Editor: Edwin L.C. Lai
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Intellectual Property Rights Protection: a Tension between the North and the South
Dr. Edwin L.C. Lai
City University of Hong Kong
As the world enters the information age, information and ideas are more easily disseminated and duplicated all over the world. Moreover, as less developed countries (LDCs, or the South) become more open to foreign trade, the markets in these countries become more and more important to multinational companies based in developed countries (DCs, or the North). Therefore, the trademarks, copyrights and technological information of products sold in South become a more serious concern for multinational companies in DCs. In the Uruguay Round of the General Agreement on Tariffs and Trade, the participating countries agreed to adopt a set of universal minimum standards of intellectual property rights (IPR) protection. This agreement, contained in annex 1C, is called the Agreement on Trade-Related Aspects of Intellectual Property Rights (the TRIPs Agreement). It basically supplements the World Intellectual Property Organization (WIPO) Conventions on intellectual property, with substantive obligations and disciplines within the World Trade Organization (WTO). One of the obligations is national treatment, whereby all members must treat nationals of other countries no less favorably than their own nationals on all matters concerning intellectual property rights. Another is the most-favored nation treatment, whereby any advantage a member grant to the nationals of any other country must be extended to all other WTO members. The agreement also calls for substantial strengthening of administrative and enforcement procedures.
According to many observers, most of the terms of the agreement are backward-looking, being based on the prevailing standards in developed countries at the time of the negotiation. Consequently, developing countries would have to substantially strengthen their legal protection of IPR. For example, the agreement stipulates patent length of twenty years for the pharmaceutical industry, whereas a country like India only protects pharmaceutical patents for seven years before TRIPS was put in place, with compulsory licensing during the protection period. Because of this, it is interpreted that the agreement forces the South to adopt the then prevailing IPR standard of the DCs.
Intellectual property rights protection includes many aspects. Most commonly, it includes patent, copyright and trademark protection. Patent protection is used to protect inventions of new products or novel designs. It is mostly used in products in pharmaceuticals, biotechnology, designs of new consumer products, designs of new machines, etc. TRIPS stipulates that patent protection must not be less than 20 years from the date of filing of the patent application. Copyright is used to protect new ideas expressed in words, images, music or computer programs, e.g. for books, audio and video CD, tapes or DVD, and computer software. The TRIPS basically upholds the requirement of the Berne Convention, which stipulates that the copyright lasts until 50 years after the death of the author. Trademark is used to protect the rent of a reputed product from being appropriated by unauthorized persons. It is used in all businesses where quality of the product can vary but is considered important to the buyers.
Besides these three major aspects, IPR also includes protection of geographical indications and trade secret. Geographical indication means the origin of the product. In a sense, this can be considered as the trademark of a country. A shirt that is labeled “Made in Italy” when in fact it is made in Indonesia is considered to have misrepresented the geographical indication, and is considered illegal under TRIPS. Trade secret refers to any information that enhances the competitive advantage of the firm that it conceals from the public and the rivals. The formula of Cola-cola is an example of a trade secret. The TRIPS agreement became effective in 1995, with a one-year transition for all developed countries. There is a five-year transition for LDCs, which have an additional five years in areas of technology (pharmaceuticals and chemicals) not yet protected at the date of application of the Agreement. The least developed countries can delay application of the standard until 2006.There are several issues associated with TRIPS in its application in the LDCs. First is the question of enforcement. The country has to set up the relevant IPR laws, which can be adapted from other countries. Then, there has to be investigation and prosecution. Then, the court system has to learn how to interpret the laws and judge the cases. This involves training the judges and lawyers. Finally, it involves social enforcement of the IPR laws, which means education of the public. The public has to know why the laws should exist and acquire a sense of respect for the laws. For many LDCs, there is the worry that granting of IPR, especially patent, to a product creates too much market power, which is harmful to consumers. There is therefore a need for enactment of some concomitant competition policy to prevent excessive market power. The TRIPS agreement raises several questions. Should IPR have been included and continue to be included in trade talks such as in the Uruguay Round? Is the TRIPS agreement good for the North? For the South? If the South loses while the North gains, are the losses greater than the gains? Does the South protect too much, even for the sake of global welfare, in adopting the same IPR standard as the North? These questions arise because it is generally viewed that the South loses from the TRIPS while the North gains from it. The question is whether the North’s gains outweigh the South’s losses. If they do, then there can be mutual gains if the North can compensate the South in other areas while asking the South to adopt the North’s IPR standard. We call this a quid pro quo. For example, the North can increase the South’s market access to the North’s traditional goods sector, such as clothing, in exchange for the South’s concessions in IPR. Finally, even if harmonization of IPR standard is good, at what level should countries be harmonized? This is another question that has to be addressed if we want to establish a global IPR system that maximizes world welfare.
