact of the matter-contrary to what the pro-patents literature assumes- is that patented inventions account for only a fraction of relevant productivity growth”. [20]

• Traditional private property rights are negative and perpetual, meaning that, they are not meant to be subjected to an action of another human being or the state, and thus, they ensure a space where possessions should not be interfered with. Private Property rights are also not conditioned to a specific period of time, even though they do depend on the life span of the title-holder, but continue to exist validly under the domain of the owner’s heirs. On the contrary, almost all kinds of IPR are limited to an extension of time, and therefore, they can not be considered identical to traditional property rights, because they do not hold to a full extent all the essential characteristics that traditional private property rights do. [21]

• In order to create IPR, states have had to modify essential attributes of traditional private property, and thus, have created a unique modern form of property that is legally protected in order to meet certain clear public objectives, which surely vary from one country to another. [22]

Nevertheless, several reasons have been claimed in favour of states granting IPR. In this sense, they are exclusively granted in order to meet specific economic conditions that should be beneficial for society as a whole. These go along the following lines:

1. Regarding inventions:
1.1. Promotion and disclosure of technology innovation.
1.2. Transfer and dissemination of technology to the mutual advantage of producers and users of technological knowledge in a manner conducive to social and economic welfare.
1.3. Monetary retribution for innovative research. The rational in this condition can be found in the difficulty that patent producers may encounter in trying to recover their fixed costs of R&D, when the product or process that embodies the new invention is readily copiable. [23]
1.4. Promotion of foreign direct investment [24]. If countries protect innovations by granting patents, this would make them more attractive for foreign investors that hold IPR abroad. The latter would increase direct foreign investment, which would stem from counties where new patented technologies are originated. However, foreign investment through this avenue is usually only delivered when patents are granted based on the condition that the owner will actually use or exploit the scope of the invention in the country that issued the patent ownership title.

In spite of the aforesaid, Maskus concurs that the theoretical work on the influence of stronger IPR regarding foreign direct investment and technology transfer are controversial and inconclusive, but does agree on the fact that there seems to be emerging empirical evidence in favour of this hypothesis [25].

Nevertheless, the OECD has stressed on the fact that “patent protection may also hamper innovation, especially when it limits access to essential knowledge, as may be the case in emerging technological areas when innovation has a marked cumulative character and patents protect foundational inventions. In this context, too broad a protection on basic inventions can discourage follow-on inventors if the holder of a patent for an essential technology refuses access to others under reasonable conditions...In addition, as has long been recognized, the main drawback of patents is their negative effect on diffusion and competition...Nevertheless, patents can also have a positive impact on competition when they enhance market entry and firm creation” [26]. Moreover, strong patents could inhibit domestic innovation by restricting the scope for creative imitation and reverse engineering (both crucial in the initial stages of economic growth within the development proposition) for countries that can not afford the cost that successful R&D demands.

The Economist’s survey of patents and technology acknowledges that one of the benefits of the patent system lies in that it improves business efficiency because of its economic specialization. It creates a market of transferable assets (a technology market), where inventor and business man can meet, in order to share expertise and make a profit and mutually benefit for each other’s efforts. The latter is sound in the sense that usually a person that is good at coming up with ideas is not necessarily the best one to market them. Alas, building new markets is always a long process and makes people outside the market feel threatened by it and condemn it. A similar market experience to that of patents and technology affected the banking system, which was capable of creating the capital market, as well as the insurance industry that formed the risk market. Hence, it seems plausible to argue that the expansion of the patent system could create a dynamic market for innovation. [27]

