Copyrights, Patents, and Trade

Megan McArdle’s critique of Dean Baker’s post on free trade is mostly solid, but I think her reply on copyright and patent protections is a little bit off base:

Property rights are not inconsistent with free trade. I cannot justify selling stolen televisions on the grounds that this is just the working of the free market. The US thinks, with good reason, that intellectual property protections benefit everyone in the country over the long run. Thus, it enforces them by preventing other industries from selling property here that has, legally, been stolen.

How is this different from labor and environmental standards, liberals will ask. Well, we have copyright and patents because otherwise, you have goods with an enormous positive externality, but virtually no positive internality. Companies that use patented ideas without paying for them are creating a big negative externality–reduced incentive to innovate–while internalizing all the benefit from doing so. This is one of those situations where we look for some sort of legal arrangement, which we might call, oh, “intellectual property law”, to keep those skewed incentives from making us all ultimately worse off.

In the case of labor and environmental standards, whatever negatives there are are largely internalized to the countries. The awfulness of low wages and environmental standards is presumably even more awful if you are already extremely poor with limited recourse to a safety net. You’re unlikely to end up with an inefficient outcome.

There are a number of problems with this argument:

It’s inaccurate, or at least begging the question, to say that a company that infringes a patent is “creating a big negative externality.” Such a company is certainly failing to create an incentive for future patenting, but this is only a negative externality if we assume as our baseline a world in which all infringers obtain licenses and all patent royalties create incentives for innovation. In the real world, neither of these conditions hold. For example, when an extremely poor nation allows local pharmaceutical companies to produce patented drugs for the local market, it is not necessarily the case that the patent holder is thereby deprived of significant income. Most of the people who buy such patent-infringing drugs would not have been able to afford the drugs at anything close to full price.

It is not self-evident that patents create incentives for innovation. To the contrary, research shows that in many industries, the patent system as a whole actually creates dis-incentives to innovation because the costs of defending against frivolous patent suits exceeds the potential licensing revenues from patents. This is especially true in the software industry. On the other hand, it appears not to be true in the pharmaceutical industry—patents appear to be relatively effective at creating incentives for innovation in the drug market. All of which is to say that equating patents with property rights is too simplistic. Patents seem to work reasonable well as property rights in some industries, but in many others they don’t work like property rights at all.

If you look at actual trade agreements, you find that most of the “intellectual property” provisions have little to do with preventing “theft” of copyrights and patents and more to do with coercing other countries to adopt our particular copyright rules. For example, many recent “free trade” agreements have included provisions requiring our trading partners to enact laws analogous to the DMCA. I’ve argued that the DMCA is bad policy for the United States, but even if you don’t find that argument persuasive, it’s certainly not the case that failure to enact a DMCA-like law is equivalent to condoning theft of copyrights.

I think there’s actually a lot of similarities between the arguments for copyright and patent protections in trade deals, and the arguments for labor and environmental protections in trade deals. Relatively “lax” labor and environmental laws give workers in the third world a relative advantage over workers in the first world in the sense that they have more freedom to accept poor working conditions and a dirty environment in exchange for higher wages. By the same token, failing to enforce copyright and patent laws in a country gives foreign producers a relative advantage because they can produce foreign products at lower costs. The former is bad for domestic labor unions; the latter is bad for domestic copyright and patent holders. How they shake out for society as a whole is a matter about reasonable people can disagree. My guess is that Megan and I would agree on the labor and environmental questions, and we might disagree to some extent on the copyright and patent questions.

But the important point is that none of these issues have anything to do with trade, the movement of goods across borders. Whatever you think about these questions on the merits—and Megan and I probably agree on the labor and environmental questions, if not the patent and copyright ones—they’re not trade issues, and insisting on including them in such agreements is little more than rent-seeking.

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