THE BLOG
12/09/2013 05:58 am ET Updated Feb 08, 2014

Why USTR Should Not Put MPAA and PhRMA Ahead of Other Industries (and Consumers) in Trade Negotiations, including TPP

I am in Singapore, for a meeting of trade ministers trying to make progress on the largest regional trade agreement in history -- the Trans-Pacific Partnership (TPP) Agreement.

The lead U.S. agency in the negotiation is the United States Trade Representative, known as USTR.

The negotiations have been conducted in extraordinary secrecy, and cover an astonishingly wide range of issues. (For details, see: Zach Carter, Obama Faces Backlash Over New Corporate Powers in Secret Trade Deal, Huffington Post, December 8, 2013, KEI analysis of Wikileaks leak of TPP IPR text, and various TPP video clips).

This week a series of "political" issues are supposed to be resolved. The dynamics of the negotiation can be broadly summarized as follows: USTR wants "more" for the industries represented by the MPAA and PhRMA, in terms of stronger intellectual property rights (IPRs), and weaker controls on drug prices, and everyone else wants access to the U.S. market. Of course, this isn't all. There are efforts by the U.S. Chamber to curb activities of state owned enterprises, and USTR is interested in additional access to the Japan market. There are demands by big companies for a controversial system of Investor State Dispute Settlement (ISDS), that critics say will be used to undermine health and environmental regulations and consumer rights and safeguards in IPR. But as a big picture, the TPP is basically about trading higher IPR and higher drug prices for access to the US Market.

Access to the U.S. market comes at the expense of U.S. jobs, so the trade-off is not without its domestic costs. And, while under some circumstances it may make sense to sacrifice one sector of the economy for greater gains in another, the value of this particular trade-off is negative, not positve.

Overall, higher standards for IPR for copyright hurts American businesses more than it helps them, and the same is true for higher drug prices.

Copyright

Let's begin with the copyright issues. The starting point is a world that already has the Berne Convention, the TRIPS Agreement, two 1996 WIPO treaties on digital copyright, plus WIPO's 2012 Beijing and 2013 Marrakesh treaty, and the 2012 ACTA agreement. Given all this, what does the TPP propose to do that has not already been done? The USTR wants to mandate copyright terms of at least life +70 years for all TPP members, create a more restrictive environment for copyright exceptions, ramp up damages and extend liability for infringement. Some of this will be accomplished through black letter provisions in the trade agreement, and some of this will be amplified and transformed by a new investor state dispute settlement (ISDS) system, that gives publishers a forum to litigate the implementation of the 3-step test, and standards for damages and third party liability. (ISDS is a system of private arbitration that can impose huge fines on governments. Some describe ISDS as a mechanism for corporate sovereignty).

Does this benefit the USA? Not everyone. It benefits a handful of politically active entertainment companies that own old copyrights, and which want to reduce unauthorized uses of works. But it hurts those U.S. companies that promote the sharing of or access to works.

The copyright term issue

Only a handful of older copyrights generate much revenue. Disney is one of the most aggressive lobbies for the life + 70 copyright term, but the revenues from its older copyrights are only a small part of its company's sales, and the same can be said of any of the other major media companies.

If you are a performer, still performing, making a movie, or creating a book that uses old photographs, clearing rights to the old copyrights is an added expense, one that reduces the incomes of creative people who are actively creating.

Consider the newer systems of streaming recorded music. When a service like Spotify sets a price point, like $4.99, $7.99 or $9.99 per month, it shares a portion of its revenues with owners of the recordings. Most consumers want to listen to music that has been recorded within the past 50 years. If a performer records an old song, they have to share the revenue from their performance, with the author of the song, or, the entity that holds the rights, including cases where the author has been dead for more than 50 years. The fact that copyright is life + 70 rather than life + 50 is irrelevant to the consumers, from the point of view of how much they are willing to pay. So, for recorded music, the extra 20 years of copyright ends up being a tax on performers, more than a tax on consumers. Makers of films, textbooks and other works face the same problem. Every time they want to use a work to create a new work, they have to pay for the extra 20 years of copyright protection.

