THE BLOG
10/31/2012 02:49 pm ET Updated Dec 31, 2012

India's Recent Trade Policies Put Domestic, International Growth at Risk

Throughout the 2012 election cycle, China and Iran have dominated the foreign policy discussion. But after Election Day, policymakers will need to address a looming threat to American innovation and jobs: India, whose recent troubling mercantilist trade practices have set off alarm bells, as U.S. and European firms vie for access to markets in the world's second most populous nation.

India's robust economic growth over the past two decades, including the development of a thriving information technology (IT) software and services industry, has largely arisen from its decision in the early 1990s to abandon the restrictive policies of the 1970s and 80s and embrace core tenets of open, market-based trade. But as the global race for innovation and technology-based economic growth has intensified, some countries are turning to "innovation mercantilist" tactics to protect domestic industries. We see this in China's regular insistence that foreign firms must participate in joint ventures, transfer technology or intellectual property, or produce domestically as the price of obtaining access to Chinese markets.

Seeing the apparent "success" of China's innovation mercantilist tactics (its economy having outgrown those of Western countries and India over most of the past decade), an increasing number of countries, including India, are adopting similar practices, as evidenced by India's recently announced Preferential Market Access (PMA) rules, which require specified amounts of domestic content in electronic goods procured by the Indian government. Even more troubling, these new rules will likely leak into private sector procurements in key sectors as well. But embracing innovation mercantilism risks compromising the gains the Indian economy has made over the past two decades in addition to harming foreign firms and the global economy. Let me explain.

India recognizes the importance of intellectual property (IP) to sustain economic growth and has committed to increasing the percentage of its GDP spent on R&D from 0.25 percent to 2 percent. Increasing R&D means greater innovation and development of advancements that have the power to make positive societal and economic changes. Unfortunately, India's policies do not achieve this objective, but rather put both U.S. and Indian innovation in jeopardy. And by making it much more difficult for American innovations to be sold in the country, India's policies hurt American workers and innovative sectors of our economy.

In March, the India Patents Controller issued a compulsory license (essentially a government-mandated licensing of a patent) for an innovative cancer therapy that was researched and developed in the United States. As a result of this extraordinary decision, premised on the fact that the product is not manufactured in India, an Indian biopharmaceutical company is now reaping the rewards of American innovation. This decision is in direct violation of the World Trade Organization (WTO) agreement and is a deeply troubling sign for all U.S. IP-intensive industries.

This is but one of at least five separate actions recently taken by the Indian government aimed at stripping innovative biopharmaceutical companies' intellectual property for the benefit of India's domestic industry. Meanwhile, even as Indian generic drug sales to the United States have grown dramatically, data suggests India has routinely flouted trade rules to bolster its generic industry at our expense. Without access to the Indian market, biopharmaceutical innovators lose access to a great number of consumers, which impacts demand and ultimately affects jobs in the United States that rely on innovation and R&D.

Of course, the biopharmaceutical industry isn't the only one affected by India's anti-competitive trade policies. One goal of India's aforementioned PMA proposal is to require that up to 80 percent of all computers sold in India by 2020 are produced in India. This is not trade. This is blatant protectionism.

As a result, all innovative companies should be deeply concerned about India's recently announced trade practices. Open markets and respect for IP are key to ensuring American innovators can continue to develop new products. And while India remains an attractive export market, these policies create significant disincentives for firms to do business there.

But it's not only in America's interest for India to remain committed to open, market-based trade and robust IP protections; it's also in India's. If India is to realize its extraordinary economic potential and lift hundreds of millions of its citizens out of poverty, the best way to do so is through promoting innovation by investing in R&D and protecting the rights of innovators, by raising its productivity across the board, and by abandoning protectionist policies.

By leveraging its strengths (e.g., a large market and educated, largely English-speaking talent pool) to attract foreign direct investment, instead of implementing policies that force it to come to India, India may well reap the success it hopes for. Until that happens, the U.S. government must insist that India adhere to the commitments it's made in international trade agreements and allow innovative American enterprises to operate fairly and without interference.