2. Regarding Trade Marks and Copyright [28]:

2.1. Trade Marks are strictly related to advertising. They ensure companies that competitors will not be able to free ride on their advertising efforts, as well as, guarantee that low quality products will not diminish the positive commercial image that consumers have developed with respect to their products.
2.2. Trade marks are consumer information facilitators, because they reduce costs to the buyer, by transmitting information about the origin and quality of products, and therefore decrease the amount of time that must be invested by a consumer in order to gather enough information to make a sound purchase decision.
2.3. Trade marks and their branding effect provide consumers with all the information that they would be able to access if they had a direct relationship with the producer. They also enable firms to create a brand reputation, and protect the value of that reputation from being eroded by potential counterfeiters.
2.4. Trade marks enabled producers to introduce goods into commerce that are characterised by economies of scale and marketed over long distance (nationally or internationally). Hence, trade marks are beneficial, both for consumers and producers because they reduce purchase costs and promote trade.
2.5. Copyright is mainly intended to encourage creativity by rewarding creative activity. Its main consequence is to promote investment in industries, such as films, music, software and books. Landes and Posner argue that an increase in copyright protection will boost the number of new works created up to some point, as the impact on expected future revenues is felt. After that point, the negative impact of the level of copyright on the cost of creating (expressing) a new work will dominate, so any further increase in protection will cause a drop in the number of new works created [29]. In this sense, it is critical to strike a balance in copyright regulatory policies, so that they can become truly capable of promoting creative industries that are already in trade, as well as fostering newcomers’ works into the copyright equation.

Consequently, there are different views on the nature and role of IPR. Therefore, it is extremely difficult to harmonize them fairly among nation-states that are at a dissimilar technological stage. Defining a single international definition for IPR is a very complex issue and usually only enables rigid grounds for poor and unsatisfying policy making.

One of these defining views is promoted by the United States of America and the European Union and another by underdeveloped countries. There is also an intermediate view, which is advocated by developed countries that are net-importers of IPR, such as New Zealand and Canada.

Countries that are IPR net-exporters seek to equalize intellectual property to traditional private property in land. Thus, they stress more on the ownership aspect of IPR and relate them heavily to trade, but tend to disregard the conditions on which they are granted. Whereas, underdeveloped countries put more emphasis on the ends (technology transfer - sharing non-rival information) for which IPR are granted and seek to not relate them necessarily to trade.

New Zealand and Canada are countries that relate IPR to trade but have not demanded TRIPS-plus (higher standard than TRIPS) provisions in the FTAs they have signed with other countries. In this sense, it is fair to state that these countries only seek to ensure TRIPS standard compliance among their free trade partners, but do not aim at obtaining more knowledge monopolises in other IPR net-importing markets.

It should be clear that understanding IPR rigidly and restrictively will only benefit countries that are net-exporters of IPR. In this sense, a sound IPR policy should aim at ensuring a balance between a regime that is neither overprotective nor excessively weak. Therefore, this balance must be appropriate to market conditions and conducive to economic growth [30], as well as, ought to be laid down on a contextual and individual country basis.

Furthermore, Nobel Prize winner Joseph Stiglitz argues that one-size-fits all IPR regime is inappropriate because “While there may be some advantages from harmonization of standards, there are also marked disadvantages. In the commonwealth-IPD report on the Development Round, we called for a ‘conservative principle’-that common standards only be adopted where there were overwhelming gains, especially to the developing countries... I would argue that a more balanced intellectual property regime, one which reflects the balance of concerns within developing countries, is in the interests of the world. It would facilitate the closing of the gap between the haves and the have nots. A balanced regime is required if the kinds of aspirations that were articulated in the Millennium Development Goals are to be achieved. As we have suggested, we are unlikely to achieve a more balanced intellectual property regime in the framework of the WTO. At the very least, WIPO, whose mandate includes the promotion of the transfer of technology to developing countries and establishing an appropriate intellectual property regime, should be one forum in which these issues are discussed” [31].

Consequently, it is fair to conclude that the WTO is not the most convenient location (the most levelled negotiating field) to promote and discuss the future of IPR regimes. Nevertheless, at this stage it seems impossible to even think of changing this venue, and therefore, it is crucial for any intellectual property policy maker or free trade negotiator to bare in mind the acute differences stated above, as well as to retain the potential pitfalls that can be provoked by blindly undertaking certain international uniformed recommendations which may have unprecedented negative impacts on the economy and social well being of people [32] in several countries [33].

The Post-TRIPS Scenario: Re-regulating the global economy to protect knowledge as a private rival good.

