WORLD TRADE
ORGANIZATIONWT/WGTCP/W/103
12 October 1998
(98-3911)
Working Group on the Interaction
between Trade and Competition PolicyOriginal:  English
COMMUNICATION FROM NEW ZEALAND
The following communication, dated 24 September 1998, has been received from the
Permanent Mission of New Zealand with the request that it be circulated to Members.
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TRADE-RELATED ASPECTS OF INTELLECTUAL
PROPERTY AND COMPETITION POLICY
I. SUMMARY
1. This paper considers the extent to which intellectual property policy is underpinned by sound
competition principles.  It looks at the purpose of competition policy and the benefits and costs of
intellectual property laws.  It then asks whether the current framework for multilateral trade
negotiations is appropriate for intellectual property rights issues.
2 The paper concludes by suggesting that more attention be given to promoting global welfare
in the area of intellectual property rights.  It suggests that future negotiations give equal weight to
avoiding the costs of under- and over-pro tection of intellectual property rights.
II. DOMESTIC ISSUES
The purpose of competition policy
3. Governments adopt competition policies and laws because it is generally accepted that free
and open markets promote economic efficiency.  This, in turn, allows their citizens to enjoy higherstandards of living.
4. At the aggregate level, strong competition drives allocative efficiency.  A society's scarce
resources will be efficiently allocated between sectors if, inter alia , there is effective competition for
resources between markets and there are strong competitive forces operating within individualmarkets.
5. Furthermore, effective competition drives production and innovation efficiency.  The threat of
business failure drives producers to provide consumers with the price/quality options that they desire.
More specifically, the threat of failure drives producers to increase production efficiency and devise
or adopt new products and processes that will provide them with a competitive advantage
(i.e., innovation efficiency).WT/WGTCP/W/103
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6. The role of innovation efficiency in promoting the objectives of competition policy is
recognized as being very important because innovation contributes the most to the growth of real
output.  Moreover, the international competitiveness of firms vitally depends on continual
improvement.
The benefits and costs of intellectual property laws
Benefits
7. Intellectual property laws promote competition and international trade in two ways:  by
promoting innovation and providing consumers with better information on which to base their
purchase decisions.
8. The purpose of most intellectual property rights laws is to discourage under-investment in
innovation.  They do so by creating enforceable property rights that prohibit individuals from free
riding on the creative efforts of others.  Without these rights some innovators would be unable to
recoup their costs of investing in innovation.  Rather than devoting resources to intellectual endeavour
themselves, potential innovators would have the incentive to wait and copy the creativity of others.
9. Intellectual property laws such as patents, plant variety rights and copyright deal with this
problem by granting time-bound exclusive property rights.  They serve to both:
• reward the innovator for the time and effo rt put into creating something new;  and
• provide an incentive for others to commence putting time and effort into creating
something new.
10. Other intellectual property laws facilitate competition in another way:  by providing
consumers with information about the quality of goods and services.  For example, trademarks benefit
society by providing information to consumers to make better-informed purchasing decisions.
Costs
11. The preceding section notes that there are costs associated with under-protection of
intellectual property.  The other side of the story is that over-protection imposes costs on a society.
The total well-being of a society is not defined solely by maximising producer welfare.  Rather, a
society's welfare is the sum of consumer and producer  welfare.  An increase in the scope or scale of
intellectual property rights protection is undesirable if the gains to producers are outweighed by losses
to consumers.
12. Furthermore, there is a risk of over-estimating producer gains.  While producers can make
short term gains at the expense of consumers through over-protection of intellectual property, theassociated monopoly power will reduce the incentives on those right holders to continue innovating.WT/WGTCP/W/103
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13. In an economic sense, the policy implications are that:
• law changes are required only where producers are incapable of protecting their own
interests.1  Before extending the scope of intellectual property protection, it is
essential to first explore whether there really is a market failure;  and
• where market failures arise the appropriate solution is to provide the least amount of
protection needed in order to deal with the problem.  Going any further imposes thefollowing costs on a society:
- higher prices, which place new products, processes and intellectual works out
of the price range of some consumers;
2
- restricting the rights of others to use the property as inputs into the production
of goods and services;
- limiting competition in innovation markets by restricting the ability of others
to innovate by building on previous innovations;  and
- reducing the incentives on existing right holders to continue innovating.
