The International Protection of Intellectual Property in Biotechnology

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By William A. Kerr and Jill E. Hobbs

The proportion of the value of goods comprised of intellectual property has been rising steadily over the last three decades. The most obvious manifestation of this phenomenon has been in the revolution in computer technology – for example automobiles 30 years ago had and an engine, a drive train, four wheels, a steering system etc., the major increase in the value of current cars is in the computer technology that enhances the performance and safety of the vehicles. The cost of the computer chips is virtually nothing, the value is in the intellectual property that is used to program the chips. Latterly, the value of crops, enzymes and a host of other biologically-based products have risen as a result of the ability to indentify and use genetic information in an economically useful fashion. As with the case of automobiles, the genetic material is nearly costless – is naturally occurring – the value comes from the intellectual activity that is required to enhance the usefulness of genetic material.

Historically, the breeding of better crop varieties was largely undertaken by governments primarily because it was impossible to control the use of new varieties once they were available to agricultural producers – farmers could simply retain part of their crop to use as seed in the next season. As a result, intellectual property was not extended to biological-based innovations when governments established patents and other institutions to vest intellectual activity with property rights. As the economic potential of modern biotechnology came to be understood – and the size of the investment that would be required – governments were daunted by the task and decided that the coming, but risky, biotechnology revolution would be better undertaken by the private sector. To provide the incentive for private enterprises to invest in biotechnology, intellectual property rights were extended to biological-based innovations.

The extension of intellectual property rights to biological innovations was controversial. Farm groups worried about the royalty costs that would now be included in the prices of new seeds, pharmaceuticals and other biologically-based inputs, other groups were concerned with the ethics of bestowing ownership on nature’s bounty while still others fretted over the additional control over the food supply and availability of pharmaceuticals that could be garnered by multinational corporations.

Along with the information-cost reducing technology associated with the internet, the pillars of the evolution modern market economies into knowledge economies are computer electronics and biotechnology. Most governments in developed countries perceive that their future relative prosperity will increasingly depend on knowledge-based innovation. Thus, promotion and facilitation of knowledge-based activities has become a centrepiece of governments’ industrial policy. The protection of intellectual property is one cornerstone of success in the transition to a knowledge economy.

Investment in knowledge economy innovations, including biotechnology, is a very risky activity. Investment decisions pertaining to innovations are based on the expected net revenues over the product lifecycle of innovation compared to the costs associated with research and development – positive valuations lead to decisions to invest, negative valuations end a project. Expected net revenues are a function of size of the market, the life cycle of the product and the lifespan granted for intellectual property. The protection of intellectual property allows firms that own the intellectual property to charge monopoly prices over the period for which the government has extended protection – for example, 20 years in the case of patents. This increases the expected value of net revenues. In many cases, however, the product life cycle may be less than the period provided by intellectual property protection. Product life cycles are determined by the speed with which new superior competitors are commercialized. In the case of biotechnology, competitive products may well manifest long before the expiry of a patent. Of course, the larger the markets where intellectual property protection exists, including international markets, the greater will be the potential expected net revenues. Increasing the potential net revenues that will accrue to any innovation will increase the likelihood that the investment in the innovation will take place. Thus, as part of the industrial policy targeted at ensuring their success in the knowledge economy, governments of modern market economies became interested in extending the protection of the intellectual property of their firms to additional markets in the mid-1980s– particularly markets in developing countries where no or poor levels of protection were the norm.

At the time, the major organization tasked with the cooperative international protection of intellectual property was the World Intellectual Property Organization (WIPO) headquartered in Geneva. The WIPO administers a number of international agreements related to intellectual property such as the Paris Convention for the Protection of Industrial Property of 1883 and the Berne Convention for the Protection of Literary and Artistic Works of 1886 and works to develop improved protocols for the protection of intellectual property suitable to modern technological and economic realities. From the point of view of governments wishing to strengthen the international protection of intellectual property, however, the WIPO has some serious deficiencies. First it is a voluntary organization meaning that many governments chose not to belong – i.e. they had no commitment to protect foreign intellectual property. Second, the WIPO has no binding dispute mechanism. Third, it has no enforcement mechanism so that countries that do not live up to their commitments can do so with impunity. What was needed was a multilateral institution that would provide an incentive for countries to belong, which had a binding disputes settlement system and which could punish countries that failed to protect the intellectual property of foreign firms.

Developed countries found – or rather constructed – such an entity in the World Trade Organization (WTO). In 1986 governments agreed on a new round of General Agreement on Tariffs and Trade (GATT) negotiations. The GATT’s institutional structure, which had been negotiated in 1947 when its membership was limited to a small club of less than 20 countries, was no longer suited to an organization with 120 countries whose membership was continually expanding. The GATT only made rules for trade in goods while the services component economic activity was expanding rapidly on a global basis. There was a clear need for a set of rules for trade in services. While the GATT allowed countries to retaliate with the imposition trade barriers if trading partners were found to be in breach of their commitments, it had a consensus-based disputes settlement system which meant that countries could block both the establishment of disputes panels or implementation of their judgements. As a result, trade disputes festered and led to acrimony in international relations. It was agreed that reform was required. The Uruguay Round of GATT negotiations which commenced in 1986 had an agenda to undertake a major revamping of the international trading system.

