Pirates on the High Seas: The Modern Pirates

Pirates on the High Seas

The United States and Global Intellectual Property Rights

Bénédicte Callan

1998

The Modern Pirates

The Most Important Reasons intellectual property disputes are here to stay are that modern piracy is big business and that stopping piracy requires behind-the-border intervention in national policies, which is politically difficult.

Every year a few dozen countries are cited by the U.S. Trade Representative for their lack of vigilance in intellectual property. ₄₇ Factories abroad churn out millions of copies of illegal products for both domestic and, more worrisome, international markets. A 1993 USTR report suggested that U.S. entrepreneurs lose up to

$60 billion annually from infringement of their intellectual property, and some estimates of American losses to piracy run as high as $200 billion annually. ₄₈

Of course, damages are difficult to estimate because they seek to measure what was not sold and the profits not made. ₄₉ In calculating losses one must estimate how much of a country’s market would have been captured in the absence of infringing products, and at what price. ₅₀ Industrywide figures are rare. According to an International Trade Commission report, in 1986 the software and computer industries lost $4.1 billion to infringement. The scientific and photographic equipment industries estimated lost sales of $5.1 billion. The pharmaceutical, entertainment, motor vehicle, and electronics industries each lost about $2 billion. Chemicals and petroleum refining lost $1.3 billion each. The total damages from worldwide lost sales, according to the ITC, amounted to $24 billion. ₅₁ Most individual industries’ estimates for current losses are significantly larger.

While the cumulative figures are impressive, even more significant is the fact that infringement makes market entry into countries whose economies are growing very difficult. In addition, the United States fears that pirated goods are then exported, cutting into the market share of legitimate products in third countries. For precisely these reasons, the United States was adamant in the spring of 1996 that China shut down 31 pirate factories—the majority of them joint ventures with Taiwanese and Hong Kong companies—and increase customs control. China had the capacity to make fifteen times more CDs, LDs, and CD-ROMs than are purchased domestically. ₅₂ Obviously most products were destined for wider Asian markets. To prevent such "double whammy" revenue erosion, the United States now believes border controls are key to new intellectual property agreements.

Hardest hit by intellectual property infringement are the hightechnology sectors and the entertainment industries. Not all are victims of the same type of infringement, however. Counterfeiting is the illegal copying of brand-name products or the use of a trademark without the permission of its owner. Levi’s jeans, BMW spare paits, and Whitney Houston CDs are frequently counterfeited. The pirate, on the other hand, illegally uses a copyrighted or patented product or process. In piracy, retaining name recognition may not be central to profitability—as with many pirate pharmaceutical and agrochemical products. Finally, the most subtle type of infringement occurs when an idea, a product, or a process is similar to, improves on, or incorporates another patented or copyrighted product without the permission or remuneration of the rights holder. The conditions under which this use constitutes infringement are often contestable. In many cases, determining whether infringement has occurred at all requires a great deal of technical knowledge, and leads to fierce disputes, domestic as well as international.

Unfortunately for the advanced industrialized world, IP infringement is easy and relatively cheap. Pirates are hard to eradicate because they are frequently small companies with low overhead costs and capital requirements, which when shut down quickly reopen elsewhere or are replaced by new entrants. Modern technologies are conspiring to make protection even more difficult. Rapid access to and replication of new ideas and products is made simple by personal computers, the Internet, and low-cost but high-performance equipment like new-generation copier machines. In China, computer disks containing up to $20,000 worth of stolen software can be bought for a few dollars. Moreover, companies that want to hide their infringing activities can render pirated software programs unrecognizable over the course of a couple of days using simple algorithms to transform the program code ₅₃ Many pharmaceuticals that required hundreds of millions of dollars to research and develop are trivial to synthesize ₅₄ Knockoff drugs sell in developing markets at one-tenth to one fifth the cost charged when licensed from the inventor. ₅₅

In addition, the built-in lead time that companies used to enjoy, which allowed them a certain period of market exclusivity, has disappeared. Product cycles in most industries have shrunk due to a more targeted approach to research and growing consensus over which products and markets to pursue. ₅₆ Combined with the rapidity of modem travel and communications, the transfer of know-how from country to country is almost instantaneous: copies of the computer operating system Windows 95 were on the streets of Moscow and Beijing before they hit New York.

While pirates can be found in all comers of the globe, the United States is most concerned with the big emerging markets (BEMs), primarily in Asia and Latin America. (Less-developed countries have little capacity to purchase or absorb new technologies and are, in the medium term, almost irrelevant to U.S. IP interests. The advanced industrialized countries are already signatories to the important IP conventions and well integrated into the international system. ₅₇ ) The emerging markets, on the other hand, promise an ever growing, ever richer consumer base for IP products (see Table 2). They are large countries, accounting for one-half of the world’s population, whose purchasing power is rapidly expanding.