III. INTERNATIONAL ISSUES
14. International agreements on intellectual property rights are essential.  The reason for this is
that, in their absence, net importers of intellectual property have an incentive to free ride on overseasinnovations.  Net exporting countries are justified in expecting net importers to contribute to the cost
of innovation.  The gain accruing to net importers in return are the broader benefits from being
members of the liberal global trading system.
15. There is a question, however, of whether the world trading system would be well-served if
intellectual property rights agreements continue to be negotiated using the traditional offer and request
process.  That process has been successfully used for traditional border measure negotiations such as
tariffs where continued reductions have promoted global economic growth.
16. However, intellectual property rights issues can be much more complex because there are
costs associated with both under- and over-protection.  We cannot have the same confidence that
future rounds of multilateral trade negotiations seeking increasing levels of protection would steadily
improve global welfare.  On the contrary, there is a risk that intellectual property could become a
bastion of protectionism where minimum property rights  could be defined in ways that are out of all
proportion to the size of the problem.
Is there over-protection already, or is this a potential future problem that must be guarded
against?
17. It is very difficult to answer this question because there has been very little empirical analysis.
To our knowledge, there have been few studies into the economic effects of the TRIPS Agreement in
its totality or in relation to each area of intelle ctual property covered by the Agreement.  Some more
                                                     
1 Electronic commerce is an example.  There is a risk that WTO Members will unnecessarily amend
copyright laws or enact new laws to protect property th at producers are capable of ad equately protecting through
contractual and technological means.
2 The most serious consequences lie in such areas as pharmaceuticals where over-protection is likely to
cause loss of life, particularly in developing countries.WT/WGTCP/W/103
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work is required before this question can be answere d.  However, some of the specific Articles in the
TRIPS Agreement may be considered to go too far.  One example is copyright term.
18. Article 12 provides for a 50 year minimum.  From an economic perspective, the appropriate
period for copyright protection is the least necessary to create incentives for investment in producingoriginal works.  However, few, if any, business enterprises would consider income streams arising
anything like 50 years after their investment for two reasons.
19. First, it is very rare for enterprises to proceed with investments having a long payback period.
Every business has internal competing claims for capital.  Investment in a copyright project which has
a long payback period is likely to be rejected on the grounds that other projects will offer a far shorter
payback period.  Secondly, due to the time value of money, the later income streams would have to bevery large in order to make an otherwise unprofitable investment profitable.
20. The minimum term for natural persons, life of the author plus 50 years, is covered by
Article 7 of the Berne Convention.
3  It is highly unlikely that the determining factor for a significant
number of persons in deciding whether to invest time in producing original works is whether theirchildren and grandchildren would have the opportunity to receive some royalties after their own
deaths.
IV. CONCLUSION
21. The offer and request process for multilateral trade negotiations has served the world well
over the last 50 years.  Members that have consistently advocated free trade have been able to
successfully chip away at barriers to trade at the border over successive GATT rounds.  Many of the
serious barriers at the border have now been dealt with, although they remain high in agriculture.
22. There is, however, an issue about whether the same level of success can be anticipated if offer
and request negotiations continue to be used for intellectual property rights.  Unlike tariff policy,
where the least trade restrictive outcomes are easily identified, the least trade restrictive intellectual
property rights outcomes are subjectively determined.  There may be a risk that intellectual property
protection could go too far in some areas and not far enough in others.
23. The greater risk appears to lie with over-protection.  The trend in multilateral intellectual
property rights fora has been to conclude agreements that increase levels of protection, both in terms
of the range of intellectual property that shall be protected and the minimum term of protection.
Those fora do not appear to have attempted to guard against the risks of over-protection by, forexample:
• including maximum protection articles in agreements;  or
• reviewing whether previously agreed mi nimum protections are appropriate and, if
necessary, reduced.
                                                     
3 Article 9 of the TRIPS Agreement committed signatories to comply with Articles 1 to 21 of the Berne
Convention.WT/WGTCP/W/103
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24. The New Zealand view is that more attention could be given to promoting total global welfare
in the area of intellectual property rights.  One option would be to conduct future negotiations within a
framework that recognizes, in equal measure, the risks of under- and over-protection.  This objective
could be promoted by requiring advocates of change to demonstrate empirically that the changes they
propose would be likely to increase global welfare.
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