Smart Trade

• Author: Thierry Verdier
• Position: Ingénieur-Général des Ponts et Chaussées, professor at the Paris School of Economics (PSE-ENPC), and research fellow at the Centre for Economic Policy Research.

A shipment containing the generic drug losartan potassium, used to help reduce arterial hypertension, leaves India bound for Brazil. While the shipment is in transit through the Netherlands, Dutch customs authorities, acting on an allegation of patent infringement, seize and hold it for 36 days before eventually releasing and sending it back to India. The December 2008 event was part of a wave of seizures of generic medicine on key transit routes through Europe. It renewed concerns about the international trade of pharmaceutical products and again cast light on the issue of access to affordable and essential medicines by the poor in a globalized world

Also on the intellectual property stage, the large international digital music services iTunes, Spotify, and Deezer expanded their global presence in the past two years from about 20 countries to more than 100. In 2012, the revenues of record companies’ digital divisions surged to more than a third of total music industry revenues—a 9 percent rise from the previous year. That same year thousands of protesters rallied across Europe against an international antipiracy agreement (the Anti-Counterfeiting Trade Agreement), fearing that it would encourage Internet surveillance and curb their freedom to download movies and music for free.

These examples illustrate two facets of the same phenomenon: ideas, information, and knowledge are increasingly tradable assets, taking many forms in their creation, dissemination, and movement across borders. They are now at the center of the 21st century global economy. Indeed most of the value created in new medicines and high-technology products resides in the amount of innovation, research, and testing involved in bringing these products to fruition. Along the same lines, movies, music recordings, books, and computer software are essentially traded and consumed because of their embedded information and creativity. Even standard manufacturing products and commodities such as clothing and plants may now include a high proportion of invention and design in their value. International trade flows of knowledge-intensive products have grown steadily since 1997 (see Chart 1). But trade in these goods is not uniformly distributed throughout the world (see Chart 2). Some countries clearly tend to export more high- and medium-high-technology manufacturing products than others.

The previous examples also highlight how the diffusion of knowledge through international transactions, whether traditional goods shipments or digital downloading, generates serious tension across countries and among individuals. That producers of knowledge have the right to prevent others from using their inventions, designs, and creations and can negotiate payment in return for their use by others is the subject of intense debate and friction between governments, firms, and civil society organizations. So-called intellectual property rights take a number of forms: copyrights for creative and cultural works, patents for innovative manufacturing products, and trademarks for design and fashion items. The legitimacy and extent of protection of such rights vary widely around the world and involve social, cultural, humanitarian, and political considerations. Here, we focus on the economic dimension of the problem: the role of intellectual property rights in international trade and the global economy, their impact on development and global welfare, and how to lessen the tension they generate across the world.

Intellectual property is based on information and knowledge, which have two specific economic properties. First, one person’s use of information or knowledge does not diminish another’s use. Consider a song, a computer program...