Pirates on the High Seas: Constraints

Pirates on the High Seas

The United States and Global Intellectual Property Rights

Bénédicte Callan

1998

Constraints

In Addition To unclear goals, recent IP policy has been scatter-shot because American actions are constrained, politically and monetarily. The major impediments to a consistent IP policy include the lack of supportive allies, poor follow-up funding to aid third countries in establishing IP regimes, and weak negotiating tools.

First, intellectual property rights are in one major respect unlike other trade issues: Japan and Europe are not eager to define the international rules. The effort to create a global IP system is driven almost entirely by the United States. Even the successful TRIPs negotiations were in large part pushed by the efforts and enthusiasm of U.S. negotiators and businesses. Since both the Europeans and the Japanese have been much less active in their efforts to change the IP behavior of their trading partners, the first constraint is the lack of supportive allies.

Cooperating with the European Union

The European Union shares many of the American concerns about intellectual property protection in Asia. ₉₃ The high-profile exports of Louis Vuitton handbags, Cognac, EMI classical records, and Mercedes spare parts have high intellectual property content. The overlap of interest is most striking in specific industries. For ex ample, the United States and Europe share world leadership in the pharmaceutical and chemical industries. ₉₄ The Europeans have a substantial publishing industry, and sectors such as scientific texts are frequently pirated on international markets. In Europe, the recording industry is even more important than in the United States—three of the top five recording companies are European. ₉₅ The economic impact of piracy is believed to be approximately the same in Europe and the United States, given the equivalent contributions of copyright and high-technology industries to gross domestic product.

Europe, like the United States, sees growth opportunity in dynamic Asian markets and it knows stronger IP regimes would help expand sales to Asia. Its other developing-country export markets—Africa, Eastern and Central Europe, the Middle East—are relatively slow growing. While the percentage of European exports to Asia is still small compared to that of the United States and Japan, ₉₆ the European Commission has made market access and export promotion to Asia a priority. ₉₇ The private sector has obliged, increasing direct investment in Asia fivefold during the early 1 990s and rapidly expanding exports. Europe and the United States also share a desire to extend high IP protection to countries outside the WTO, to revise and modernize the TRIPs Agreement, and to make sure that TRIPs is fully implemented by all signatories.

Government and industry interests, would seem to suggest transatlantic cooperation should be easy. In fact cooperation with third countries has been erratic and fraught with tension. In pan the inability to work together in raising IP regimes abroad sterns from the fact that there is not a perfect overlap of interests in intellectual property protection. In the packaged software and the motion picture industries, American firms are much larger and more export oriented than their European colleagues. As a result, the Europeans have not been eager to join in U.S. piracy complaints in these areas. But the problems extend beyond simple divergences in industry structure. After all, if the problem was that our concerns were not perfectly parallel, one could imagine a tit-for-tat strategy emerging, in which the United States would agree to back Europe when its interests were most at stake, and vice versa.

Were the Europeans and the Americans to deepen their cooperation, they would need to have not only a common interest in raising IP standards abroad but equivalent strategies for engaging the offending country. Cooperation founders because the United States and Europe disagree about the appropriate modes of action for combating piracy. As the world’s largest trading bloc, the EU has considerable influence in making global trade rules. Theoretically, it could be as proactive in shaping IP practices abroad as the United States. But its bilateral tools are far more circumscribed in this arena of trade policy than, for example, those of the United States, and it prefers to rely on multilateral mechanisms for IF dispute resolution. All this has made cooperation outside multilateral frameworks difficult.

Bilaterally, Europe has the greatest influence on the IP regimes of Central and Eastern Europe. The carrot of accession to the EU, however distant, serves as a powerful incentive. Since the minimum standards of accession to the EU are already decided on, there is little bargaining allowed by supplicants. Poland, for example, has upgraded its standards for intellectual property protection, and its piracy rates have dropped considerably since the 1980s. Asia is not Eastern or Central Europe, yet the European Union does have a couple of bilateral tools at its disposal in the East. To begin with, the EU is in the process of renegotiating "Third Generation" framework cooperation agreements with developing countries, which include intellectual property clauses. The European Commission and Korea signed such an agreement in February 1996, in which Korea pledged to implement TRIPs within the year. Korea has made great strides in its compliance with TRIPs. Nepal, Laos, Cambodia, and Vietnam have also concluded framework agreements, while Pakistan, Bangladesh, and India are in the process of negotiating terms. Some agreements have timetables, but most only specify medium-term targets, which are not necessarily binding. In exchange for full implementation of TRIPs, accession to the major IP treaties, and in rare cases higher standards than TRIPs demands, the EU provides technical assistance. While not exacting radical revisions, the framework agreements combine carrots with a vague threat of sticks, thereby articulating Europe’s concern about external intellectual property protection.