The fundamental problem regarding IPR lies on the fact that knowledge is a public good, at least in the sense that there is no cost if an additional individual is enjoying the knowledge covered by any IPR. Economists refer to this property as exclusivity. If I know something that does not necessary entail that another persona at the same time can not also know that identical knowledge. To deny someone the right to that knowledge or the right to use that knowledge clearly creates an inefficiency. But intellectual property is based on such exclusion. Therefore, knowledge should be considered a global public good in order to benefit anyone in the market. There is a global social cost in depriving people in certain countries from the right to use available knowledge. [34]

Stressing more on the fact that intellectually property is as a private good rather than a public one, seems to be driving the global policy agenda of the post TRIPS system where we are entangled in. Furthermore, the TRIPS successful strategy is being internationally entrenched by what Peter Drahos has called the Global Intellectual Property Ratchet , which depends on the following propositions: [35]

1. The entrenchment in international agreements of a principle of minimum standards (WTO).
2. A process of forum shifting to venues that are more adequate to promote higher IPR standards: from the World Intellectual Property Organization (WIPO) to the WTO [36].
3. Co-ordinating bilateral and multilateral IPR strategies (signing FTAs with higher IPR standards than TRIPS).

Proposition three of the aforementioned description, clearly shows that the United States of America is on board a “divide and conquer policy” which main objective is to reward countries that are willing to accept their terms on IPR standards and ignore or retaliate against those that do not. Moreover, some analysts are worried about the fact that many FTAs include IPR regulations that are considered controversial and dodgy even in the USA. Others, like Professor Ruth Okediji believe that the trend of mainstreaming TRIPS plus bilateralism can eventually entail that the IPR regulations in FTAs could become customary international law, which would make it very difficult for any country (and especially for those who are pushing TRIPS plus provisions) to remove itself from the overprotective international array of IPR regulations that stem from bilateral agreements. [37]

The table below reveals the strategy of divide and conquer.

 [38]

Moreover, this expanding international trend seems to resemble the enclosure movement which happened in Britain in the 18th and 19th century. The latter entailed that open land which was out of any property right framework became fenced, and hence owned by people. The extension of land in the public domain was reduced drastically, likewise our IPR are currently growing in scope and life span, plundering the intellectual commons of our public domain. [39]

In sum, for developing countries, current trends in the Global Intellectual Property Ratchet raise the floor of minimum IP standards above and beyond the TRIPS Agreement. They also place severe constraints on the policy space available to them to devise and implement IPR policies which are in line and are supportive of development goals, as well as deprive them of the policy options and flexibilities that developed countries so clearly relied upon to serve their national strategic development.

Intellectual property chapters in free trade agreements: an oxymoron?

One of the main consequences of globalization has been the expansion of international trade. Bringing down trade barriers and deregulating markets is definitely a trend nowadays. In spite of the latter, an exception to this inclination seems to be IPR, which have become systematically more regulated since the global intellectual property ratchet started to be pushed, especially by means of imposing north-south fixed FTAs (with TRIPS plus chapters incorporated awkwardly) to underdeveloped countries and net-importing developed countries, as economic trade offs for acceding bigger and stronger purchasing power markets.

The relation between IPR and trade is not either completely straightforward nor naturally deemed as mandatory. In this sense, IPR are orientated to protect intellectual creations, which are essential to our human proclivity to solve problems and promote secure avenues towards progress, whereas, trade is the activity of exchanging goods and services, which is subsequent to the intellectual creation process and is oriented to mainly satisfy necessities and distribute scarce resources efficiently, both in domestic and international markets. [40]

The tendency aforementioned is hazardous in the sense that it might hinder the flow of the world’s trade regime in the long run. Free trade is about goods and services moving across borders without barriers, but intellectual property law through its complex rules on parallel importation, exhaustion of rights and doctrines of infringement allows owners of IPR to impede the movement of goods instead of facilitating their global circulation. A good example of this trend is Europe’s keenness on increasing its monopoly over other words that they consider to be geographical indications, but that have been used internationally by other countries for a long time, such as feta, bratwurst, parmesan and brut. [41] This position confirms that IPR are being manipulated to the extent of creating new forms of protectionism under the complex veil of intellectual property law.

Moreover, these new forms of IPR only seem to benefit the countries pushing the TRIPS plus agenda. An enlightening contrast can be made between geographical indicators and traditional and indigenous knowledge to expose these contrasting approaches. On one hand, the European Union is very prone to withdraw geographical indicators from the public domain (via TRIPS and FTAs), but on the other, is reluctant to withdraw rights that come from traditional and indigenous knowledge from the public sphere, mainly because this new form of IPR is of no economic interest for them. In this sense, when it comes to geographical indicators they are very keen on regulating this matter, but on the contrary, when it comes to traditional and indigenous knowledge they seem to be quite unwilling to lay down protective rules for this area.

