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How Intellectual Property Protection Incentivizes Innovation

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How Intellectual Property Protection Incentivizes Innovation

World Intellectual Property Day was marked last week, an important moment to consider the critical relationship between intellectual property (IP) protection and innovation. Just as we have in years past, the Information Technology and Innovation Foundation (ITIF) took a deeper look at the latest data on the strength of IP laws and the amount of innovative, creative output around the word, and found that overall, countries with stronger IP protection also have more creative output, even at varying levels of development. The results show why countries need to support efforts to ensure international rules address new and emerging IP issues in order to ensure that firms and countries are maximizing their innovative and creative potential.

ITIF compared the strength of IP laws and the effectiveness of anti-counterfeiting laws based on data from the World Economic Forum’s Global Competitiveness Report 2016-17 with creative output scores from the Global Innovation Index 2016, a report from Cornell University, INSEAD, and the World Intellectual Property Organization (WIPO). The Global Innovation Index combines three measures of creativity. First, “intangible assets” combines measures of domestic and international trademark applications and rates of information and communication technology adoption. Second, “creative goods and services” measures trade in creative services and output by a nation’s media, printing and publishing, and entertainment industries. Finally, “online creativity” measures a nation’s top-level internet domains, as well as the number of YouTube videos uploaded and Wikipedia pages edited.

The key finding is that there is a strong positive correlation (0.74) between the strength of IP protections and countries’ score on creative outputs, based on a sample of 119 countries (only those countries which had all the necessary data). ITIF assessments in 2016 and 2014 produced similar results of 0.70 (from a sample of 127 countries) and 0.72 (from a sample of 136).

Some advocates that are opposed to IP protections claim IP only benefits high-income countries. To test whether the correlation was solely based on income, the data were divided between high-income (>$20,000 GDP per capita), middle-income ($5,000-$19,999 GDP per capita), and low-income nations (<$5,000 GDP per capita). The sample has 33 high-income countries, 37 middle-income countries, and 49 low-income countries. Similar to past years, the relationship between IP protection and creative output was strongest in high-income countries, with a correlation of 0.51, but it was still positive for both middle-income (0.19) and low-income countries (0.22). In other words, even for the poorest nations, stronger IP protection was associated with stronger creative outputs, which in turn lead to job creation and GDP growth.

As in past reports, the Global Competitiveness Report 2016-17 shows that it’s difficult for countries to score well in creative outputs without ranking highly in intellectual property protections. The average level of IP protection for the top 20 most-creative countries (5.85 out of 7) is well above the average (4.37). Delving deeper, the analysis shows that the 50 countries with above average total creative outputs also have above average intellectual property protections (5.01).

Setting New International Norms: Analyzing IP, Creative Output, and Trade Agreements
At the multilateral level, the World Intellectual Property Organization’s Copyright Treaty sets a basic framework for its 95 member-countries to enact to prevent unauthorized access to and use of creative works on the Internet, such as for computer programs and databases. Along with the Performances and Phonogram Treaty, it comprises WIPO’s “Internet Treaties,” which aim to update and supplement core international IP agreements—the Berne Convention and Rome Convention—which were adopted or last revised over 50 years ago.

This year’s analysis shows the value of the Copyright Treaty’s basic levels of digital IP protections. Our analysis included 88 of the 95 WIPO Copyright Treaty members. These nations had a level of IP protection and creative output above the average for the entire sample: 4.5 vs. 4.37, and 93.5 vs. 87.7, respectively. Meanwhile, non-members (the sample included 31) had an average level of protection and creative output well below the average: 4 vs. 4.37, and 71 vs. 87, respectively. These results show why bilateral, regional, and multilateral efforts to update the issues addressed by the Copyright Treaty and other digital IP issues should be supported. Given that this treaty was negotiated in the 1990s and came into force in 2002, there are obvious needs for further updates given changes in technology and the digital economy.

Efforts to set higher common levels of IP protection and enforcement have mainly occurred at the regional level, especially in the Asia-Pacific, with the Trans-Pacific Partnership (TPP) leading the way and the Regional Comprehensive Economic Partnership (RCEP) addressing this as well.