It goes without saying that 20 extra years of copyright protection does not induce creative activity. Not quantified and/or accounted for by USTR (and USPTO) is how much the extra term harms creative activity, or services that expand access. The Google Books project is just one effort to provide access to older works, and there are and will be additional efforts. Most interesting will be efforts to expand access to the countless "orphaned" copyrighted works that generate zero income for right holders, and for which the ownership is difficult or impossible to determine. The extra 20 years just makes most of the works dead the world, and it also represents a lost opportunity for jobs, investment and profits.

Copyright Enforcement, and exceptions to rights

How about the impact of stronger copyright enforcement and narrower exceptions on more recent works? These are hard to quantify, but still, isn't this something the Chief Economist at the USPTO or USTR should try to quantify? If we want to change the law, to influence how people actually use works, there is not only a benefit to the right holders, but also a loss to users. If the benefit is small relative to the losses, then it's a bad policy.

Greater access to information has benefits, including more informed decision making. If anyone could eliminate all unauthorized sharing of copyrighted works, businesses and government agencies would have a hard time functioning. Reading FOIAs from USTR or USPTO, one observes many examples of publishers forwarding by email entire copies of articles that are protected by copyright, to make government officials or industry advisors aware of some new development. This sort of thing takes place without authorizations from right holders. The world would be worse off if it stopped.

Social networks like Facebook are another example of uses without authorizations from right holders. Facebook is basically a web page full of user generated and uploaded content. Today the market values Facebook at $117 billion. On a daily basis, countless photographs are uploaded onto Facebook pages, for sharing, and almost never does anyone have a license to upload the content. Crazy remixes of content are popular, as are links to various web pages and news stories. Facebook can operate because copyright is not enforced strictly on social networking sites. Facebook is a U.S. firm, employees people in the U.S., and its shares valued at three times the value of Viacom stock.

Google, sometimes described as the nemesis of publishers, by the publisher lobby, is an American company. The Google search engine and other services are astonishingly powerful tools to find and share information. Google has a market value of $357 billion -- 2.8 times the market value of Disney. Apple, with a market value of $503.9 billion, Microsoft, with a market value of $320 billion, and Intel, with a market value of $123.6 billion, are examples of companies that aggressively protect their intellectual property rights, but also are primarily valuable because they are used to manage and expand access to knowledge resources.

Where the jobs are, and are not

Publishers have made much of the recent U.S. and EU studies that purport to show huge employement and GDP contributions for "IP Intensive industries." In fact, these studies are mostly propaganda for IP rights holders, and deliberately combine all sorts of things that make little sense. In the USPTO study, the largest IP intensive industry is the retail grocery business. In the EU study, they claim 7 million jobs are "copyright intensive."

But where are they? Book publishing is listed at 317,150, Sound recording and music publishing activities at 37,750, and Publishing of journals and periodicals just 13,300, the three making up roughly 5 percent of the total estimated jobs. Libraries and archives, on the other hand, are listed as a "copyright intensive industry" with 397.800 jobs -- 5.6 percent of all copyright intensive jobs. (http://keionline.org/node/1432).

Many of the so called copyright intensive jobs in the EU study involve such things as advertising or public relations. In the United States, most of the jobs in the copyright intensive sector rely very little or not at all on copyright, and certainly have no reliance on something like a 70 year copyright term. (see: http://keionline.org/node/1803).

Whose Publishers?

And, there is also the question of who owns the publishing companies. Many that were once US companies are now foriegn owned.

See: Jonathan Band and Jonathan Gerafi, Foreign Ownership of Firms in IP Intensive Industries, March 13, 2013. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2333839

Getting copyright policy "right" is not only about creating infinite copyright terms or putting users in jail for sharing information, but about creating a system that protects and restricts some, but not all uses of works, and does not unduly block innovative ways to make knowledge resources more useful and valuable. When the USTR simply operates off a play-book written by Disney, Time Warner, Viacom, it misses the larger picture, and promotes policies that lower incomes in the United States.