The importance of the BEMs as present and future markets cannot be overstated. One-quarter of U.S. exports in 1994 were to the BEM countries. By the turn of the century, ITC projections put the BEM share at one-half of U.S. exports. ₅₈ BEM growth rates, on the whole, are substantially higher than the world average of 2.9 per cent, with some Asian BEMs growing three times more rapidly. ₅₉ It is expected that their GDP will double over the next 20 years, and that by 2020 six of the ten largest economies will be BEMs. ₆₀ These countries have undertaken economic programs to increase growth, trade, and investment. In Asia especially, poverty rates are dropping, while exports and productivity are on the rise. Spending on health care, software, and entertainment is bound to rise also. Clearly, the advanced industrialized countries would like to bring this large segment of humanity into the fold of the international trade system.

Not only do these countries represent future markets, but some are also producers of more advanced technology products, with a significant strata of scientists and the potential to spawn high-technology industries. Brazil, for example, is known for its informatics industry, India for its software companies, and Argentina and, increasingly, Egypt for their pharmaceutical production. As Keith Maskus documents, trade in high-tech goods, which now accounts for over 50 percent of total merchandise trade for the developed countries, is growing even more rapidly in developing countries. ₆₁ In Mexico, 42 percent of merchandise trade in 1993 was in high tech goods, a figure that had nearly quadrupled since 1985. In Korea, high-tech goods accounted for 45 percent of merchandise trade, and in China, 35 percent; in both countries growth rates of technology products since 1985 have roughly doubled. ₆₂ The United States is therefore taking a keen interest in shaping the terms of competition with the BEMs because they represent growing technology markets and future competitors.

Table 2. Population, per capita GNP,
and GDP growth rates in the 10 BEMs

	Population (millions),1993	GNP per capita (PPP),1993	GDP annual growth l98O–93
Argentina	34	$8250	0.8%
Brazil	157	$5370	2.1%
China (PRC)	1,178	$2300	9.6%
India	898	$1220	5.2%
Indonesia	187	$3150	5.8
Mexico	90	$6810	1.6%
Poland	38	$5000	0.7%
South Africa	40	n.a.	0.9%
South Korea	44	$9630	9.1%
Thailand	58	$6260	8.2%
Turkey	60	$5160	4.6%
U.S.	258	$24,740	2.7%

Source: World Bank, Workers in an Integrating World, Oxford University Press: New York, 1995. U.S. figures for comparison.

The big emerging markets are also big entertainment markets. Piracy in the $40 billion worldwide music industry is estimated to be $2 billion annually and growing. ₆₃ Brazil’s legal music industry has revenues of $700 million, 84 percent of which is dominated by affiliates of Northern multinational companies. ₆₄ Piracy is a problem in Brazil, but not on the order of China, which produces an estimated $250 million of pirated music CDs and cassettes every year and where three-quarters of all music CDs are pirated. ₆₅ In the film industry, the fastest growing market is Asia. India already has a $1 billion movie industry, which produces two times as many films as in the United States. ₆₆ Hollywood is interested in augmenting its Indian sales, especially as the country’s 13,000 theaters expand in number and raise their 65 cents admission fees. (There is room to grow, as the United States, with one-third India’s population, has 29,000 screens.) The greatest growth market is China, which has only 3,000 official cinemas and still regulates foreign film releases. The music, film, and television industries are eager to tap into these fertile markets.

Because of, or perhaps in spite of, their technological ability and their relative affluence, the BEMs are home to some of the world’s most virulent pirate producers ₆₇ In software, 80 percent to 90 percent of all applications in the developing countries are illegally copied (with the exception of Latin American countries, where the figures are somewhat lower). The business software industry estimates that it loses $8 billion to piracy worldwide, an amount equal to its total sales. ₆₈ Piracy rates are generally higher in the developing world, which is why the issue is often portrayed as a North–South problem. But it is important to remember that advanced countries are often responsible for larger total losses due to piracy because their purchasing power is so much greater. High copyright piracy rates in the developed world, for example, are due primarily to higher expenditures on software. ₆₉ It is the rates of piracy, and the lack of prosecution or enforcement, rather than the absolute value of losses that make infringement most problematic in the BEMs.