Unfortunately, the future of the TPP is in serious doubt given America’s withdrawal, but if the other 11 members were to decide to implement the agreement, it would hopefully include the TPP’s high-standard IP chapter. Still, the TPP’s developing-country members (Malaysia, Vietnam, and Peru) need to make significant progress to close the gap to developed-country-member levels of protection and creative output. In 2016, out 119 countries, Malaysia ranked 27th in IP protection and 42nd in output (both improvements from 109th and 34th in 2015, which had 127 countries), Vietnam ranked 92nd and 51st (up from 82nd and down from 54th), and Peru ranked 100th and 67th (slightly up from 96th and 61st).

RCEP shows an even bigger gulf between leaders and laggards. The 16 members of RCEP include developed countries with high-standard free trade agreements and IP systems (such as Australia, Singapore, and Korea), but also a broader range of developing countries that do poorly with IP protection and creative output (such as Cambodia, China, India, the Philippines, and Thailand). Developing-country members of RCEP have a below-average level of IP protection (4.05) and total creative output (72.8). In reality, this underperformance is likely much worse given Laos and Myanmar are not included in the sample due to a lack of data. The membership complicates the potential for a high-standard IP chapter. While China has made efforts to improve its domestic IP and innovation systems, it has likewise sought to steal or coerce IP from foreign firms and has failed to push for strong IP as part of past trade agreements. Other RCEP members have also not prioritized IP in their past trade agreements, so the level of ambition in RCEP is going to be much lower than TPP if these members prevail over the countries with well-developed IP systems, such as Australia, Japan, Korea, and Singapore, especially if the RCEP succumbs to the same misguided scare campaign as the TPP’s IP chapter. However, IP is just one of many divisions that could prolong, or ultimately doom, RCEP’s future.

Correlation Does Not Equal Causation, But IP is Key to Incentivizing Creativity and Innovation
Of course, correlation does not equal causation, and enacting higher levels of intellectual property protections will not always automatically lead to greater creative output. IP does not function in a void without other policy support. An OECD literature review and empirical study found that efforts to strengthen IP protections over the last two decades had a positive economic impact but that variations were due to certain complementary factors, such as human capital, legal and institutional conditions, and fiscal incentives.

This all leads back to a central point worth remembering this World Intellectual Property Day: Whether a country is trying to catch up to the technology frontier, or push it ahead, stronger intellectual property protections are crucial to incentivizing the creativity and innovation that helps make this happen. Given this, countries—at all levels of development—that want to spur innovation need to support efforts to ensure international norms reflect the modern challenges facing IP protection and enforcement and help set better, shared IP rules in order to ensure that firms and countries are maximizing their innovative and creative potential.

Nigel Cory is a trade policy analyst at the Information Technology and Innovation Foundation.

Financial data exemption was included in TPP, a trade agreement which also covers shipments of export cargo and import cargo in international trade.

TPP: USTR Closes a Loophole for Digital Protectionists

The Obama administration has taken a key step in fixing its decision to exempt financial data from the Trans-Pacific Partnership (TPP) trade agreement’s otherwise groundbreaking rules to protect crossborder data flows.

This rule was unnecessary and redundant, and created a dangerous loophole that could be misused for protectionist purposes by other countries, such as China, India, and Russia. Thankfully, this patch by the U.S. Trade Representative (USTR), if successfully applied, will help reduce the likelihood that other countries could misuse this loophole.

The TPP’s special treatment of financial data has become a major issue for the deal’s passage as U.S. lawmakers and firms know that the free flow of data across borders is essential to the modern global economy and that the free flow of data is increasingly at risk of being restricted. A growing range of countries are enacting barriers to data flows as a form of digital protectionism. Allowing forced local storage for financial data on regulatory grounds could have been the start of a slippery slope that allowed these countries to force local data storage for other types of “important” data, such as health and education, based on poorly defined “regulatory” concerns.

The TPP’s ecommerce chapter, while not perfect, took a number of steps to prohibit such a slide as it contains provisions which limit countries from enacting barriers to crossborder data flows. The TPP’s new rules are a much needed update to current World Trade Organization trade rules, which are proving ineffective at protecting data flows, partly due to the fact these rules were agreed upon in the 1990s when the internet as we know it barely existed.

The draft text of the fix shows that USTR, in its negotiations with the Department of Treasury and financial regulators (who both wanted this special treatment for financial data), has achieved an outcome that will go a long way to removing this loophole. In an ideal world, this provision would be dropped completely from the TPP and future trade agreements. However, given the position of financial regulators, the fix seems to find middle ground: It sets out specific steps to facilitate data access, and in doing so makes localization a truly final resort, while ensuring that countries remain committed to not enacting policies that require data localization or other barriers to data flows.

