More on market-access rent-seekers

James Surowiecki of the New Yorker writes about how bilateral trade agreements increasingly allow the U.S. to rewrite other countries' laws:

Free trade is supposed to be a win-win situation. You sell me your televisions, I sell you my software, and we both prosper. In practice, free-trade agreements are messier than that. Since all industries crave foreign markets to expand into but fear foreign competitors encroaching on their home turf, they lobby their governments to tilt the rules in their favor. Usually, this involves manipulating tariffs and quotas. But, of late, a troubling twist in the game has become more common, as countries use free-trade agreements to rewrite the laws of their trading partners. And the country that is doing this most aggressively is the United States.

Our recent free-trade agreement with South Korea is a good example. Most of the deal is concerned with lowering tariffs, opening markets to competition, and the like, but an important chunk has nothing to do with free trade at all. Instead, it requires South Korea to rewrite its rules on intellectual property, or I.P.—the rules that deal with patents, copyright, and so on. South Korea will now have to adopt the U.S. and E.U. definition of copyright—extending it to seventy years after the death of the author. South Korea will also have to change its rules on patents, and may have to change its national-health-care policy of reimbursing patients only for certain drugs. All these changes will give current patent and copyright holders stronger protection for longer.

As Surowiecki notes, other recent agreements with Peru, Colombia, and Central America contain similar provisions (as did earlier ones with Chile and Jordan).

One can make a very strong argument that the extension of U.S. patent and copyright rules to developing nations shifts rents to U.S. corporations without providing compensating benefits. So why do countries like South Korea, Peru, and Colombia go along with this?  They must feel that other provisions of these free trade agreements, and in particular the enhanced access they provide to U.S. markets, makes it worthwhile.

They may be wrong. No FTA held greater promise than NAFTA did for Mexico, and the results have been disappointing, to put it mildly. Developing countries will have to stop treating trade agreements as a shortcut for generating economic growth.

Comments

[Idaho_Spud]

Hahaha. And I thought US government negotiators would be insistent about workplace safety, child labor and the environment. Silly me.

[Justin Rietz]

First, a "free trade" agreement isn't truly free if it doesn't allow for the free trade of the most important good - labor. The "F" in NAFTA should be removed.

Second, to say "the results have been disappointing, to put it mildly" is only true if one expected NAFTA to create economic growth regardless of other factors and events. As the NY Times article points out, many other factors outside of NAFTA have factored into Mexico's economic progress. The biggest factor, I believe, is the difficulty of doing business in Mexico - I say this from personal experience. The level of government bureacracy and corruption is magnitudes worse than in the U.S. Anyone who thought that NAFTA would change this is naive.

However, given the aforementioned limitations, NAFTA has had positive impacts. Walk down the streets in a major Mexican city and you will see unprecedented growth in business, both foreign and domestic. I was in Mexico in February for the first time in two years, and I couldn't believe the amount of construction. Wal-Mart, Costco, Blockbuster, Starbucks, Office Depot, and many other foreign retailers were building new stores at every corner. Domestic businesses have had to raise their game, and have done so with success - I noted that a major Mexican grocery store chain had drastically improved their stores and was competing quite well against the local Wal-Mart Super Center.

Most important, these stores were busy. It is quite apparent that the middle class in Mexico is growing, and even the lower class is making enough money (in real terms) to enjoy things they could have only dreamed of ten years ago.

[R Mutt]

This is a very lazy question I know, but what economic work has been done on the optimum duration and extent of copyrights and patents?

It seems to me that with the current state of the laws, the increased costs of new products to consumers, and the constant stream of computing lawsuits, must outweigh the benefits of protected innovation.

Surely someone must have done a study saying "the optimum length of a patent should be X years, the optimum length of copyright Y years"?

[DRR]

No fan of rent-seeking, I would find this much more troubling if there was some type of coercion going on.

The U.S. already has very small average tariff barriers so general access to U.S. markets isn't really much of an obstacle. If South Korea wants to open it's markets, there is no requirement that it has to enter into a trade agreement with the U.S. or any other country to do so.

But South Korea wants access to U.S. markets on terms more favorable than those enjoyed by some of it's neighbors so it can gain an advantage over them.

In that context my only disagreements would be with the extreme inefficiency of IP protection itself. That a country would insist on protections for industries where it has a comparative advantage in exchange for super special access to it's markets isn't as troubling.

[notsneaky]

"This is a very lazy question I know, but what economic work has been done on the optimum duration and extent of copyrights and patents?"

This area is/was pretty huge. All sorts of economists, from Industrial Organization folks, to Growth and Development folks have contributed. One key subject is that of "breadth vs. depth" of patents (how long should they last vs. how broad of a definition should be used).

It's been awhile since I've looked at this literature though. Here however is a quick overview available on the web:

http://www.econ.iastate.edu/research/webpapers/paper_2061.pdf

Here's a relevant paper but it's for subscribers only;

http://ideas.repec.org/p/fal/wpaper/04022.html

Here is are two classics, available from JSTOR:

http://links.jstor.org/sici?sici=0741-6261(199021)21:1%3C113:HBSTSO%3E2.0.CO;2-A
http://links.jstor.org/sici?sici=0741-6261(199021)21:1%3C106:OPLAB%3E2.0.CO;2-2

[notsneaky]

Just to add, the above papers basically try to establish conditions under which you want infinite-but-very-narrow-patents (so sufficiently different knock-offs and generics are fine) and under which you want short-duration but broad patents.

The costs of litigation and enforcement are not factored in. That'd be an interesting research topic.

[CH]

"So why do countries like South Korea, Peru, and Colombia go along with this? "
Who knows, maybe these laws are good things for their knowledge-related industries. I am not surprised that IP is starting to be taken seriously outside of US.

[R Mutt]

Thanks, notsneaky! Lots of good stuff there.

I thought the stuff on the "tragedy of the anticommons" relating to blocking patents in the first article was particularly interesting.

The Eolas patent might be an example.
http://en.wikipedia.org/wiki/Eolas

[Robert Vienneau]

I've linked ( http://robertvienneau.blogspot.com/2006/10/do-patents-and-copyrights-spur.html ) to some reports from the National Academy of Science on the costs and benefits of patents. I haven't read them myself because I'm not sufficiently interested to purchase them.

I wouldn't mind not so much hearing Dani Rodrik's comments on my post here ( http://robertvienneau.blogspot.com/2006/05/unregulated-international-trade_31.html ), but rather on the literature on which I draw. My view is that much of what mainstream economists teach was shown to be mistaken mathematically decades ago.

[Swarnim]

Prof. Rodrik writes, "They must feel that other provisions of these free trade agreements, and in particular the enhanced access they provide to U.S. markets, makes it worthwhile."

In my work on trade policy in the Asia-Pacific, I have found this to be the central motivation of many countries for signing North-South BTAs: IP is the bitter pill that needs to be swallowed for sweet market access. Sri Lanka and Bangladesh, for instance, would sign a BTA with the US any day containing the most stringent IP, competition, and investment provisions, if only their clothing exports got into the US duty-free. There is a whole political economy aspect to this, but many developing countries' export baskets are so small that they feel they have to be fostered at whatever cost (to the domestic policy space by way of agreeing to these strict IP provisions that come with US BTAs or tough investment protection provisions required in EU or Japanese EPAs. "Revamp your patent regime, if you want us to let in your T-shirts cheap." For development practitioners, this is indeed an ugly side of the proliferating bilateral trade deals.

For more on BTAs in Asia: http://www.undprcc.lk/Publications/Publications/Policy_Paper_Book_3.pdf

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