Consequently, IPR chapters and FTAs seem to not cope with each other straightforwardly, and moreover, seem to create a disruptive trend that divides countries into those that believe that a stronger IPR regime will promote free trade, foreign direct investment, technology transfer and economic growth, and others, that believes it will not. Including these chapters, enables countries that are IPR net-exporters with a capability to increase trade barriers, as well as, a source of monopoly pricing and a potential for the abuse of rights.

The Most-Favoured-Nation Clause in TRIPS-Plus FTAs

Article 4 of TRIPS introduces a new element in the international intellectual property regime, called the most-favoured-nation clause (MFN). Under this provision, any advantage, favour, privilege or immunity granted bilaterally to nationals of any other country (even to those which are not WTO members) must be accorded to nationals of all WTO members. This clause is not applicable to international agreements related to protection of intellectual property which entered into force prior to the entry into force of the WTO Agreement, provided that such agreements are notified to the Council for TRIPS and do not constitute an arbitrary or unjustifiable discrimination against a national of other Members.

The MFN clause has a wide impact when it comes to signing FTAs, which include TRIPS-plus provisions. In this sense, if a country is willing to grant a higher IPR standard to another country in order to enhance its trade balance, this literally means that all the advantages, favours, privileges or immunities could be automatically demanded for all nationals of another WTO member which is not subscribing to the particular FTA.

This clause is an acute tactical mechanism to ensure the objectives of the global intellectual property ratchet, which basically aims at gradually imposing the highest level of intellectual property protection to the whole world.

The Australian United States Free Trade Agreement (AUSFTA)

Under chapter 17 of the AUSFTA, Australia agreed to strengthen the protection given to holders of IPR, mostly by harmonizing their IPR regime to that of the United States (which is extremely high even for a country that is a net exporter of IPR), and more specifically by adopting the following prescriptions:

• commitments to reduce differences in law and practice and participate in international harmonisation efforts with respect to trademarks (article 17.2.11);
• an increase in the duration of copyright protection, for individuals to the life of the author, plus 70 years (formerly 50 years), with similar increases for corporations (17.4.4);
• strengthened protection and remedies against the circumvention of technological measures used by authors and others to restrict access to their work (17.4.7), such as coding of CDs to restrict how and where they might be used;
• protection of encrypted program-carrying satellite signals, thereby extending the present regime to include foreign and other transmissions not now covered by the Broadcasting Services Act 1992 (17.7) and to criminalise end-users of unauthorised decryptions; and
• additional remedies for copyright infringements. [42]

On one hand, all of the obligations stated above are aimed at expanding the legal protection that IPR title holders already have, and more specifically, at lengthening the period of the protection, broadening the scope, facilitating the enforcement, and easing the requirements for obtaining IPR. On the other, the United States of America (USA) argues that the AUSFTA will grant Australia a stronger IPR regimen, which will promote growth through trade and investment, basically because it will boost Australian exports towards the USA, as well as increase the USA’s investment in Australia. [43]

One of the most controversial issues in the AUSTFA is the extension of copyright protection (article 17.4.4 is known as the Mickey Mouse clause) from 50 years to 70 years after the death of the creator. The latter entails modifying Australia’s 1968 Copyright Act to the extent of producing an unsound redirection of funds from Australian consumers to the USA without commensurable benefit. It also involves the relocation of royalty flows to foreign authors and publishers, as well as not necessarily providing incentive to produce new creative works. [44]

The inconvenience aforementioned can be confirmed if we analyse Australia’s data on this issue. According to Australia’s Productivity Commissions empirical findings, extending the extension of copyright would be inconvenient because it would turn the terms of trade against Australia, mainly because the share of copyright content in Australia’s imports in 1996/97 was 0.38% of GDP, whilst the share of copyright content in their exports was 0.16% of GDP. Correspondingly, the patent content of imports was 0.19% of GDP compared with 0.07% of GDP for exports. Another useful way of assesses this issue is to examine the value of royalties and license fees in Australia’s balance of payments. In 2003/04 this country paid $ 1.82 billion worth of royalty and licence fees to the rest of the world, while only received $618 million in return. These figures amount to 0.24 and 0.08 % of GDP respectively, rendering evidence on the negative economic effects of said extension. [45]

Consequently, it seems fair to argue that this extension is quite arbitrary and will impose upon Australian consumers increased royalty payments and could hamper domestic opportunities for build on innovations and wider the development of their cooperative public domain material.

