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Global IP Infringement’s Significant Cost to the U.S. Economy

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“Abdominal pain comes first. After three days, the kidneys fail. After five days, neurological dysfunction leads to paralysis and breathing difficulties. Patients who survive will be dialysis-dependent for the rest of their lives. But in the end, most will die.” That’s from ITIF Trade Policy Analyst Michelle Wein’s gripping monograph, The Devil Wears Counterfeit Prada—And Sells Fake Glycerin: The True Cost of Global Trade in Illicit Goods, which leads by describing the mass poisoning of 100 Panamanian children in 2006 caused by Chinese exports of counterfeit glycerin that was really poisonous diethylene glycol. Unfortunately, that’s just one example: each year, approximately 1 million people around the world die from counterfeit drugs, which account for 30 percent of global drug sales. And that’s just the damage from one category of counterfeited products. It doesn’t even count the damage caused by counterfeit foods, pet medications, electronic products, or the over 1,800 cases of suspected counterfeit electronic parts recently found across a wide range of U.S. weapons systems, according to a 2012 Senate Armed Services Committee report. In fact, the total value of the global counterfeit goods trade now tallies $1.8 trillion, with 80 percent of the trademark- or copyright-infringing goods entering the United States coming from China (and an additional 10 percent from Hong Kong). Aside from counterfeiting, which costs the U.S. economy $250 billion in economic losses per year, rampant online piracy of U.S.-produced digital content such as music, film, and books costs the U.S. economy an additional $60 billion per year.

But while counterfeiting and piracy effected by private-sector actors is bad enough, worse is the increasing level of state-sanctioned intellectual property (IP) theft and infringement. For instance, as ITIF writes in Enough is Enough: Confronting Chinese Economic Mercantilism, a recent article in the Journal of Science and Technology Policy in China, published by the Chinese Academy of Sciences, writes about the “Shanzhai ethos” of counterfeiting mobile phones as a legitimate way to take on global corporations by producing copies of world-leading brands. Likewise, China‘s 2007 anti-monopoly law treats legitimately acquired intellectual property rights as a “monopolistic abuse.” A judge from China’s leading IP-related court recently wrote of a colleague that, “Chief Judge Qiu believes that Huawei’s strategy of using anti-monopoly law as a weapon and countermeasure is a strategy that other Chinese companies should study and understand. Qiu recommends that Chinese enterprises boldly employ anti-monopoly lawsuits to break technology barriers and carve out space for development.”

Elsewhere, foreign IP rights holders in India have experienced significant difficulty securing and maintaining their IP rights, particularly in the life sciences sector, due to compulsory licenses, patent revocations, and patent denials. For instance, India issued a compulsory license be issued for Bayer’s anti-cancer drug Nexavar in part on the invalid grounds that the drug wasn’t being adequately manufactured in India, opening the door for generic manufacturers to copy Bayer’s IP and manufacture the drug for sale in both Indian and potentially third-party markets. Many firms have had their patents revoked even years after issuance, as happened to Pfizer’s anti-cancer drug Sutent in 2013. Worse, countries ranging from Argentina and Ecuador to the Philippines and South Africa have copied elements of India’s life sciences IP policy, embracing compulsory licenses or restricting patentability, perpetuating a global contagion effect. In fact, since 2010, the Ecuadorian Intellectual Property Institute, Ecuador’s main IP agency (responsible for ensuring IP rights, including enforcement and promotion), has granted nine compulsory licenses with twelve applications still pending. Six of those nine CLs were issued in 2014 alone, including one for Pfizer’s kidney and gastrointestinal cancer medication, Sutent.

Such state-sanctioned IP theft inflicts serious damage on the U.S. economy. The U.S. International Trade Commission estimated that Chinese theft of U.S. IP in 2009 alone cost almost one million U.S. jobs and caused $48 billion in U.S. economic losses. And In 2013, the Commission on the Theft of American Intellectual Property found “the scale of international theft of American IP to be unprecedented,” causing at least $320 billion in annual economic losses to the U.S. and job losses “running into the millions.”

Accordingly, it’s important that policymakers recognize the vital importance of IP rights in underpinning America’s (and the global) innovation economy. You simply can’t have innovation without the protection of ideas. Therefore, the U.S. government should take a number of steps, such as supporting expanded U.S. trade enforcement activities, including by providing more resources to the Interagency Trade Enforcement Working Group, and by directing the United States Trade Representative’s Office (or a related agency) to author a new report, a Global Mercantilist Index, that would more comprehensively index and rank countries’ unfair trade practices (including IP theft) against U.S. interests.

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About the author

Stephen Ezell is vice president, global innovation policy, at ITIF. He focuses on innovation policy as well as international competitiveness and trade policy issues. He is coauthor of Innovating in a Service-Driven Economy: Insights, Application, and Practice (Palgrave MacMillan, 2015) and Innovation Economics: The Race for Global Advantage (Yale, 2012). Ezell holds a B.S. from the School of Foreign Service at Georgetown University.
  • Ed Casares

    And the US government has done nothing!