Trade and TRIPS

Alex Singleton makes an interesting point about patent and copyright protection in the WTO (known as TRIPS):

Free trade liberals take the view that unilateral liberalisation is good for countries, regardless of what anyone else does. But those, like Pugatach, who believe it would be a disaster to liberalise without an IP agreement can only, logically, be opponents of unilateral free trade. Without such an agreement, free trade would be a race to the bottom. … It is not uncommon for market-oriented people to believe in the necessity of TRIPS and also in the virtue of unilateral liberalisation. But the fact is that you cannot serve two masters: if you think that civilization will crumble without TRIPS, you have to reject unilateral free trade.

Is there an intellectually valid reason for supporting unilateral trade liberalization while still believing in the need for multilateral copyright and patent agreements?

I think there probably is a defensible distinction.  In short, it is this: there is a colossal market failure in the market for knowledge-based products which can only be corrected by government intervention, nationally and internationally, which menas that "free trade" in these goods would produce a sub-optimal equilibrium.  That is why they are different from other products.

More specifically, knowledge is a public good, because it is non-rival.  Knowledge is non-rival because consumption has no social marginal cost.  It follows that in a competitive market, in which prices would drop to marginal cost, the equilibrium price would be zero.  The original inventors of the knowledge – who may have invested enormous amounts of money in R&D, or taken enormous risks – would have no way to recoup their costs or repay their investors.  If this happened, too little knowledge would be created. So governments create instruments which interfere in the free operation of markets – such as copyright restrictions and patents – which permit the inventors a period of market exclusivity, and so prevent the price falling to the free-market equilibrium.   These higher prices provide a return to the developer of the knowledge, but at the expense of reducing consumption of the goods that make use of the knowledge.  Pushing the price of the goods above the social marginal cost creates a welfare cost for consumers. This can be a very substantial welfare cost if the knowledge-intensive good has high value (eg essential medicines).  In other words, the system of copyright and patents leads to a trade-off between dynamic economic benefits (incentives for developers to develop new knowledge) and static economic benefits (low prices for consumers).  

(I am deliberately not using the term "intellectual property rights".  I think this term is a piece of propaganda designed to mislead us into thinking that the power to limit the use of knowledge is a "property right" analagous to the right of ownership of physical property.  The analogy is totally false, because use of physical property is rival, whereas knowledge is non-rival.)

Note that the market failure is not caused by the existence of copyright and patents: it is caused by the fact that knowledge is a public good.  Copyright and patents are government interventions aimed at reducing (and transferring) the economic costs of that market failure, increasing incentives to innovate at the expense of reducing the static welfare of consumers.  (I think that in many cases, we have got the balance between dynamic incentives and static welfare costs wrong; but that is a separate question.)

How does this relate to international trade?  Well the existence of this market failure means that "free trade" in knowledge-intensive goods would be sub-optimal.  National governments step in to regulate the market for such goods in national economies (to prevent person A from duplicating and selling softare developed by person B, for example); and an analagous arrangement is needed to regulate the international trade in such goods.  So in the absence of a world government to create and enforce intellectual property laws, international agreements are needed. This is quite different from the trade in physical goods or services which are rival (eg tech support) for which there is no corresponding market failure.  In those cases, liberalisation and free trade unambiguously enhances welfare, whether it is unilateral or multilateral.

This means that it is not quite as contradictory as Alex implies to believe in unilateral trade liberalisation in general, while still advocating multilateral agreements on intellectual property.

(This post should not be taken as a defence of the specific content of the TRIPS agreement, about which I have many doubts. I just wanted to make the more general point that it is intellectually coherent to believe in trade liberalisation while supporting international intellectual property rights agreements.)

Leave a Reply

Your email address will not be published. Required fields are marked *