Table 3. Estimated losses due to global copyright piracy, 1994

	Piracy Losses (millions of U.S. $)	World Percentage
Western Europe	3809.2	25.50
United States and Canada	3517.0	23.55
Developing Asia Pacific	2296.2	15.37
Japan, Hong Kong, Singapore	1531.5	10.25
Russia and CIS, East Europe	1462.0	9.79
South and Latin America	1442.2	9.66
Middle East, Mediterranean	773.5	5.18
Africa	103.7	0.70
Total	14,935.3	100.00%

Source: Intemational Intellectual Property Aliance.

The United States is immediately concerned with piracy in Asia and Latin America. ₇₀ Contemporary Latin America, however, is less problematic than Asia. A greater percentage of losses in films, music, software, and, especially, print occur in Asia than in Latin America. ₇₁ Computer chip theft in Asia is reputed to run to $8 billion a year. ₇₂ In addition, the ratification of NAFTA, the new economic liberalism, and an increased sensitivity to the desires of foreign direct investors has set Latin American nations on a course of IPR reform, the latest step of which was the enactment of Brazil ’s new and modem patent law in April 1996. The MERCOSUR grouping—Brazil, Argentina, Paraguay, and Uruguay—adopted a common protocol for trademarks in 1995, and discussions on copyrights are under way. Similarly, the Free Trade Area of the Americas created a Working Group on Intellectual Property Rights at its meeting in Colombia early this year. With the exception of Argentina, all indications are that Latin America is committed to establishing stronger IP standards unilaterally and through regional cooperation. ₇₃

Asian countries have not been bitten by the same IPR bug that is driving Latin American reforms. In particular, the People ’s Republic of China, not yet a WTO signatory, poses huge enforcement problems, making it the only country in 1996 for which the United States considered trade sanctions to force IP changes. One rung down the USTR ’s hierarchy, three of the five BEMs on the "priority watch list" in 1996 were in Asia. ₇₄ India ’s lack of modern patent and trademark laws, and its delay in passing legislation for the TRIPs mandated "mailbox" for filing pharmaceutical and agricultural patents, raises the possibility of a WTO violation. ₇₅ Indonesia was placed on the USTR ’s priority watch list for copyright violations. South Korea, which has made great progress in IPRs over the past decade, is on the priority watch list for its lack of trade secret, software, and textile design protection. The USTR even cites Japan, despite its comparatively strong IP rights, for narrow interpretation of patents that spurs companies to "patentflood,"for its treatment of software, and for its lax recording rights. ₇₆

Raising standards in the greater Asian economic area poses a special challenge to the United States. The APEC regional agreement is broader and weaker than NAFTA, and is therefore unlikely to push significant improvements on the TRIPs agreement. Furthermore, India is located in South Asia and thus not included in either APEC or ASEAN, nor in any other regional grouping headed by one of the advanced industrialized countries. There is no regional trade agreement in Asia that is weaving a strong and inclusive IP net. As Asia represents the fastest growing and most technically endowed of the U.S. developing country trade partners, this region must be a top priority for U.S. policymakers. Asia is an important test case for the question of whether regional or multilateral mechanisms can be used to raise IP standards further.

Endnotes

Note 47: In 1996 the United States placed China, Argentina, the European Union, Greece, India, Indonesia, Japan, Korea, and Turkey on the "priority foreign countries list" or the "priority watch list." An additional two dozen countries are on the "watch list" for questionable IP practices. Back.

Note 48: Office of the U.S. Trade Representative, The Uruguay Round: Growth for the World, Jobs for the US—A Primer, Dec. 1, 1993, p.6. As quoted in Richard Steinberg, "The Uruguay Round: A Preliminary Analysis of the Final Act," Laws of International Trade, February 1994. The U.S. International Trade Commission estimated the aggregate worldwide losses to infringement at $23.8 billion for key U.S. sectors in 1986. See U.S. ITC, Foreign Protection of Intellectual Property Rights and its Effect on US. Industry and Trade Report to the US. Trade Representative. Investigation no.332–245, Publication no.2065, Washington, D.C., 1988. Back.

Note 49: Business associations, the U.S. government, and foreign governments each use different assumptions to calculate lost sales or lost profits Back.

Note 50: Frequently companies must adjust their prices to the purchasing power of the developing world if they are to compete at all. In calculating lost sales or profits therefore, one cannot use the price of the product in the home market, but must estimate how much it could sell for in the developing country and how large a market it could then command When calculating damages due to infringement, courts resort to one of several metrics, including: "(I) the intellectual property owner’s actual economic loss caused by the infringement; (2) the infringer’s total profits derived from the infringement; or (3) an amount no less than a reasonable royalty." See Jianyang Yu, "Protection of Intellectual Property in the PRC" Pacific Basin Law Journal, vol.13, no. 140 (1994), pp.140–62. Back.

