An important feature of intellectual property rights is their exclusiveness and territorial dimension. This means that a patent holder or licensee is the person solely entitled to manufacture and market the patented product within a given territory of the state in which the patent is granted. The exclusive and territorial character of such rights is capable of creating obstacles to both the free movement of goods and competition. For example, a patent or trademark owner in country A may be entitled to block the importation of a product legally manufactured in country B by its own licensee or subsidiary. Although such restrictive use of intellectual property rights interferes with free trade, the grant of monopoly rights is considered an acceptable trade-off to encourage research and the diffusion of new knowledge and technology. In short, free trade between countries as a result of an agreement such as NAFTA, EEC, or WTO does not preclude prohibitions or restrictions on imports, exports, or goods in transit, justified on the grounds of the protection of intellectual property rights.
A number of issues pertaining to intellectual property rights have important implications to the conduct and growth of international trade. They are described in the following sections.
1. The Growth of Trade in Counterfeit Goods
The globalization of markets, the increased demand for new products, and the nearly prohibitive R&D costs of developing such products have created incentives for the unauthorized use of intellectual property rights. For example, counterfeiting (false labeling for sale in export markets) has spread from the faking of strong brand-name consumer goods to a variety of consumer and industrial goods. Related violations include copyright and patent infringement and unfair competition. The International Intellectual Property Alliance estimates that more than half of all compact disks and about 70 percent of all video games sold in Brazil are pirated (International Perspective 20.1).
2. Lack of Adequate Protection for IPRs in Many Countries
An important contributing factor to trade in counterfeit/pirated goods is the lack of adequate protection and effective enforcement of intellectual property rights in many countries. Furthermore, some new technologies do not fit within any of the existing types of intellectual property. For example, in many developing countries, the protection of computer software, biotechnology, and semiconductor chips remains unclear. For example, copyright piracy exceeded $1.7 billion (U.S.) in Russia alone in 2004. Even though Russia has laws on IPRs, there is limited enforcement by local authorities. Jail sentences for piracy are rare, and authorities do not conduct surprise inspections or seize or confiscate equipment (Bird, 2006).
3. Piracy of IPRs as a Trade Barrier
Given the fact that counterfeit/pirated goods displace those of legitimate producers, such action distorts international trade and has the long-term effect of reducing trade in technology-intensive goods. Piracy leads to the misallocation of resources by diverting trade from legitimate producers to pirates. Trade experts believe that elimination of piracy abroad of U.S. intellectual property could easily wipe out a majority of the U.S. trade deficit.
Source: Seyoum Belay (2014), Export-import theory, practices, and procedures, Routledge; 3rd edition.