Recently, Edwin Lai of City University of Hong Kong and Larry Qiu of Hong King University of Science and Technology develop a theoretical model to investigate the above questions. They assume that before the TRIPS was signed, the North and the South both adopt IPR standard that optimize their own region’s welfare, given the IPR standard of the other region. The basic assumption is that a lengthening of patent increases the duration for which the patent-holder maintains monopoly power of the product. Under monopoly, the buyers’ welfare is hurt because they pay higher price but the seller gains because of the increased profit. On balance, however, there is an efficiency loss (called deadweight loss), because the buyers’ losses outweigh the seller’s gain. Therefore, there is an increase in efficiency loss as patent is lengthened. However, there is a gain from increased innovations from the innovators. These increased innovations would increase consumer welfare. An optimal patent length would strike an optimal balance between the costs and benefits of increasing the patent length. One striking result they obtain is that, for the sake of world economic welfare, the South should adopt an IPR standard at least as rigorous as that of the North. As a result of the raised IPR standard of the South, the South's consumers lose by paying higher prices, both regions' producers gain higher profits, but all consumers in the world gain from larger variety of goods. On balance, there is net income transfer from the South’s buyers to the North’s sellers, since there are by far more sellers in the North than in the South. Therefore, the South's welfare decreases and the North's welfare increases. However, the latter's gains outweigh the former's losses, and world economic welfare increases. The main reason for this is that the South’s increase in IPR protection increases the profits of firms in the North without raising the deadweight loss there. Moreover, the the North’s consumers gain from more innovations. Recently, Philip McCalman of University of California at Santa Cruz makes estimates of the transfer of income from consumers to producers (mostly a transfer from South to North) and the deadweight loss resulted from the TRIPS. He finds that there is about US$3 billion of net transfer of income from South to North as a result of the TRIPS. The net deadweight loss to the world is about 2.8 times the net transfer. However, he does not estimate the welfare gains from larger product variety due to increased R&D efforts, which can be substantial. Lai and Qiu argue that such a gain from the increased R&D efforts of innovators would actually outweigh the deadweight loss so that a raise in the South's IPR is globally welfare-improving. McCalman finds that the deadweight loss is as much as 1/5 of the short run gains from trade liberalization in the Uruguay Round. The welfare loss to the South must be of similar order of magnitude. This large magnitude of welfare involved demonstrates that the IPR issue should indeed be included in the WTO negotiations. Moreover, it shows that the IPR issue can indeed be an important leverage for the South to elicit trade concessions from the North. Although it is globally welfare-improving for the South to adopt the North's IPR standard, simply requiring the South to do so without compensation benefits the North at the expense of the South. The South would not be willing to make the concessions voluntarily. Yet, both regions can gain if the North helps the South in some other areas. For example, it is generally understood that it is globally welfare improving for the North to lower its trade barriers against imports from the South in the traditional good sector, such as clothing. If this is true, it would benefit both regions for the South to raise its IPR protection standard to the North's level, in exchange for the North lowering its import tariffs. This is why multi-sectoral negotiations (or multi-issue negotiations) in the WTO can be constructive and useful. Recently, Gene Grossman of Princeton University and Edwin Lai of City University of Hong Kong, using a similar but more sophisticated modeling technique as Lai and Qiu, find that global welfare is not yet maximized if the North and South harmonize IPR at the North’s pre-TRIPS level. They find that the globally optimal harmonized standard is more stringent than both the North and South’s pre-TRIPS standards. However, how much income transfer from the South to the North is needed in order to achieve this global optimum is still under investigation.
Recent Publications
A list of the recent output with our staff names highlighted is provided below:
Articles in Academic Journals
Cheng, L.K. and Y.K. Kwan (2000), “What Are the Determinants of the Location of Foreign Direct Investment? The Chinese Experience”, Journal of International Economics, Vol. 51, No. 2, pp. 379-400.Ching, Stephen T.F. and Lin Zhou (2000), “Multi-Valued Strategy-Proof Social Choice Rules”, Social Choice and Welfare, forthcoming.Clubb, C. and Aris Stouraitis (2000), “The Significance of Sell-Off Profitability in Explaining the Market Reaction to Divestiture Announcements”, Journal of Banking and Finance, forthcoming.Li, K.W. and Tung Liu (2000), “Financial Liberalization and Growth in China’s Economic Reform”, The World Economy, forthcoming.Li, Shuhe and Peng Lian (1999), “Decentralization and Coordination: China’s Credible Commitment to Preserve the Market under Authoritarianism”, China Economic Review, Vol. 10, pp. 161-190.Li, Shuhe and Weiying Zhang (2001), “Optimal Assignment of Principalship in Teams”, Journal of Economic Behavior and Organization, Issue 44, No. 1, forthcoming.Li, Shuhe, Shaomin Li and Weiying Zhang (2000), “The Road to Capitalism: Competition and Institutional Change in China”, Journal of Comparative Economics, Vol. 28, No. 2, pp. 269-292.Wang, Xiaozu (2000), “Size Effect, Book-to-Market Effect, and Survival”, Journal of Multinational Financial Management, Vol. 10.Zhang, Anming and Yimin Zhang (2000), “Airport Changes, Economic Growth and Cost Recovery”, Transportation Research, E(Logistics), Vol. 37, pp. 25-33.Conference PapersLi, Shuhe (2000), “The Value of Websites”, presented at the China International Websites Exhibition and Conference, Chinese Academy of Science, Shenzhen, China, August 2000.Stouraitis, Aris (2000), “Reversing Corporate Diversification and the Use of the Proceeds from Asset Sales: The Case of Thorn EMI”, presented at the 13th Annual Australasian Finance and Banking Conference, Sydney, Australia, 18-20 December 2000.