USTR has its work cut out in applying this patch. As it would be untenable to re-open and revise the concluded TPP text—as it would open everything else up to renegotiation—USTR plans to use the Trade in Services Agreement (TiSA) to apply this patch to both eight of the 12 TPP members and 16 other countries negotiating TiSA. The ecommerce chapter in TiSA would become part of a new global norm for digital trade and the free flow of data as it includes a broader set of countries than the TPP. For those four TPP member countries outside of TiSA—Brunei, Malaysia, Singapore, and Vietnam—USTR aims to work with these nations in the TPP implementation plan process.

Applying the patch this way is sensible, but the outcome is by no means assured. For the TiSA option to work, other countries need to agree to the terms of this fix (not a sure thing, especially given the view of European Union consumer and digital rights groups and the implicit preference for data localization in parts of the European Union), and the agreement needs to be completed and ratified. No small feat given today’s political debate over trade. Hopefully, USTR’s decision to use TiSA to apply its patch is indicative of its commitment to concluding an ambitious agreement on e-commerce in TiSA—and soon. For those non-TiSA countries, applying the patch through the deal’s implementation raises other concerns over whether the patch is legally enforceable.

The fix, if enacted, means that the United States will be able to resume its leadership position in helping to establish the rules that govern trade across the global digital economy. As a key player in developing the foundational technologies behind the internet, it is in the United States’ own interest to maintain its reputation as a credible advocate for a free and open digital economy. The carve out for financial data threatened to undermine this position. This patch should be applied quickly and the entire experience should be a lesson that policies around data flows need to be carefully considered and that no sector should be exempt from robust protections for open cross-border data flows.

Nigel Cory is a trade policy analyst at ITIF. He previously worked as a researcher at the Sumitro Chair for Southeast Asia Studies at the Center for Strategic and International Studies and in Australia’s Department of Foreign Affairs and Trade.

ITA will expand technology shipments of export cargo and import cargo in international trade.

Expanded Information Technology Agreement is Here

On July 1, the global production, trade, and usage of information and communications technology (ICT) products received a long-awaited boost when the expanded Information Technology Agreement (ITA)—a trade agreement that eliminates tariffs on hundreds of ICT products—came into force.

The World Trade Organization (WTO) considers the initial ITA, concluded in 1996, as one of the most successful trade agreements ever. The expanded ITA is the biggest tariff-cutting deal in WTO history. It’s hoped that the deal will have similar success in driving ICT-based trade, productivity, and innovation as its predecessor.

The expanded ITA will build on the significant impact that the initial ITA exerted on growing global ICT trade. From 1996 to 2008, total global two-way trade in ICT products covered by the agreement increased by more than 10 percent annually, from $1.2 trillion to $4.0 trillion.

The expanded ITA promotes affordability and accessibility to a new generation of ICT products by eliminating tariffs to trade on an updated list of 201 ICT products. The initial ITA cut tariffs on eight categories of ICT products, such as semiconductors, computers, and telecommunication products. The latest list includes scores of products that the initial ITA did not cover, such as types of computer memory, and many new and innovative ICT products, such as multi-component semiconductors, GPS devices, medical devices, and video games. This expansion eliminates tariffs on $1.3 trillion in annual exports, which represents about 10 percent of total global trade.

Updating the ITA will not only lower prices and help boost exports, but also facilitate greater diffusion and adoption of ICT worldwide. With greater ICT use, there is more productivity and economic growth across the global economy—a win for all participants. Just as important, the expanded ITA can further empower the formation of global ICT supply chains, which have enabled a shift from a closed, linear innovation model to an open innovation model that relies on close collaborations among suppliers, network partners, and customers to bring new ICT products to market. For example, the Organization for Economic Cooperation and Development (OECD) has found that the probability of innovation in a firm increases with the intensity of ICT use and that this holds true for both manufacturing and services firms and for different types of innovation.

Implementation of the ITA expansion was not without complications, especially considering some hurdles introduced by China. July 1 marks a significant date because this is when tariffs on two-thirds of the 201 ICT products will be eliminated, with the vast majority of the remaining tariff cuts phased in between now and 2019. However, China played a last-minute delaying role in negotiations by pushing for much longer phase-out periods—five to seven years—for more than half their products, including major tech items of interest to the United States, such as advanced semiconductors.