More powerful is the rarely used Commercial Policy Instrument, akin to Section 301 in the United States, which allows the European Union to take action against its trade partners. The old version, called the New Commercial Policy Instrument (NCPI, 1984), was revised in 1994 as the Trade Barrier Regulation (TBR). Inspired by Section 301 of the 1972 Trade Act in the United States, the European Community decided in 1984 that it should be able to protect its international rights and retaliate against unfair trade practices. ₉₈ But from 1984 to 1994 only four examinations Were opened under NCPI and no measures were taken. There are several reasons for the sparse application of NCPI. First, the northern European countries were wary of its potential for protectionist use. This is ideologically consistent with their dislike of Section 301 as a protectionist unilateral instrument. Second, the requirements for case admissibility were high. The plaintiff had to show injury to a Community industry —not a firm, not a national industry—resulting from an illicit practice. In the United States, the practice simply had to be unfair, and proof of injury to an en tire industry was unnecessary. Third, the checks and balances within NCPI made for a slow process in which objections of the member state had to be fully addressed. A member state with important ties to a third country that was under NCPI or TBR investigation could slow or even halt the process if it felt that its other trade or political interests hung in the balance.

Despite its weaknesses, however, the threat of NCPI exacted change in the IP behavior of third countries. In 1984 producers of Scotch Whiskey considered filing a case against Bulgaria for its misleading "Scotch Whiskey" products. The Bulgarians dropped the use of the term Scotch before the case could be filed. Two of the four cases that reached the European Commission dealt with piracy: a 1987 case against Indonesia for its piracy in sound recordings, and a similar case in 1991 opened against Thailand in 1991. In bilateral negotiations both countries agreed to change their practice. In 1994 NCPI was revised to work with the dispute resolution mechanism of the WTO. To make it more effective, admissibility requirements were lowered so that simple "obstacles to trade" are actionable and industries need only show "adverse effects to trade" instead of injury to the entire Community industry within Europe. The Trade Barrier Regulation, therefore, is geared toward the problems encountered in entering third-country markets, much like Section 301. The real question is whether European countries and industries are any more likely to use the Trade Barrier Regulation for intellectual property disputes. Will bilateral dispute resolution flourish in Europe? probably not. In order to build consensus among the member states, the commission, and the European Council, procedures remain complex and reaction times to trade practices abroad remain slow.

The European Commission is fully aware of the problem. Its new market access policy statements are reassuring to the United states in that they assert the need for full implementation of TRIPs and the desire to use bilateral mechanisms, including the withdrawal of benefits like General Systems of Preferences (GSP) when third countries do not fulfill their trade obligations. ₉₉ Sir Leon Brittan, Vice-President of the European Commission, has been open about the need for the European Union to speak with one voice in trade matters. He has in fact lobbied to extend Article 113 of the Treaty of Rome—which gives the Commission authority in multilateral negotiations-to intellectual property rights, among other issues. His reasons are simple: finalizing international negotiations takes too much time because three unanimous approvals from the Council of Ministers are necessary; national legislatures then take two to three years to ratify trade agreements; unanimity means the European Union must adopt the lowest-common-denominator bargaining position, a fact exploited by other countries. ₁₀₀

In the absence of a large stick, Europe has focused its bilateral efforts on technical cooperation. Hard data on amounts spent are elusive, but Europe is thought to be one of the most important providers of technical assistance, both through the EU and through national programs. ₁₀₁ The European Union will spend approximately 4.5 million ECU on the IPR Cooperation Programme for China over five years, and a similar amount for technical cooperation in ASEAN countries. Since the European Commission has the power to extend technical aid, and to file complaints with the WTO, it has relied primarily on positive incentives and on retaliation within multilaterally sanctioned bounds to change the practices of third countries.