Working Papers
No. 133 Ho, T.M. (June 2000), “The Effects of Exogenous Price Shocks on Manufacturing Industries in Small Open Economies: A Production Theory Approach”.No. 134 Kwan, Y.K. and Edwin L.C. Lai (July 2000), “Intellectual Property Rights Protection and Endogenous Economic Growth”.
No. 135 Lui, Francis T., Leonard K. Cheng and Y.K. Kwan (July 2000), “Currency Board, Asian Financial Crisis, and the Case for Structured Notes”.
No. 136 Li, Shuhe (October 2000), “The Benefits and Costs of Relation-Based Governance: An Explanation of the East Asian Miracle and Crisis”.
No. 137 Li, Shuhe (October 2000), “Determinants of Private Sector Development in Chinese Industry”.No. 138 Jiang, Lishang, Qihong Chen, Lijun Wang and Jin Zhang (October 2000), “Recovery of Implied Volatility: An Optimal Control Approach”.No. 139 Zheng, Lihui and Jin Zhang (October 2000), “A Disturbance Attenuation Approach to Option Pricing with Transaction Costs”.
No. 140 Zhang, Jin (November 2000), “Theory of Continuously-Sampled Asian Option Pricing”.
Books and Chapters
Cheng, L.K. and Y.K. Kwan (2000), “The Location of Foreign Direct Investment in Chinese Regions: Further Analysis of Labor Quality” in The Role of Foreign Direct Investment in East Asian Economic Development, Chapter 7, pp. 213-235, edited by T. Ito and A.O. Krueger, University of Chicago Press, Chicago, USA, May 2000.
Kwan, Y.K. and F.T. Lui (2000), “Deregulation, Profit, and Cost in Commercial Banking: The Case of Hong Kong” in Deregulation and Interdependence in the Asia-Pacific Region, Chapter 10, pp. 305-324, edited by T. Ito and A.O. Krueger, University of Chicago Press, Chicago, USA, January 2000.
Oum, T.H., J.H. Park and Anming Zhang (2000), Globalization and Strategic Alliances: The Case of the Airline Industry, Pergamon, Oxford.
Others
Ching, Stephen T.F. and Michael Devereux (2000), “Risk Sharing and the Theory of Optimal Currency Areas: A Reformulation of Mundell 1973”, Hong Kong Institute for Monetary Research Working Paper No. 8.
Ching, Stephen T.F. and Michael Devereux (2000), “Mundell Revisited: A Simple Approach to the Costs and Benefits of a Single Currency Area”, Hong Kong Institute for Monetary Research Working Paper No. 9.
Chow, Gregory C. and K.W. Li (2000), “China’s Economic Growth: 1952-2010”, Working Paper No. 64, Center for Economic Policy Studies, Princeton University, August 2000.
If you would like to receive a copy of the Publications, please write to Ms. Lily Yeung, the Administrative Officer of the Department. AnnouncementsPromotion
Prof. Qiang Zhang has been promoted to Professor on 1 July 2000. We express our congratulations to him.
Arrivals
Dr. Aris Stouraitis joined the department as an assistant professor in August 2000, after receiving his PhD in finance from Imperial College in London. Aris holds a BA from the American College of Greece and an MSc from INSEAD in Fontainebleau, France, where he has also worked as a research associate and teaching assistant. His research interests are in corporate finance, with particular emphasis on corporate restructuring, corporate governance and company valuation.
Dr. Chengzhong Qin joined the department as a visiting fellow in July 2000. He obtained his B.Sc. from Nankai University and his Ph.D. from the University of Iowa. His research lies in the areas of microeconomic theory, game theory and its applications to economics and contract law, and evolutionary economics. He has published in journals including Journal of Economic Theory, Journal of Evolutionary Economics, Games and Economic Behavior, etc.
Departures
Dr. H.J. Ahn, Dr. Bob Y.C. Chan, Dr. M.K. Lai, Dr. J.H. Park and Dr. C.Y. Sin (formerly Assistant Professors) left our department between August and September this year. We thank for all their past contributions to our department and the University. We also wish them every success in their new environments.
Conferences
An International Conference
"Greater China and the WTO"
City University of Hong Kong, March 22-24, 2001
Organizing Units: City University of Hong Kong; University of Washington; Chung-Hua Institution for Economic ResearchSponsors: Centre for International Economics Research, City University of Hong Kong and University of Washington
Local Organizers: Clement Y.P. Wong <efcwong@cityu.edu.hk> and Anming Zhang <efanming@cityu.edu.hk> of City University of Hong Kong.For details, please refer to the following web-site:
http://faculty.washington.edu/karyiu/confer/HK-C01/index.htm
Research Seminars
Our department will organize seminars in alternative weeks. The objective of this well-attended series is to provide a regular forum to communicate recent contributions to economics and finance by local and overseas scholars. We will announce the schedule later.