Note 51: USITC Publication 2065, 1988, "Foreign Protection of Intellectual Property Rights and the Effect on U.S. Industry and Trade," Washington, D.C. Back.

Note 52: USTR, "Chinese IPR Piracy Results in Fewer Jobs for U.S. Workers," USTR Fact Sheet, January 5, 1995. Back.

Note 53: William T. Ellis, "Patent and Copyright Protection for Software in the Post TRIPs World," unpublished paper for Council on Foreign Relations study group, American IPR Policy afier ihe TRIPs Agreement, March 1996. Back.

Note 54: The Pharmaceutical Manufacturers and Research Association estimates that the costs of developing a drug-initial research to marketplace—are between $300 million and $500 million for a U.S. firm; see Kate Murashige, "Industrial Policy and Biotechnology—can Intellectual Property Protection Systems Catch Up?" Back.

Note 55: See Daniel Pearl, "Big Drug Makers Push Egypt, Other Nations to End their Piracy," The Wall Street Journal, December 13, 1996, p. Al. Back.

Note 56: Harvey Bale makes the point that most pharmaceutical research has become narrowly targeted on key diseases such as AIDS, heart disease, and cancer, see Bale, "Regionalism and the Protection of IPRs." Back.

Note 57: This is not to say that the U.S. is not concerned with IP infringement domestically or in advanced countries. Advanced countries are reviewed by the USTR on an ongoing basis. The eight trading partners placed on the "priority watch list" in April 1996 included, for example, the European Union, Japan, and Greece. On the watch list were Italy, Canada, Japan, and Australia. Back.

Note 58: See Jeffrey Garten, "The Big Emerging Markets," Columbia Journal of World Business, vol.31, no.2 (Summer 1996), pp. 6–31. Back.

Note 59: Average annual GDP growth rates for the world from 19801993. See World Bank, Workers in an Integrating World, New York: Oxford University Press, 1995, pp. 164–65. Back.

Note 60: Garten, "The Big Emerging Markets." Back.

Note 61: Maskus, "Regionism and the Protection of IPRs." Back.

Note 62: Figures for 1985–93, from Maskus, "Regionalism and the Protection of IPRs." Back.

Note 63: Figures from the International Federation of the Phonographic Industry. See Frances Williams, "Copyright rules planned for the Internet," Financial Times, December 2, 1996, p.4. Back.

Note 64: See John Lannert, "Latin Notas," Billboard, February 24, 1996. Back.

Note 65: See Shada Islam, "Foreign Record Companies Have a Deal for China," Far Eastern Economic Review, November 21, 1996, pp. 84–86. Note that the losses to bootlegged, counterfeit, and pirate recordings in the U.S. amount to $300 million a year according to the Recording Industry Association of America. See Don Steinberg, "Digital Underground," Wired, no.1 (January 1997), pp.104–10. Back.

Note 66: See Sharon Moshavi, "Bollywood Breaks into the Big Time," Business Week, September 25, 1995, pp.122–23. Back.

Note 67: While piracy is often portrayed as a North–South issue because piracy rates are much higher in developing nations, in fact the gross estimates of piracy losses are much larger for the industrialized countries because their purchasing power is so much greater. It is the rates of piracy, and the lack of prosecution or enforcement, which makes infringement most problematic in the BEMs. Back.

Note 68: See Software Publishers Association, 199S Report on Global Software Piracy. Washington, D.C., 1995. Back.

Note 69: According to the IIPA, software piracy accounts for 77% and 84% of copyright piracy losses in Europe and the United States, respectively. Back.

Note 70: For a discussion of developing country IP issues see Carlos Alberto Primo Braga, "The Newly Industrializing Economies," in M. Wallerstein, M.E. Mogee, and R. Schoen, Global Dimensions of lntellectual Property Rights in Science and Technology, Washington, D.C.: National Academy Press, 1993. Back.

Note 72: In a semiconductor chip market worth $151 billion, most of the theft occurs within Asia. See Emily Thornton, "Some Like it Hot," Far Eastern Economic Review, August 15, 1996, pp.58–60. Back.

Note 73: Despite earlier assurances and efforts on the part of the Argentine president, the Argentine legislature enacted a new patent law in 1995 which fell short of the protection required under the TRIPs agreement. Back.

Note 74: The other BEMs were Argentina and Turkey. Non-BEMs European Union and Greece were also cited. Back.

Note 75: Developing countries that do not immediately extend patent protection to pharmaceuticals and agrochemicals must create a mailbox or black box system in which patent applications can be filed so as to be eligible for protection when patent protection is finally extended. Back.

Note 76: Patent flooding refers to the practice of filing many patents to surround a single innovation with strong protection. Back.