PhRMA

USTR's other major client in the TPP is PhRMA, and its members. Here in Singapore USTR is continuing its efforts to impose patent extensions, lower standards for patents, 12 years of exclusive rights in biologic drug test data, restrictions on the uses of compulsory licenses, weakening of national efforts to control drug reimbursement costs, and other measures that are collectively designed to raise the prices of drugs, vaccines, diagnostic tests and medical devices.

The underlying rationale for these efforts is that the U.S. has a strong pharma sector, which is true, and that our companies export, which is also true. But that does not tell the whole story. First, the U.S. pharma sector is not so dominant that it should be considered a U.S. industry only. Big firms from Europe, Japan and Israel have large shares of the market, and several countries have accelerated their patenting of medical inventions. This is true for patents in general. According to the USPTO, before 1999, patents of "Foreign Origin" were 38.6 percent of the total of all patents granted, for all patent classes. By 2000, the foreign share was 46 percent. In 2008, foreign patents became a majority, at 50.8 percent. In 2012, foreign patents were 52.2 percent. In the past seven years, the foreign share has increased six times.

Of special interest may be the activity of China, as regards patents. According to a WIPO press release, dated today:

"In 2012, for the first time, residents of China (560,681) accounted for the largest number of patents filed throughout the world." Global Patent Filings See Fastest Growth in 18 Years, WIPO press release, December 9, 2013.

In sectors like cancer, foreign owned companies like Roche, Novartis, Sanofi and Bayer play an important role.

Regardless of the nationality of the drug manufacturer, the prices for cancer drugs are now so high they threaten the sustainability of cancer treatment, and create burdens on both private and public sector entities paying for drug reimbursements.

For employers that pay for drugs, both through private insurance and through contributions to medicare and medicaid, the high drug prices are a cost of doing business. To the extent that the prices in the U.S. are higher than in other countries, that is a disadvantage, as regards competitiveness.

The U.S. now pays more for many innovative drugs than do other countries, and regardless of the TPP outcomes, this may continue to be the case, given the current resistance to cost control measures in the United States, illustrated by US barriers to parallel trade in drugs from other high income countries, and the legal prohibition of negotiating drug prices for Medicare.

In theory the strong IPR provisions in the TPP will bring foreign prices higher to the US prices, but under most likely scenarios, the U.S. will continue to pay more, often deliberately so in order to set an example that others should follow. The policy of making the US a price leader works to the disadvantage of non-pharma companies, and makes them less competitive.

The argument that high drug prices are essential for innovation sounds plausible, but the case is weak. Globally, the pharma market is now more than a trillion dollars, and for many years, the amount of self reported private sector investments in R&D has been less than 8 percent of turnover. Of the less than 8 percent the industry reports, easily half is of little or no value from a health or scientific perspective -- given spending on marketing related trials, development of me-too drugs that do not improve health outcomes, and consulting fees that are basically bribes to doctors. So, for about 4 cents on the dollar, we tolerate high inequalities of access, and budget busting reimbursement claims.

The U.S. could adopt a different strategy, and push U.S. drug prices down, as far as it wanted, and use other mechanisms to ensure funding for R&D, including for example, proposals for a medical R&D treaty, or a WTO agreement on the supply of public goods, or some type bilateral and regional negotiations, possibly as a chapter of agreements like the TPP. Given the potential savings from current outlays on over-priced medicines, moving toward delinkage policies to pay for R&D would be cheaper, even if the overall investments in R&D were higher. The new trade framework would accommodate both public and private sector R&D, and could include robust incentives for the private sector investments.

This week in Singapore, the Obama administration has a different focus -- providing "more" for the MPAA and big pharma lobby. That should change, before this huge trade deal is concluded.

Subscribe to the Politics email.
How will Trump’s administration impact you?