The Uruguay Round lasted from 1986 to 1994. In the end, the GATT organization was rolled into a new multilateral institution, the WTO. The new organization administered three international agreements – the updated GATT and two new agreements; the General Agreement on Trade in Services (GATS) and the Agreement on Trade Related Aspects of Intellectual Property (TRIPS). The latter committed member countries to protect the intellectual property of foreign firms and specifically included protection for biotechnology. The new organization was endowed with a binding disputes system and was specifically structured to provide for cross-agreement retaliation. Cross-agreement retaliation means that if a country is found not to be protecting foreign intellectual property under its TRIPS commitments, the aggrieved country can retaliate by imposing trade sanctions on the offending country’s goods under the GATT. Many developing countries belonged to the GATT and that membership would automatically be rolled over into membership in the WTO as long as the provisions of all three agreements were accepted – GATT, GATS and TRIPS. Developing countries perceived considerable benefit from the rules of the GATT and were loath to give them up. Thus, it appeared that developed countries had found the solution to their desire to have developing countries protect the intellectual property of their firms. The WTO had an extensive membership among developing countries, it had a binding dispute settlement system and it could allow developed countries to punish developing countries that failed to protect intellectual property.

The inclusion of the TRIPS in the WTO was contentious and stoutly resisted by developing countries in the negotiations. Developing countries were particularly concerned with protecting intellectual property for pharmaceuticals and agricultural inputs – both areas where intellectual property in biotechnology is important. They felt that their many low income people would have difficulty paying for medicines and that their poor farmers would suffer unduly from rising costs for an essential input – seeds. Further, as they produced so little intellectual property themselves, developing countries wondered whether protecting the intellectual property of foreigners was a good use of their scarce resources. Many worried about their capacity to live up to TRIPS commitments and the economic cost of the retaliation that would follow. To induce developing countries to accept the TRIPS, developed country governments promised better access to their markets for developing country agricultural products and textiles. Thus the grand bargain was struck and the WTO, including the TRIPS, came into force in 1995.

While unenthusiastic, developing countries moved to put legal regimes in place to protect intellectual property or to bring their existing regimes into compliance with TRIPS – the only exceptions being least developed countries which were given long lead times, periods that have now been further extended. Enforcement, however, has been problematic. This has been particularly the case in the areas where biotechnology figures prominently, agriculture and pharmaceuticals. The latter has proved particularly controversial given the human and economic devastation the HIV/AIDS epidemic has brought to some developing countries. Further, developing countries’ view of their enforcement commitments has changed as they do not feel that developed countries lived up to their part of the grand bargain as access for their agricultural and textile products remains far more restricted than they expected.
With weak enforcement efforts in developing countries, developed countries should have taken recourse in the stick provided by the WTO – the right to bring a dispute and to use trade sanctions against countries found not to be sufficiently protecting the intellectual property rights of their firms. There is considerable theoretical evidence, however, that the WTO stick is not sufficiently large to induce compliance with the TRIPS – such analysis was not apparently done prior to the inclusion of the TRIPS in the WTO. Hence, developed country governments have been reluctant to act on the threat of trade sanctions – TRIPS disputes at the WTO have been few.
With the institutional stick apparently ineffective, developed countries need to find alternative mechanisms to induce developing countries to protect intellectual property – otherwise smaller markets will mean less willingness by private firms to undertake research and development leading to cronic underinvestment in the creation of intellectual property globally – a significant market failure. The usual alternative to a stick is some sort of carrot – in other words some means must be found to share the rewards associated with the creation of intellectual property. Given developing countries produce so little intellectual property, this is a significant challenge. Developing countries are clearly frustrated with their inability to share in the benefits arising from intellectual property in biotechnology and have been attempting to obtain some of those benefits through the creation of new classes of property in the form of traditional knowledge and indigenous plant varieties – the bioprospecting or biopiracy debate.
This market failure, however, means that developing countries will miss out on the major potential benefits likely to arise from biotechnology. All of the major commercial crops that incorporate biotechnology are temperate climate crops that were developed for modern market economies. The private sector is not investing in enhancement of tropical crops through biotechnology or in developing drugs to treat tropical diseases – entirely predictable behaviour given the absence of protection for intellectual property in those markets. The only developing country undertaking any significant investment in agricultural biotechnology is China, and there research and development is being funded by the government.

New forms of international cooperation are clearly required if the benefits available from biotechnology are to reach their full potential. Unless a way is found around the current impasse intellectual property in biotechnology will not be protected in a large part of the world, underinvestment will continue and both developed and developing countries will be losers.

Further Reading
Gaisford, J.D., J.E. Hobbs. W.A. Kerr, N. Perdikis, M.D. Plunkett (2001) The Economics of Biotechnology, Cheltenham: Edward Elgar Press.
Kerr, W.A. (2007) Trade Related Aspects of Intellectual Property: Enforcement Issues, in W.A. Kerr and J.D. Gaisford (eds.) Handbook on International Trade Policy, Edward Elgar, Cheltenham, pp. 520-526
Gaisford, J.D., J.E. Hobbs and W.A. Kerr (2007) Will the TRIPS Agreement Foster Appropriate Biotechnologies for Developing Countries?, Journal of Agricultural Economics, 58 (2):199-217.
Kerr, W.A. and G.E. Isaac (2005) The International Treatment of Biological Material as Intellectual Property, Journal of International Biotechnology Law, 2 (3): 105-111.
Isaac, G.E. and W.A. Kerr (2004) Bioprospecting or Biopiracy? – Intellectual Property and Traditional Knowledge in Biotechnology Innovation, The Journal of World Intellectual Property, 7 (1): 35-52.
Kerr, W.A., J.E. Hobbs and R. Yampoin (1999) Intellectual Property Protection, Biotechnology and Developing Countries: Will the TRIPS Be Effective? AgBioForum, 2 (3&4): 203-211.

William A. Kerr is Van Vliet Professor of International Trade at the University of Saskatchewan, Canada. He has published extensively on international aspects of biotechnology.

Jill E. Hobbs is Professor and Head of the Department of Bioresource Policy, Business and Economics at the University of Saskatchewan, Canada. Her research in biotechnology has focussed on the organization of supply chains, international transactions, the effect of trade rules on international commerce and incentives in the protection of intellectual property.