Another issue in stake is the impact that the AUSTFA may have on Australia’s pharmaceutical benefit scheme (PBS), which was established under the National Health Act in 1953, in order to ensure universal access to affordable and essential medicines. These medicines are listed and priced by government officials to be used in the national health system. The USA does not want PBS schemes to become model for developing countries, so they have put a lot of effort in weakening Australia’s PBS, through provisions in the AUSFTA, which clearly seeks to set a precedent for future agreements among the USA and other developing countries. The main threats seem to be:

• Interpretative principles which are heavily weighted towards the rights of manufacturers of innovative medicines, and contain no reference to the principle of universal access to affordable and essential medicines.
• Requirements for Australia to set up an independent review body so that drug companies (but not consumer or public health organisations) can submit requests for examining drugs rejected by the Pharmaceutical Benefits Advisory Committee (PBAC) [46].
• A dispute resolution procedure (chapter 21) which gives a panel of three trade lawyers nominated by the Parties (Article 21.7) the power to interpret compliance with obligations in AUSFTA, including the provisions that shift the focus of the PBS towards greater rewards for drug innovation.
• The USA could submit a damage claim on grounds of not enjoying a benefit that could reasonably have been expected under the AUSFTA, even though no specific provision has been breached. The consequence of the latter is that any of PBAC’s decision to not list an innovative new USA drug in this scheme, because it is not cost effective, could only be made in the shadow of a possible US trade retaliation in other sectors affected by the trade agreement such as manufacturing and agriculture. [47]

The threats stated above clearly render evidence on the fact that the AUSFTA is inclined towards ensuring that certain patent protected pharmaceutical products, regardless of their cost-benefit impact, are listed in PBS, in order to assure their commercialization (usually at higher prices) in Australia’s national health system. These risks also tend to arbitrarily relate public health to IPR, which are only linkable in certain cases, due to their different nature. The former seeks to assure that medicines are completely hazard free before they are incorporated to the market, whereas the latter are exclusively aimed at promoting innovation, so that new R&D can be undertaken. In this sense, this linkage seems more in line with an abusive expanding IPR stance than one which is truly concerned about fostering innovation for the common good. A case could be argued to link these areas, but exclusively to when private interests are being imposed over those of the general public, such as trying to increase the prices of medicines via pipeline patents or others means. Scarifying policy independence in public health in order to foster a farfetched notion of IPR does not seem to be neither in the interest of any country, nor of their higher IPR policy objectives.

The Chilean United States Free Trade Agreement (CHUSFTA)

When it comes to pharmaceuticals, Chile has a lot in stake. Its local industry satisfies about 90% of this country’s public heath sector and is a relevant source of employment; generating directly more than 6,000 jobs, as well as about 50,000 indirectly, which correspond to those that are outsourced. Foreign pharmaceutical companies only import and distribute products which are produced abroad, not promoting the growth of local industry. The Chilean pharmaceutical market amounts to about 600 million US$, whereas USA’s pharmaceutical market amounts to US$ 140.000. [48]

The CHUSFTA does not use the public interest language which can be found in preamble of TRIPS, and thus, is tremendously IPR orientated. Moreover, this FTA makes no reference to the Doha Declaration of TRIPS and Public Health [49]. This absence involves approaching IPR with a zero-sum proposition, which means that one party’s gains entail the others loses. Framing IPR in this regulating structure and treating IPR strictly as an end pushes less developing countries to constrain their independence to use policy, by confusing instruments and objectives (the means and ends of the intellectual property policy equation). In an agreement where trade barriers are supposed to be eliminated, for the benefit of both parties, it seems quite arbitrary to use IPR as an end (expansion of IPR) rather than an instrument to promote economic development.

