Patents as a retaliatory weapon

During the Uruguay Round talks on trade in the early 1990s, India fought tooth and nail against two new trade rules proposed for the World Trade Organisation. One was to make intellectual property rights (patents, copyright, trade marks) an integral part of world trade for the first time. The second was to permit cross-retaliation: if a country failed to observe patent rights of the US or EU, those rich countries could retaliate in some other field like trade, by imposing tariffs. These provisions, said Indian trade officials, would be used to hit poor countries on the head, with no reciprocal benefit for them.

Dead wrong. These two provisions have, for the first time, given India real weapons against rich countries that flout WTO rules. These weapons can be used in the trade dispute that India has won just this week.

The WTO has ruled illegal an outrageous US law (the Byrd amendment) that pays anti-dumping duties on imports to US complainant companies, not the US government. This double dose of protectionism contravenes WTO rules. Eight countries including India had complained, and the WTO has now upheld their complaint.

Under WTO rules, India can now levy retaliatory tariffs against US exports. But this will not serve India’s interests. Additional duties on US goods will make imports more expensive, penalising innocent Indian consumers. Moreover, raising the price of US goods will encourage commercial rivals of the US to increase their prices to India too. Finally, India is such a small market that Indian retaliation will barely hurt rich countries or make them change their minds. So, while WTO rules allow trade retaliation, such retaliation is in practice impractical for poor countries. It amounts to shooting yourself in the foot.

Is there any way out? Yes indeed, thanks to the new rules introduced by the Uruguay Round. Instead of levying additional duties on US goods, India can retaliate by reducing intellectual property rights (IPR) for US goods and services. This will penalise the US while actually helping Indian consumers by bringing down prices. This can threaten US companies with substantial damage, and so be a powerful trade tool.

The legality of such retaliation will raise issues of both international and domestic law. According to WTO rules, any retaliation should preferably be in the same sector as the offence. For example, retaliation against an offence in textile trade should preferably be in textiles too. If that is not feasible, the retaliation should be in some other traded goods. Only as a last resort is cross-retaliation allowed in IPR.

Can India claim this last resort? This issue was tested recently when Ecuador retaliated against an illegal trade practice of the European Union (tariff preferences for banana imports from former French and British colonies). Ecuador proposed retaliation in industrial design patents, music copyright and geographical indications (such as champagne and cognac). The EU objected to such cross-retaliation in IPR. However, in a recent judgement, the WTO has upheld Ecuador’s approach.

This sets a useful precedent for India. After 2005, India will have to conform fully with the international IPR regime, especially in patents. But the WTO verdict on Ecuador opens the door for India to breach IPR rules as a form of trade retaliation.

However, India will first have to overcome a domestic legal hurdle, emphasised by economist Arvind Subramanian in a recent book India and the WTO. Indian IPR laws do not provide for the selective withdrawal of IPR protection for the goods and services of any one country. Hence India needs to amend its own IPR laws.

This should not be difficult. A Presidential ordinance with the required amendments can be issued quickly, and later ratified by Parliament.

Exactly what form should such retaliation take? A tempting but bad approach will be to stop the grant of fresh patents for US drugs, or to issue compulsory licences to Indian companies to reverse-engineer and manufacture newly patented American drugs. Indian companies will be hesitant to do the required R&D for fear that India may lose its case in the WTO after a few years, so their efforts will go waste. Effective retaliation needs to be quickly profitable. Suspending music and video copyright for US firms will achieve instant success in retaliation. Patent protection can be suspended for drugs that have less than three years to expire: in such cases the patents will run out before the legal dispute is settled, so Indian drug companies can embark on R&D with confidence.

Such cross-retaliation in IPR can really hurt giant US com-panies like Pfizer (drugs), Disney (videos) and Time Warner (music). This can persuade the US Congress to scrap protection-ist laws like the Byrd amend-ment. Thanks to IPR, India at last has real trade weapons, not just toy guns. Mr Kamal Nath, please note.

What do you think?