A place to convene. A place to discuss. A place for ideas.

Stephen Ezell: Latest Report Highlights Continuing IP Infringement Concerns

By Stephen Ezell May 14, 2013

The ITIF's Ezell discusses possible responses to the latest report demonstrating the damage theft of intellectual property has on the U.S. economy.

On May 1, 2013, the United States Trade Representative’s Office (USTR) released the 2013 Special 301 Report, which identifies countries providing inadequate intellectual property rights (IPR) protections for U.S. IP rights holders. The report addresses a wide range of IP-related trade issues, including IP and trade secret theft, piracy of digital content, counterfeiting of goods, copyright and trademark infringement, forcing IP transfer as a condition of market access, compulsory IP licensing, and countries’ failure to award IP protections to innovative products. Unfortunately, the 301 Report finds widespread and growing global infringement of U.S. IP rights, with the total number of countries on the list growing from 39 in 2012 to 41 in 2013.

The report places countries on either a “Watch List” or “Priority Watch List,” the latter reflecting countries with more numerous, egregious, and longer-standing IP infringement issues. Ten nations comprise the Priority Watch List—Algeria, Argentina, Chile, China, India, Indonesia, Pakistan, Russia, Thailand, and Venezuela—while Ukraine is named a “Priority Foreign Country,” the first time in seven years USTR has used this category to identify the most-severe IP infringement.

Among the findings presented, the authors express “serious concerns with widespread piracy and counterfeiting” in at least ten countries—Bulgaria, Canada, Chile, China, Italy, India, Mexico, Romania, Pakistan, and Vietnam. Indeed, rates of software piracy in most of these nations top 65 percent. It also sights inadequate IPR protections and enforcement in China and India, noting “A wide range of U.S. stakeholders in China report serious obstacles to effective protection of IPR in all forms, including patents, copyrights, trademarks, and protection of pharmaceutical test data.” Regarding India, USTR adds “innovators are facing serious challenges in securing and enforcing patents.” The report specifically challenges the India Patent Controller’s recent decision to issue compulsory licenses for innovative biopharmaceuticals—such as Genentech’s breast cancer drug Herceptin and Bayer’s Nexavar—on the grounds that they weren’t being sufficiently worked (i.e., manufactured) in India.

The inability of these trade partners to protect IP rights is particularly damaging to the U.S. economy, because we increasingly depend on the production of knowledge- and IP-intensive products and services. For example, in 2010, IP-intensive industries accounted for 40 percent of U.S. GDP and 74 percent of U.S. exports. Moreover, IP-intensive industries either directly or indirectly support 40 million U.S. jobs, with those jobs paying 42 percent more than the average U.S. salary. In fact, the U.S. International Trade Commission found that Chinese theft of U.S. IP in the year 2008 alone cost 1 million American jobs and $48 billion in domestic economic activity.

But as bad as IP infringement damages the U.S. economy, it likewise can hurt the countries that practice it by limiting long-term economic growth. Countries with inadequate IP protections and enforcement mechanisms only stifle incentives for innovators to embark on home-grown technology development, while enterprises in these countries are forced to invest an undue amount of resources in protecting their ideas rather than investing in innovation. Most fundamentally, weak IPRs discourage trade and investment, which hurts a country’s own businesses and consumers by limiting choice and access to best-of-breed technologies. The effect of India’s decision to issue compulsory licenses for innovative biopharmaceuticals, for example, will only discourage biopharmaceutical companies from introducing their latest life-improving drugs in India.

In contrast, the evidence is strong that when countries—developed and developing alike—improve their IP protections, it leads to increased rates of inbound foreign direct investment (FDI), domestic investment in research and development (R&D) and thus innovation, and exports. For example, a seminal study by the OECD found that a 1 percent increase in copyright protection in developing countries leads to a 6.8 percent increase in inbound FDI and a 3.3 percent increase in domestic R&D. Likewise, a 1 percent increase in patent protection leads to a 2.8 percent increase in FDI and a 0.7 percent increase in R&D. Put simply, it’s impossible to have innovation without the protection of ideas. Thus, the most important reason U.S. policymakers should push all countries, especially developing nations, to enact stronger IP rights is not because it’s in America’s interest (though it is), but because it’s in the best longer-term interest of those countries. But like the politics increasingly in this country that put short-term interests ahead of long-term ones, these countries choose short-term benefits (cheaper products and services through IP theft) over long-term growth and innovation.

Still, the damage IP theft causes to the U.S. economy is real, and it’s time for the federal government to do more than issue an annual report with the intent of shaming nations into reforming their errant ways. The United States needs to raise the cost to countries that continue to systemically violate IP rights.

First, the United States should not enter into new free trade arrangements with countries on USTR’s Special 301 list. It is disconcerting that five of the United States’ eleven would-be partners in the Trans-Pacific Partnership (TPP)—Canada, Chile, Mexico, Peru, and Vietnam—are listed in the 301 report. USTR should make getting off and staying off the 301 list a precondition for concluding the TPP agreement with these nations.

Second, the United States should withdraw Generalized System of Preferences (GSP) benefits for countries appearing on USTR’s Special 301 report. GSP is a development assistance program that eliminates import duties on thousands of products from developing countries. In 2010, $22.5 billion of imports from the 129 GSP-beneficiary countries entered the United States duty-free, saving the exporting countries $682 million in import duties. But countries not protecting U.S. IP rights aren’t meeting their part of the bargain. In fact, of the top eleven GSP-beneficiary countries in 2013, nine—Argentina, Brazil, India, Indonesia, Pakistan, the Philippines, Russia, Thailand, and Turkey—are listed in the 301 report. Congress should remove these countries’ GSP benefits immediately and restore them only when and if they get off the 301 list.

Third, countries appearing on the 301 list should lose their right to enjoy Millennium Challenge Grants. The Millennium Challenge Corporation (MCC) is an independent U.S. foreign aid agency that provides developing nations large-scale grants to fund country-led solutions to reduce poverty and achieve sustainable development. The MCC has supported $8.4 billion in compact or threshold programs, most of this supported by U.S. taxpayers. But USTR places five of the leading MCC grant recipient nations—Indonesia, Paraguay, Peru, the Philippines, and Ukraine—on the 301 lost for damaging the interests of those same taxpayers. Going forward, a condition of country eligibility for MCC grants should be their not appearing on the 301 list.

Finally, it’s important to note that the Special 301 report only touches on trade issues pertaining to intellectual property rights infringement. A separate USTR report, the National Trade Estimate Report on Foreign Trade Barriers, covers broader mercantilist trade practices such as forced technology transfer as a condition of market access, barriers to FDI and services trade, and discriminatory standards or government procurement practices. Both these reports are effective at bringing unfair foreign trade and IP infringement practices to light and “naming and shaming” the perpetrators. But it’s time for USTR to create and issue a new and consolidated report that explicitly ranks, in order, the top mercantilist countries and lists their most egregious practices. More to the point, it’s time for the United States, and our European allies, to meet these practices not with reports—but with action.

Stephen Ezell is a Senior Policy Analyst with the Information Technology & Innovation Foundation.