China also proposed a last-minute amendment to set in place a trigger that would suspend the deal if membership slipped below a critical mass of countries, further holding up negotiations. There are also concerns about China’s implementation of the agreement. China’s approach to the ITA expansion is hard to understand given that it has benefited tremendously from the initial ITA.

While implementation of the ITA expansion gets underway, focus will start shifting toward getting more countries to join. Membership in the Information Technology Agreement is voluntary as it is a plurilateral agreement, not a WTO agreement. Moreover, because the ITA was negotiated on a most-favored nation basis, the tariff eliminations will apply to all WTO members. In other words, a country does not have to participate in the ITA for its exports of covered ICT products to receive zero-tariff treatment in ITA-participating nations. While some nations have thought they could free ride on this arrangement by keeping their own tariffs on imports of ICT products high while in many cases enjoying tariff-free treatment of their own ICT exports, this reasoning has proved fallacious. Rather, the reality is that countries (such as Argentina, Brazil, and South Africa) that have elected to not participate in the ITA and to keep their tariffs on ICT imports high have seen their participation in global value chains for ICT products decline by over 60 percent since the ITA was initially chartered in 1996.

The original ITA has grown from an initial 29 countries to 82, representing approximately 97 percent of global trade in the goods covered. The expanded ITA starts off with 53 WTO members, including a broad range of developed and developing countries, which account for 90 percent of world trade in these ICT products. Many of the holdouts to joining the ITA expansion are developing countries, which stand to gain a range of benefits by joining the ITA, as ITIF has argued. It’s encouraging to see that Kenya, Moldova, Vietnam, Georgia, and some Arab countries have expressed interest in joining ITA expansion.

Nevertheless, many developing countries, such as India, Indonesia, and Nigeria, continue to see tariffs as a way to pursue misguided state-directed industrial development policies, instead of focusing on measures that raise across-the-board productivity growth. For example, India, while a member of the initial ITA, did not join its expansion, claiming that it has not benefited from the agreement. Lamentably, India continues to see tariffs as a tool to protect domestic manufacturers, applying an average tariff of more than 13 percent on technology goods, including new 10-percent tariffs on some ITA products, in contravention of the initial agreement.

For developing countries, if the policy objective of imposing high tariffs on ICT products is to incentivize domestic ICT production, why does doing so tend to produce the opposite result? In large part, the answer is that the globalization of ICT supply chains means that ICT products often move across several countries in their production, with key components added at various steps in the process before final assembly occurs. In this case, as noted, high tariffs on ICT parts and products simply compel ICT firms to bypass these countries entirely in their global supply chains and manufacture and assemble elsewhere.

Empirical evidence demonstrates the misguided logic of high tariffs on ICT goods. The World Trade Organization has found that, on average, signatories to the initial ITA increased exports by 8.5 percent and increased imports by nine to 10 percent. Importantly, this finding suggests that many ITA signatories were able to tap into cheaper intermediate goods imports to grow their ICT industries, leading to cheaper and greater quantities of final goods for exports. It’s no surprise that the top 10 ICT exporters are also the top 10 importers as global production networks, meaning that different countries contribute components that come together to create the final good.

The expanded ITA agreement shows that sub-groupings of WTO members can come together to deliver new economically significant outcomes on trade. In terms of what’s next, given the ITA’s success for physical ICT goods, finishing negotiations on a services plurilateral—the Trade in Services Agreement (TiSA)—would be a natural complement given the critical role that services play in modern trade, as ITIF argued in Crafting an Innovation-Enabling Trade in Services Agreement.

Nigel Cory is a trade policy analyst at ITIF. He previously worked as a researcher at the Sumitro Chair for Southeast Asia Studies at the Center for Strategic and International Studies and in Australia’s Department of Foreign Affairs and Trade. This article was co-authored with Stephen Ezell, Vice President, Global Innovation Policy, ITIF.

International data flows now exceed the value of shipments of export cargo and import cargo in international trade.

Expanding U.S. Digital Trade and Eliminating Digital Trade Barriers

Digital trade issues continue to grow in importance to the U.S. economy as people and businesses find new and innovative ways to use data and technology to deliver more goods and services via the internet. However, the growth in entrepreneurship and innovation so vastly enabled by digital technologies is increasingly threatened by a growing range of digital trade barriers.

