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.
Recent free-trade agreements with Peru and Colombia insisted on much the same
terms. And CAFTA—a free-trade agreement with
countries in Central America and the Caribbean—included not just longer copyright
and trademark protection but also a dramatic revision in those countriesÕ
patent policies.
Why does the U.S. insist on these rules? Quite simply, American drug,
software, and media companies are furious about the pirating of their products,
and are eager to extend the monopolies that their patents and copyrights
confer. These companies are the main advocates for such rules, and the big
winners. The losers are often the citizens in developing countries, who find
themselves subject to a Draconian I.P. regime that reduces access to new
technologies.
Intellectual-property rules are clearly necessary to spur innovation: if
every invention could be stolen, or every new drug immediately copied, few
people would invest in innovation. But too much protection can strangle
competition and can limit what economists call Òincremental innovationÓ—
innovations that build, in some way, on others. It also encourages companies to
use patents as tools to keep competitors from entering new markets. Finally, it
limits consumersÕ access to valuable new products: without patents, we wouldnÕt
have many new drugs, but patents also drive prices of new drugs too high for
many people in developing countries. The trick is to find the right balance,
insuring that entrepreneurs and inventors get sufficient rewards while also
maximizing the well-being of consumers.
History suggests that after a certain point tougher I.P. rules yield
diminishing returns. Josh Lerner, a professor at Harvard Business School,
looked at a hundred and fifty years of patenting, and found that strengthening
patent laws had little effect on the number of innovations within a country.
And, in the U.S., stronger patent protections for things like software have had
little or no effect on the amount of innovation in the field. The benefits of
stronger I.P. protection are even less convincing when it comes to copyright:
thereÕs little evidence that writers and artists are made more productive or
creative by the prospect of earning profits for seventy years after they die,
and the historical record suggests only a tenuous connection between stronger
I.P. laws and creative output.
The U.S., in its negotiations, insists on a one-size-fits-all approach:
stronger rules are better. But accepting a diverse range of I.P. rules makes
more sense, especially in light of the different economic challenges that
developing and developed countries face. LernerÕs study found that the benefits
of stronger patent laws were reduced in less developed countries. And
developing countries, being poorer, obviously have more to gain from shorter
patent terms for foreign innovations, since that facilitates the spread of new
technology and the diffusion of ideas. Tellingly, this is the approach the U.S.
takes when it comes to labor standards, arguing that we shouldnÕt impose
developed-country standards on developing countries. But in the case of
intellectual property the governmentÕs position is exactly the opposite. The
only difference, it seems, is whose interests are at stake.
The great irony is that the U.S. economy in its early years was built in
large part on a lax attitude toward intellectual-property rights and
enforcement. As the historian Doron Ben-Atar shows in his book ÒTrade Secrets,Ó
the Founders believed that a strict attitude toward patents and copyright would
limit domestic innovation and make it harder for the U.S. to expand its
industrial base. American law did not protect the rights of foreign inventors
or writers, and Secretary of the Treasury Alexander Hamilton, in his famous ÒReport
on Manufactures,Ó of 1791, actively advocated the theft of technology and the
luring of skilled workers from foreign countries. Among the beneficiaries of
this was the American textile industry, which flourished thanks to pirated
technology. Free-trade agreements that export our own restrictive I.P. laws may
make the world safe for Pfizer, Microsoft, and Disney, but they donÕt deserve
the name free trade.♦