The main reason Europe is unlikely to use bilateral instruments to further its IP interests—and therefore unlikely to join the United States in the use of unilateral sanctions against third countries—is that it does not have the will to make those instruments effective and responsive to industry needs. In part this is due to the institutional tension of the European Commission and its relationship to the member states. But it is also due to differing interpretations of the necessity to press countries for ever higher IP standards.

The authority over intellectual property regulations is shared in the European Union by member states and the Commission. This "shared competency" has created a certain degree of tension, as countries are not always eager to give up sovereignty. In international forums, the European Commission is charged with coordinating member state positions in IP negotiations. It is itself a party to the WTO. ₁₀₂ In bilateral negotiations with a third country, however, most believe that the Commission cannot initiate a complaint on its own—as the U.S. government can and regularly does—but must react to complaints from a member state or a company. Since the European Commission clearly can bring a case to the dispute settlement process within the WTO, it will probably prefer doing so over engaging in bilateral discussions that could be questioned by its own member states. The European Commission needs multilateral forums to sanction its involvement in IPR debates.

The European Commission concern about market access, the need for proactive negotiation, and enforcement of trade rules is a relatively new orientation for Brussels. ₁₀₃ The primary mission of the European Union has been to create a better business environment for Europeans within Europe, not to respond to extra-European private sector complaints. For this reason, there is no single body in the Commission with the ability and authority to flex European muscles in trade disputes. The USTR, by contrast, in the early 1970s formed the Advisory Committee on Trade Policy Negotiations (ACTPN), whose primary purpose is to alert the government to business concerns abroad. And while the office of the USTR is subject to the usual checks and balances, it has significant authority to make decisions about trade issues. This freedom is lacking in the Brussels bureaucracy.

Beyond these institutional factors, there has been a deep ideological divide between the United States and Europe in their approach to third countries. Europeans believe that while acceleration of TRIPs implementation is desirable, developing countries are entitled to the transition periods stipulated in the agreement. They do not believe that pressuring developing countries beyond what they bargained for is legitimate. In fact, during the TRIPs negotiations, the Europeans acted as moderator, softening the extreme positions of the United States on the one side and Brazil and India on the other. ₁₀₄ Transition periods were the quid pro quo for uniform minimum standards of protection.

Moreover, Europe has frequently registered its distaste for American unilateral pressure tactics, embodied in Section 301, even though many Europeans privately acknowledge the usefulness of this approach and publicly the European Union has mimicked it in the Trade Barrier Regulation. Americans argue that the aggressive U.S. approach has been a boon to European negotiators because they can enter the fray after the United States has, thanks to the threat of retaliation, and forge their own bilateral agreement The tactic looks suspiciously like free-riding, given that the Europeans did not waste any political clout for changing the third country’s IP behavior. From the European perspective, however, Section 301 makes cooperation infeasible. Since the European Union has itself frequently been the target of Section 301 investigations, it cannot lend support to a measure it decries as unfair and extralegal when used against Europe. The preferred EU approach, therefore, for changing behavior behind borders is the donation of technical aid. Internationally sanctioned retaliation, however, is okay by Europe. It is willing to file WTO complaints—as it did against Japan’s sound-recording copyright laws and against India and Pakistan for their failure to set up a mailbox system for filing patent applications as stipulated in the TRIPs Agreement.

The WTO’ s Dispute Settlement Body holds out the promise that Europe will become more proactive in its policies toward third countries, as the EU does not have ideological objections to using this multilaterally sanctioned forum. It is unlikely, however, that Europe will single out a WTO member for TRIPs-plus implementation because of its greater tolerance for the transition periods. There is a slightly greater, though still slim, possibility that Europe might start a Trade Regulation Barrier case against a non WTO member. Given the ideological divide, the United States cannot expect Europe to be a kindred spirit in its use of bilateral trade pressure, especially not in Asia, where Europe’s influence is weak.