This agreement also requires an extension of patent protection beyond the 20 year period required under TRIPS, by extending the monopoly period in order to compensate the titleholder for unjustified delays (for more then five years since the date that the patent application was lodged or three years after a request for examination of the application has been made) in granting the patent or the marketing approval. These extensions could eventually delay the introduction of low cost generic medicines into Chile’s market. In spite of the latter, it is important to bear in mind that this extension of protection is not automatic and will only be granted is the patentee requests it. Another controversial issue, as stated earlier, is the linkage that this FTA imposes upon patent protection and drug registrations (this link is not TRIPS binding). The CHUSFTA contains provisions that do not allow national drug registration authorities from registering generic versions of patented drugs during the entire patent period (since the day the patent application has been submitted), unless the patentee grants consent. This linkage is unsound and is contrary to the essence of IRP which are legal private rights, and therefore, must not be publicly enforced. In this sense, national drug registration authorities have a clear mandate, which is to promote public health, by allowing companies to market pharmaceuticals which are effective, safe and sound, whereas, patent offices are bounded to only determine if a drug is innovative and novel enough to become a patent. [50] The CHUSFTA burdens Chile’s national drug registration authority, which is already an overwhelmed governmental agency, by transforming it into an enforcer of private patent rights.

Moreover, the linkage describe above (article 17.10.1 of CHUSFTA), seeks to protect undisclosed information concerning the safety and efficacy of a pharmaceutical or agricultural chemical product (known as regulated products) which has not been previously approved by national drug registration authorities and utilizes a new chemical. Formerly in Chile, a sanitary or marketing permit would be granted to the first person or corporation who submitted an application for a product with specific undisclosed information, meaning the latter that any other person or company, who filed an application to market a similar or identical product would benefit from the undisclosed information presented by the first applicant regarding the soundness of the product. Thus, this linkage aims at avoiding people or companies to benefit from a third party’s undisclosed information and to oblige them to present their own confidential information concerning the safety and efficacy of the pharmaceutical or agricultural chemical products they wish to market. This prohibition will last for a period of at least five years from the date of approval for a pharmaceutical product and ten years from the date of approval for an agricultural chemical product. [51]

Consequently, the linkage aforementioned entails that “...for the first five to ten years after the registration of an innovator drug, even in absence of patent barriers, government regulatory authorities cannot rely on originator test data to approve a bio-equivalent generic product. If no generic suppliers can obtain marketing approval without repeating time-consuming and costly test on their product (which would be impossible during an emergency situation due to time constraints), the compulsory licensing is render useless”. [52]

Abuse of Pharmaceutical Patents and Avian Influenza in Chile

Another interesting yet alarming issue in Chile’s TRIPS plus context is the abusive stance that foreign pharmaceutical companies are assuming when it comes to pharmaceutical patents. According to provisions 52 d) of Chile’s revised industrial property law number 19.039 (which is TRIPS compliant), a patent application holder can file criminal and civil actions against anyone who violates the scope of said application (since the filing date), unless it is in the end rejected by the patent office. This right stems from what is know as the administrative patent, which involves a groundless application that is submitted exclusively in order to abuse the rights granted by this country’s revised industrial property law, and hence, threaten local pharmaceuticals to not produce or market similar medicines that might fall within the scope of this administrative patent. What we are witnessing is the abusive position of international pharmaceutical companies who are hindering the access of Chilean companies to the pharmaceutical market by submitting as many administrative patents as possible, and therefore, completely abusing the patent system and undermining free competition. [53]

This issue becomes even more alarming when we bear in mind the impact that an outbreak of avian influenza could have in Chile. Many administrative pharmaceutical patent applications regarding medical treatment for avian influenza have been already filed in Chile by foreign corporations, which currently are in the ideal position of discouraging local industries to market pharmaceuticals that can cure the lethal effects of avian influenza. In this sense, the abuse of administrative patents could eventually not only increase the prices of these medicines, but more importantly, limit the amount of stock necessary (because local industries will be reluctant to produce this drugs) to face the effects of an avian influenza outburst.

A FTA among the USA and Peru: a knowledge balance concern

Peru and the USA are negotiated a comprehensive FTA as we speak. This potential agreement will also have an intellectual property chapter that is going to completely regulate this issue following the tone of prior provisions in other FTAs signed by the USA. In this sense, INDECOPI, Peru’s competition and intellectual property governmental office, issued last year (May, 2005) an interesting research paper [54] regarding the impact that this agreement could have not on this country’s trade balance, but more importantly, on its knowledge balance [55]. It highlights that usually the economic impact that FTAs produce is exclusively analysed by measuring trade creation and diversion, investment promotion, labour intensification, consumer and local producers’ welfare, and the growth of foreign trade, but no attention is spent on assessing the impact they can have on knowledge.

