Does Tariff Induce Intellectual Property Right Protection and Reduce Incidence of Piracy?

• Author: Dyuti S. Banerjee,Rajat Acharyya
• DOI: http://doi.org/10.1111/roie.12263
• Date: 01 May 2017
• Published date: 01 May 2017

Does Tariff Induce Intellectual Property Right

Protection and Reduce Incidence of Piracy?

Rajat Acharyya and Dyuti S. Banerjee*

Abstract

We consider a model with North exporting a copyrighted product to South where there is IPR violation,

and South exports a basic good to North. We examine the impact of North’s imposition of import tariff on

South’s monitoring of IPR violation and the incidence of piracy. If South values IPR compliance “lowly”,

then tariff imposition do not alter the pre-tariff no monitoring equilibrium outcome but unambiguously

raises the incidence of piracy. If IPR compliance is valued “highly” then tariff either switches the equilib-

rium outcome from not monitoring to monitoring or increases its rate. However, the incidence of piracy

may increase.

1. Introduction

Developed countries often use tariff and non-tariff barriers as threat instruments to

induce enforcement of Trade-Related Aspects of Intellectual Property Rights (TRIPs)

in their developing country trade partners. For example, Morrison (2015) in his Con-

gressional Research Service report on China-U.S. Trade Issues mentions that the eco-

nomic relationship between these two countries has become increasingly complex

despite China being U.S.’s second largest trade partner. A major area of concern

expressed by U.S. policymakers is China’s relatively poor record of intellectual prop-

erty rights (IPR) enforcement. On the U.S. views regarding how to better address

commercial disputes with China, Morrison mentions of an aggressive stand in the form

of trade sanctions, along with other non-punitive initiatives like free trade agreement.

1

However, despite the use of tariffs and non-tariff barriers as threat instruments, the

incidence of IPR violation has increased in many developing countries. For example,

the Business Software Alliance (BSA) Global Software Survey (2013) reports that,

emerging economies are the major sources for the rise in global software piracy. The

commercial piracy rate in the Asia Pacific region increased from 60% in 2011 to 62%

in 2013.

2

Thus, unilateral trade barriers or sanctions seem to be an ineffective instrument for

restricting IPR violation in the developing countries. This is also partly evident from

the observation that stricter IPR protection policies in the developing countries are set

as precondition by the developed countries in negotiations on Free Trade

Agreements.

3

These observations thus raise two issues, which are the main focus of our paper.

First, whether imposition of import tariff on non-patented products from developing

* Acharyya: Department of Economics, Jadavpur University, Raja S.C. Mallik Road., Kolkata, 700032,

India. E-mail: rajat.acharyya@gmail.com. Banerjee: Department of Economics, Monash University,

Wellington Road, Clayton, VIC, 3800, Australia. Rajat Acharyya thanks Bill Ethier, Charles Van

Marrewjik, Roy Ruffin and Kalyan Sanyal for helpful comments and suggestions on an earlier draft. We

would like to thank two anonymous referees whose comments and suggestions have significantly contrib-

uted in improving the quality of the paper. The usual disclaimer applies.

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C2016 John Wiley & Sons Ltd

Review of International Economics, 25(2), 233–261, 2017

DOI:10.1111/roie.12263

countries, as an indirect punitive measure, induces them to strengthen their IPR

enforcement policy. Second, whether such a tariff can effectively reduce the incidence

of IPR violation in developing countries.

As explained in this paper, a strengthened IPR enforcement policy does not neces-

sarily mean an effective reduction of the incidence of IPR violation, or more specifi-

cally, the incidence of commercial piracy of a copyrighted good. Accordingly, both

these issues mentioned above, though are intertwined, need to be addressed sepa-

rately. On the other hand, our consideration of a tariff on import of a non-patented

good as an indirect punitive measure is more relevant than a tariff (or non-tariff bar-

rier) on import of a copyright-violated good because developing countries more often

use illegal appropriation of research output to compete with the patent/copyright

holder in their own markets rather than exporting it back to the developed country.

Thus, there is little or no scope for the use of trade barriers as direct punitive action to

strengthen IPR enforcement policy in the developing countries. Trade barriers on

imports of non-patented goods from developing countries as indirect punitive action

can still be relevant to the extent to which such policies inflict real income losses by

worsening the terms of trade for them.

There is a vast literature addressing the effect of IPR protection on innovation,

technology transfer, foreign direct investment, and licensing. However, this literature

does not address the effect of a country’s increased restrictive trade policy on the IPR

enforcement policies of her trading partner where copyright violation is prevalent.

4

The same issue is yet to be addressed in the literature on commercial and end-user

piracy, where the focus is on the effect of monitoring on piracy within a country.

5

Zigic

(2000) is the only exception, who shows that tariff can be effective in reducing illegal

appropriation in developing countries if the illegally appropriated product is exported

back to the developed country. In this case tariff prohibits the export of IPR violated

products and thus acts as a deterrent. Therefore, his analysis is not directly relevant in

the present context as we focus on tariff on import of non-patented goods as an indi-

rect punitive action for reasons mentioned above.

For the purpose, we construct a general equilibrium framework of a global economy

with only two countries: the South (or the developing country) and the North (or the

developed country). Two basic goods, garment and food, and a copyright-protected

product (software), are produced in this global economy by internationally immobile

labor and land. While both countries produce food, garment is produced and con-

sumed in the South and exported to North.

6

Software is innovated and produced only

in the North and is domestically consumed as well as exported to the South where

unauthorized copies of the copyrighted software are illegally sold thereby violating

IPR. However, such illegal appropriation of research output is not exported back to

the North and only sold in the domestic market in the South. Thus the copied software

is a non-traded good, unlike garment and the copyrighted software, all of which are

traded according to the assumed pattern of production specialization. The degree of

monitoring of such illicit activities measures the strength of South’s IPR protection.

South chooses the monitoring rate that maximizes her social welfare which is a

weighted average of the net utility derive d from the consumption of f ood, garment,

copyrighted software and copied software, and the positive benefit associated with the

expected net revenue from the fine collected from the detection of piracy. The benefit

captures the positive externalities from complying with IPR protection. The weight

captures South’s valuation of the relative importance of the benefit from adhering to

IPR laws.

234 Rajat Acharyya and Dyuti S. Banerjee

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C2016 John Wiley & Sons Ltd