Cooperating with Japan

Japan has even fewer bilateral tools at its immediate disposal to direct against its trade partners, and it has a similar distrust Of unilateral sanctions. Like Europe, Japan would prefer to bring IP disputes into a multilateral context, but it is even less proactive on the matter of shaping global IP regimes. Most telling, Japan has not yet initiated any complaints in the WTO pertaining to intellectual property violations. Based on past behavior, the United states can assume that Japan is unlikely to be a staunch ally of aggressive American IP tactics.

Japan is not at the helm of an all-Asian trade organization that would allow it a greater voice in the formulation of regional trade policies. In fact, the United States has actively discouraged the formation of any such group. ₁₀₅ Japan has, however, been active in APEC taking the lead in an initiative to make Asia’s intellectual property regulations more transparent and discussions about how to enhance protection in trademarks and standardize patent filings. ₁₀₆ So far the APEC meetings have not yielded any regional standards for IP protection, and if any are reached in the near future, they are expected to represent conservative improvements on TRIPs.

Japan is uninterested in playing power politics in intellectual property rights. During the American showdown with China, for example, Japan maintained official neutrality, privately advising that economic engagement—rather than threats of trade sanctions—is the best way to bring the PRC into the international system. ₁₀₇ Country specialists explain that Japan does not like to use confrontational tactics, and that its government believes that economic development is the fastest route to a strong IP regime. ₁₀₈ To that end, the Japanese provide technical expertise and financial support to establish new administrative and judicial branches needed for the IP systems of developing countries in Asia. ₁₀₉

It is also important to remember that Japan is, and thinks of it. self as, an exporting nation. Japan has had annual export surpluses above $100 billion through the 1990s. ₁₁₀ In 1995 Japan’s surplus with Asia alone totaled $70 billion. And although Japan is importing more from Asia than in the past, over the course of the decade its surplus with Asia has grown more than 20 percent a year. The products exported are primarily machinery, and transportation equipment, while its imports have a lesser IP component (major import sectors include food, raw materials, fuels, manufactured goods, machinery, and transport equipment). ₁₁₁ Because Japan imports few technically sophisticated products and has no problem exporting to its neighbors, the government is unconvinced that it would be worthwhile to pressure trade partners for stronger IP protection. While individual Japanese companies do complain about piracy, the United States should not expect Japan to be a reliable or independent supporter of strong IP standards in Asia. ₁₁₂

instead, Japan’s strategy in IPRs has been to provide technical expertise and financial support to build administrative and judicial branches in developing countries. In 1996 Japan doubled its contribution to the WIPO secretariat for technical training in Asia. It also cooperates bilaterally with Asian countries that request aid. The United States believes that enforcing IP rights is simply a matter of will. The Japanese believe it is futile to force countries to adopt strong IP regimes until they are economically developed.

Limited Resources

Limited resources—both monetary and political—are the second set of constraints on American IP policy making. Financially, the costs of raising IP standards worldwide will put a burden on many developing countries. Two types of costs need to be considered:

(1) costs to industry associated with increased licensing payments, and (2) costs to governments associated with setting up a modern IPR system. By one measure, the costs of increased royalty and licensing payments by the South to the North could "double or triple the foreign exchange outflow caused by Third World annual debt payments." ₁₁₃ To offset the potential technological isolation of developing countries that will not be able to pay for technology, APEC and the WTO have pledged to increase technology transfer from developed to developing nations (although the types of programs this will entail and how they will be paid for remains unclear). ₁₁₄

Of more immediate concern to the United States is the behind-the-border implementation of intellectual property regulations. Monitoring and implementation is expected to be more expensive than enacting the legal foundations of an IP regime, but costs will vary widely. Laos and Cambodia would have to create IP regimes essentially from scratch, while Argentina and Brazil only have to tinker with systems that already have relatively high standards. For many developing countries, a lack of funding and expertise means that governments may not be capable of establishing in a timely fashion the administrative and legal structures—not to mention the legal culture—that must underpin any IP system. Technical assistance and financial aid is necessary to upgrade these IP regimes.

