Protecting Innovation A Tough Task
Why protecting innovation in pacts can create more headaches than traditional accords
In Barack Obama’s 2011 State of the Union address, the then U.S. president promised to set his country on a broad course to “out-innovate, out-educate and out-build the rest of the world.”
Two months later, he revisited the theme in a speech to the U.S. Export-Import Bank, promising to aggressively protect the country’s intellectual property. “Our single greatest asset is the innovation and the ingenuity and creativity of the American people. It is essential to our prosperity and it will only become more so in this century.”
Today, White House rhetoric is focused less on ingenuity and innovation and more on tariff walls and reviving old industries. Under Donald Trump’s America First trade agenda, the president has vowed to resuscitate the domestic steel industry, breathe new life into the coal business and use trade agreements to pry open foreign markets for farmers.
Yet when the smoke cleared on the United States-Mexico-Canada Agreement (USMCA), page after page was devoted to the very issues Obama had highlighted: the intellectual property rules, copyright and data flow regulations economists say are crucial to the 21st century economy.
“We had this very unusual president pushing a very specific agenda, but as soon as they announced that agreement, all these other chapters appeared, hundreds and hundreds of pages,” said Daniel Trefler, a trade economist and Canada Research Chair in Competitiveness and Prosperity at the University of Toronto’s Rotman School of Management. “That’s what surprised me most: how much work they actually did on these other issues. It shows that behind the scenes, a lot of other stuff was happening.”
Indeed, trade agreements originally designed to regulate the movement of goods across borders are increasingly being used to govern the international exchange and use of more abstract properties such as ideas, personal information and data sets. For some, the new rules are a natural and necessary extension of the deals, one that will further their fundamental purpose: to promote greater volumes of trade that will ultimately foster more innovative firms.
But critics warn that such deals can also push smaller countries into trade-offs that aren’t in their best interests, tipping the global playing field in favour of larger, richer countries.
“Intellectual property rules and chapters on digital trade are among the key places where innovation policy is essentially made,” said Jeremy de Beer, a law professor at the University of Ottawa focusing on technological innovation, intellectual property and international trade and development. “Until we recognize that and really grapple with it, we are locking up rules right now that are going to constrain us for decades to come. It’s extremely dangerous if we don’t know what we’re doing.”
Research suggests that the very act of trading across borders spurs innovation. Goods are embedded with ideas, making trade agreements a valuable tool for removing barriers to their exchange, said Robert Wolfe, professor emeritus at the School of Policy Studies at Queen’s University in Kingston, Ont. “There’s a lot of hurdles companies need to get over to get into export markets,” he said. “Trade agreements can help with some of those. They can’t help with others. But that’s the lifeblood of an innovative firm, access to markets.”
A belief that trade would promote competition, lift overall living standards and cement alliances between nations prompted a post- Second World War push to lower tariffs on physical goods. One of the first attempts to address the exchange of ideas or intellectual property, appeared in the 1989 Canada-U.S. Free Trade Agreement (CUSFTA). At the behest of the U.S., those provisions went on to form the foundation of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), the annex to the overall pact that created the World Trade Organization in 1995.
Not everyone was comfortable with the development. Some felt the addition of intellectual property would turn trade agreements on their head, serving to create rather than break down monopolies.
“But over time, there was a realization that a lot of what was being sold was the thinking, the patents and copyrights embedded within the good,” Wolfe said. “And if your ideas aren’t protected, if they can simply be taken, you aren’t going to want to trade.”
Adding intellectual property to the WTO’s rule book also served a specific purpose. While previous agreements on IP protection had been dependent on the good faith of the countries involved, the WTO’s dispute settlement mechanism made such protection enforceable.
“You really can see the arc and progress of the U.S. shifting toward a knowledge-based economy, recognizing it, promoting intellectual property capture then using their trade agreements to extend that protection globally, through Canada, then the WTO, then the CPTPP (Comprehensive and Progressive Agreement for Trans-Pacific Partnership),” said Dan Ciuriak, senior fellow at the Centre for International Governance Innovation. “And much of it had to do with ensuring that the returns on intellectual property would flow back to the U.S.”
The U.S. isn’t the only economic power seeking to strengthen intellectual property provisions. Europe has long focused on patent protection for pharmaceuticals. And China has placed an aggressive new emphasis on creating and protecting intellectual property. Yet it’s the CPTPP — a deal negotiated during the Obama administration and subsequently abandoned by Trump — that featured some of the strongest protections for intellectual property ever included in a trade agreement, de Beer said.
Many of those provisions, written at the insistence of the U.S. and then suspended upon its exit from the deal, reappeared in stronger form in the USMCA, to the frustration of critics who say they stifle innovation. “Canada, the United States and Mexico now have the longest, strongest protections for intellectual property of any trade deal in any country in the world,” de Beer said. “It’s the new high water mark. The floor has now been raised and I’m not sure it’s been raised in our interest.”
Among the most worrying items, he said, are measures that extend patent protections, strengthening a U.S. system that’s already problematic for innovators. Indeed, decades of industrialized research and development has created a flood of U.S. patents — and a tangle of legal fault lines — that analysts say inhibit young entrepreneurs.
“In every international trade negotiation Canada concedes a little bit more in terms of providing more protection to foreign patents, which really means American patents,” said Trefler of the University of Toronto. “That is not a good outcome, because we give to the Americans ever more rights to their patents at a time when most American economists think their patent system is out of control.”
What’s more, the sheer size of the U.S. patent portfolio means the more strength it is given in trade deals, the more “rents” or royalties flow to U.S. companies, Ciuriak said.
The U.S. now owns the world’s largest collection of patents, with more than 2.76 million of them in force in 2017, nearly half of them generated by residents, according to World Intellectual Property Organization data. By contrast, Canada had a little more than 175,000 patents, and residents generated just 13 per cent of them.
“We don’t have the international rent capture capability so we end up with a net negative,” Ciuriak said. “Then we sign on to trade deals that require us to level up to a standard of protection for IP that is damaging for our own innovation and creates disincentives for entrepreneurs to commit to projects.”
Michael Geist, Canada Research Chair in Internet and E-commerce Law at the University of Ottawa, said the U.S. is not just seeking to ease the flow of trade by harmonizing regulations across borders, it is trying to “Americanize” the rules abroad, using trade negotiations to establish frameworks that go beyond international standards and ultimately work in its favour.
The very inclusion of issues surrounding intellectual property and data in trade negotiations is problematic, Geist said, since it subjects the future of a crucial and still largely undefined digital economy to the horse-trading and concessions of the bargaining table.
In this arena, he added, the more tangible demands of traditional industries often win out over the still evolving needs of the emerging and fast-moving knowledge economy.