On July 13, the U.S. House Committee on Ways and Means Subcommittee on Trade held an important hearing on the growing significance of digital trade to the U.S. economy, the rise of these digital trade barriers, and the ways in which U.S. trade policy, including through the Trans-Pacific Partnership (TPP), can help remove existing—and prevent future—barriers. Robert Atkinson, founder and president of the Information Technology and Innovation Foundation (ITIF) testified, alongside representatives from IBM, the Internet Association, PayPal, and Fenugreen (a tech startup).

Digital trade benefits a large segment of the U.S. economy and its workforce. Digital trade and data flows often go unrecognized (as they are often hard to see) for the important role they play in helping U.S. companies and workers, whether from firms big or small, and whether in tech or in traditional sectors (like agriculture and manufacturing).

As ITIF has argued, cross-border data flows enable growth in all industries. Likewise, a McKinsey Global Institute study estimates that more than 75 percent of the economic value created by the internet is captured by companies in traditional industries, such as agriculture, with many of the beneficiaries being small businesses.

Committee members were interested in learning how digital technology and service platforms, such as PayPal and Amazon, provide U.S. entrepreneurs, such as fellow speaker Kavita Shukla (CEO and founder of Fenugreen), with the tools to go global with a few clicks. The Internet Association and PayPal outlined how many small businesses and app developers can now engage in digital trade in ways that could scarcely be imagined 10 years ago.

All that is required these days for a U.S. business to go global is an idea and an internet connection. All you need is a laptop to launch an innovative new business or application and disrupt an existing market. As fellow speaker Usman Ahmed from PayPal put it, this “democraticization of trade” shows committee members why they should all be interested in making sure U.S. trade policy addresses digital trade barriers.

Data flows matter. Data flows fundamentally underpin digital trade, as they are increasingly the driving forces of innovation and growth in the modern global economy. A report released in March 2016 by the McKinsey Global Institute finds that the global value of international data flows in 2015—$2.8 trillion—exceeded the value of global merchandise trade for the first time. Subcommittee Chairman Rep. Dave Reichert (R-WA) was right in saying that the “arbitrary blocking of cross-border internet traffic” is a long-term problem for the United States.

Unfortunately, as Robert Atkinson enumerated, a growing number of countries are erecting barriers to data flows, some due to misguided concerns over privacy and security (such as the European Union, Canada, and Australia), others for blatantly protectionist purposes (such as China, Russia, and Nigeria). Panelists agreed that the TPP takes a number of key steps to address these barriers through its provisions that prohibit barriers to data flows and measures to force companies to store data within a country—a measure known as data localization. The next step beyond TPP is building on these provisions in the Trade in Services Agreement.

Atkinson made the case that if the TPP does not pass—meaning that the United States’ vision for enacting new rules that protect a free and open internet and digital economy—then countries may be more tempted to follow data mercantilists, such as China and Russia, in enacting the barriers to data that will ultimately lead to a balkanized internet. Such an outcome would adversely impact U.S. firms and workers, many of which work for firms whose competitive position is based on having access to global markets for their innovative development and use of digital technologies.

The special treatment of financial data in the TPP was a mistake and the United States Trade Representative’s fix for this, if successfully applied, can help close this dangerous loophole. Given the importance of data flows, committee members, including Rep. Ron Kind (D-WI) and Rep. Bill Pascrell (D-NJ), were interested in discussing the implications for digital trade if the TPP’s exemption for financial data was allowed to remain unchanged. As ITIF recently argued, this rule was unnecessary and redundant, and created a dangerous loophole that could be misused for protectionist purposes by other countries, such as China, India, and Russia.

Thankfully, the U.S. Trade Representative has essentially recognized this and has been leading efforts to develop a fix for this provision. In an ideal world, this provision would be dropped completely from the TPP and future trade agreements. However, given the position of financial regulators, the fix seems to find middle ground. It sets out specific steps to facilitate data access, and in doing so makes localization a truly final resort, while ensuring that countries remain committed to not enacting policies that require data localization or other barriers to data flows.

Nigel Cory is a trade policy analyst at ITIF. He previously worked as a researcher at the Sumitro Chair for Southeast Asia Studies at the Center for Strategic and International Studies and in Australia’s Department of Foreign Affairs and Trade.