The actual costs to each country are hard to estimate, and depend on the route each country chooses. ₁₁₅ The United States aids developing countries through visiting scholar training programs, conferences, and consultations with foreign governments on how to set up or improve their patent, trademark, and copyright systems and how to fulfill TRIPs obligations. The most visible agency abroad is the USTR, but it is a trade negotiator, not an intellectual property rights enforcer. However, the Patent and Trademark Office, the Justice Department, the Commerce Department the U.S. Information Agency, and the U.S. Agency for International Development (USAID) are involved in aid and technical assistance programs. Continued funding of these programs is critical if the United States wants strong IP systems to emerge worldwide.

The World Intellectual Property Organization is by far the biggest source of advice, training, and documentation for developing countries. With its $200 million budget financed primarily through fees, it costs the U.S. government relatively little. In addition, the private sector plays an important role in educating developing countries. Groups like the Business Software Alliance, the Pharmaceutical Manufacturers and Researchers of America, and the International Intellectual Property Association spend a good deal of time abroad providing information and training on how to abide by the TRIPs Agreement and explaining the benefits of doing so. And promises of investment by foreign companies can also go a long way in changing practices.

To a certain extent, the United States can expect outside funding to be available for developing countries. Japan is enthusiastic about sponsoring IP seminars to train officials in East Asia, and the European Union is also well funded for technical assistance in IP ₁₁₆

The United States privately hopes that these countries will continue their activities, although aware that foreign models of IP protection—Japan’s in particular—are not always in harmony with the American one. Nevertheless, if the United States is to shape global IP’ regimes, it should think of foreign governments and the private sector as supplements to, not substitutes for, U.S. assistance to countries building modern intellectual property systems.

Narrow Negotiating Margins

Beyond the isolation of U.S. policies and the uncertain funding to follow up trade agreements, conflicting political goals hinder a coherent IP policy. To raise standards further, the United States needs to wield credible threats or to dole out attractive benefits in exchange for cooperation. Unfortunately, the negotiating tools at its disposal are no longer as effective as in the past, and paying for stronger rights is an expensive strategy. The United States has less and less leverage when it acts alone to influence the IP behavior of its trade partners. Countries know that American threats of unilateral sanctions are rarely carried out, and can be challenged within the WTO." ₁₁₇ Benefits offered to developing countries, like GSP, are outside the purview of the WTO and can still be used to exact changes, but as average U.S. tariff levels fall, the marginal dam age incurred by developing countries from the withdrawal of GSP privileges becomes less threatening. ₁₁₈

Moreover, from a purely diplomatic perspective, the United States can only cash in its chips so many times. Intellectual property issues will sometimes take a back seat to other trade or foreign policy priorities. In politically fragile countries caution and patience is necessary, as pushing too hard a line on intellectual property may backfire. And in countries with the geostrategic importance of China or Russia, the United States is unlikely to incite a trade war over intellectual property since so many other security or economic interests hang in the balance.

The intellectual property battles the United States pursues in the future must be particularly well chosen because it will fight them alone, it will fight them without deep pockets, and such battles will require more patience and commitment than in the past. These constraints limit the strategies open to the United States.

Endnotes

Note 93: Much of this section is adapted from Bénédicte Callan, "The Potential for Cooperation in Intellectual Property in Asia," in Richard Steinberg, ed., Transatlantic Trade Cooperation in Asia: Issues, Sectors, and Modalities, unpublished book manuscript. Back.

Note 94: Of the largest pharmaceutical firms in 1995, four were European and six were American. However, this distinction makes less and less sense as mergers are bringing Euro–American firms under a single roof. Back.

Note 95: BMG, EMI, and Polygram are European. The other two are Time Warner (U.S.) and Sony (Japan) Back.

Note 96: Almost 12% of European exports are to Asia, 14.4% of U.S. and 29.6% of Japanese exports are to Asia. See Francis Williams, "Copyright rules planed for the Internet," Back.

Note 97: Michael Vatikiotis, "Squandered Advantage," Far Eastern Economic Review, February 1997. Back.

Note 98: This section is based on Harri Beekmann, "The Revised Commercial Policy Instrument of the European Union," Law and Economics Review, Kluwer International. The Hague, 1995. Back.