This paper concludes that Peru’s knowledge balance of goods and services in 2004 was negative in 427 and 59 million US$ consecutively. In order to balance this deficit Peru would have to multiply the amount of its exports by eight (the rest of the factors remain ceteris paribus), which entails selling about 93 billon US$ more than what this country buys from abroad. The 2004 global knowledge balance holds a deficit of 487 US$ million, which represents a 0.6% of Peru’s GDP.

In a forecast without a FTA with the USA, Peru’s knowledge balance in 2015 would amount to 726 million US$ (614 million US$ due to trade and 112 million US$ due to services). In one with a FTA (using the USA’s FTA version), Peru’s knowledge balance in 2015 would amount to 1327 million US$ (1183 million US$ due to trade and 144 million US$ due to services). Bearing in mind these figures, INDECOPI concludes that the additional gap in the knowledge balance that a FTA with USA would trigger in 2015, amounts to 602 million US$, which represents 0.49% of this country’s GDP. If the deficits of 2005 and 2015 are added, the figure amounts to 3434 million US$. Consequently, only if Peru’s exports grow at a yearly rate of 28%, this negative balance could be eliminated by year 2015.

INDECOPI recommendations go along the lines of overcoming this structural deficit in Peru’s knowledge balance by promoting policies which seek to increase the knowledge and intellectual property content of the goods that this country manufactures, but do not favour the expansion of IPR by any means. The trade off between IPRs loses and trade gains most be weighed very carefully, because in the long run Peru can benefit more by increasing its knowledge balance than its trade balance. Developing countries should be more interested in quality (added value in products based on technology intensity) than quantity (trade flows), mainly due to the fact that quality of products and services increases profit margins and living standards. Peru should invest a significant amount of resources to introduce knowledge to the products and services they market. An R&D alliance among the private sector and the government must be undertaken in order to meet these ambitious goals. [56]

Concluding Remarks

We are clearly living in an intense and pivotal time for the future of IPR. Every country in the world should strive to both be able to benefit from the bulk of international free trade and IPR. Following a strategic policy to promote the economic objectives of intellectual property for any country (especially those of low and middle income countries) seems more challenging and complex now than ever. Swimming in the rigid and overregulated pool of international IPR can definitely be overwhelming and demands long term planning and excellent negotiating capabilities from policy makers. Several intellectual property offices in different countries have been forced to reduce their policy manoeuvrability (this entails a lose of sovereignty) to the extent of having almost renounced to their original mandates (which are to foster and promote sustainable economic development), in order to assure an alleged beneficiary international trade scheme, which seems still quite flawed with heavy protectionist biases (unfair trade and non trade barriers), and has not rendered conclusive evidence to determine if IPR regulations in FTAs are necessarily sound enough for economic development in the long run. Real free trade coupled with a reasonable international IPR system, which takes into account the development stage of each country independently, seems not only less arbitrary, but also more in line with the historical policy rational of IPR, which as stated earlier, clearly differentiates the ownership component (the right to own and sell knowledge) from the usage component (the right to control the use of knowledge after the first sale).

When it comes to acknowledging the impact that IPR chapters in FTAs are having upon developing countries and could eventually have on net-exporters of intellectual property related goods, it seems highly recommendable to undertake Stiglitz’s pointers in regards to a development oriented IPR agenda. These win-win propositions assures an environment where IPR are used to promote the economic growth of countries which are in dissimilar stages of development (which really need to grow!), and thus, require more space to define their own set of IPR policies and freely choose the international agreements which best fit their necessities, as well as assure developed economies sufficient safeguards to protect their R&D assets, and avoid the free rider problem.

The following issues should always be followed when dealing with IPR and international trade:

• “The importance in ensuring effective competition. There is even greater risk of limitations in competition in smaller developing countries, so that even greater weight should be given to the risks that patents pose in decreasing competition.
• The importance of ensuring access to life-saving medicines. With strong budgetary limitations at both the household and government levels, higher prices translate directly into a loss of life.
• The importance of ensuring the transfer of technology. Unless the gap in technology and knowledge between developed and less developed countries can be closed, there will be no successful development. What is required is not only access to products and technology, but the ability to learn how to produce with more advanced technologies, which may not be feasible without compulsory licensing”.
• The importance of ensuring protection of traditional knowledge, recognizing the special problems in establishing patents in this area and the dangers here, even more than in other areas of the public domain”. [57]

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