Note 99: See European Commission, DG 1, "The Global challenge of International Trade: A Market Access Strategy for the European Union," website—http://europa.eu.int/en/comm/dgO1/feng.htm. Back.

Note 100: From Lionel Barber, "Brussels Strives to Call the Tune on Trade," Financial Times, March 1996. Back.

Note 101: Detailed descriptions of assistance programs are submitted by the advanced Countries to the WTO in compliance with Article 67 of the TRIPs Agreement. Total expenditures on technical assistance are not published. Back.

Note 102: The Commission was highly visible during the GATT TRIPs negotiations and at the WIPO New Instruments/Berne Protocol conference in December 1996 Back.

Note 103: In 1996 the Commission issued report entitled "A Market Access Strategy for the European Union," which outlines Europe’s new orientation. Back.

Note 104: In part, this may be because Spain, Portugal, Greece, and Italy were reluctant to adopt some sections of the TRIPs Agreement themselves. Back.

Note 105: Joseph M. Grieco makes this point in "Realism and Regionalism: American Power and German and Japanese Institutional strategies during and after the Cold War," paper presented at the annual meeting of the American Political Science Association, August 29–September 1,1996. Back.

Note 106: APEC’s 1996 Collective Action Agenda included several agreements to further discussions on IPR. Back.

Note 107: Christopher Johnstone, "Tokyo Reticent as U.S.–China Trade War Looms," Japan Economic Indicators Report, no. 20B, pp 5–6, May 24, 1996. Back.

Note 108: The Japanese and the American systems of IP protection are substantially different, and have been the cause of many trade disputes. The United States would probably object were Japan to exercise a heavy hand in forming the IP systems of other Asian countries. For a discussion of the major U.S.–Japanese differences see Koichi Hamada, "Protection of Intellectual Property Rights in Japan," Economic Growth Center at Yale University, April 1996. Back.

Note 109: Koichi Hamada, "Protection of Intellectual Property Rights in Japan." Back.

Note 110: In 1995 the Japanese trade surplus was $135 billion and the American trade deficit was $158 billion. Back.

Note 111: Seventy percent of total exports from Japan were machinery and transportation equipment. The figures in this paragraph are from the Japanese Ministry of Finance and the U.S. Departnent of Commnerce as published in Japan Economic Institute, "Statistical Profile, International Transactions of Japan and the United States in 1995,"JEI Report no. 34A, September 13, 1996. Back.

Note 112: And given many disagreements with Japan over IP issues, the U.S. may not welcome a forceful Japanese presence in international IP negotiations. For a good overview of disagreements about IP protection for software, see Joel West, "Software Rights and Japan’s Shift to an Information Society," Asian Survev, vol. 35, no.12 (December 1995), pp. 1118–39. Back.

Note 113: Figures from the Rural Advancement Fund International, quoted in de Almeida, "The Political Economy of Intellectual Property Protection: Technological Protectionism and the Transfer of Revenue among Nations," International Journal of Technology Management, vol.10, no.2/3(1995), pp. 214–29. Back.

Note 114: Article 67 of the TRIPs agreement stipulates that developed countries shall provide technical and financial assistance to developing countries. In APEC the Osaka Action Agenda of 1995 also included a clause on the need for technical assistance and technology transfer to reduce disparities in economic development. Back.

Note 115: For example, many countries choose to charge fees for filing patents and trademarks in order to cover the costs of administering the IP system (however fees usually do not cover new expenses incurred by the judicial system and customs services). In addition, since establishing a patent system with the independent capacity to search for prior art and evaluate patents in every country would be very expensive, WIPO suggests that developing countries rely on the search and examination decisions of one of the advanced developed countries (e.g., the U.S Patent and Trade Office, the Japan Patent Office, or the European Patent Office) to minimize patent-related expenses. Back.

Note 116: Koichi Hamada, "Protection of Intellectual Property Rights in Japan." Back.

Note 117: In 1988 Brazil threatened to take the United States to the GATT if it did not drop its proposed Section 301 sanctions. The United States backed off. Back.

Note 118: The GSP is the Generalized System of Preferences. Also relevant are the Caribbean Basin Initiative and the Andean Trade Preferences Act. Back.