WTO Disputes: Cross-retaliation and IP

2010-02-20

This isn't a China issue currently, nor do I expect it to be relevant to China trade in the future. However, it may have an impact on IP and trade generally.

Brazilian President Lula has adopted a measure to enable the suspension of Brazil’s obligations to protect intellectual property rights from the United States, which follows a World Trade Organization ruling of US non-compliance with WTO rules.

The dispute arose between the United States and Brazil over US cotton subsidies. An August 2009 WTO arbitration report gave Brazil the right to use trade countermeasures against the US, and in specific circumstances to suspend intellectual property rights obligations. (IP Watch)

This is very cool stuff. The way that disputes usually work themselves out is that if the claimant wins, the other country will either come into conformity (i.e., fix the problem) or drag its heels. If the latter occurs, the claimant will apply for the right to retaliate. If this is approved, usually the claimant will have the right to raise tariffs on imported products from respondent nation.

This is all well and good, but the system isn't perfect. If trade between the two countries is, for example, $100 billion annually with a perfect trade balance, and the "damages" in the dispute amount to $15 billion, it may be relatively easy for the claimant to raise tariffs sufficiently on respondent imports.

Imagine, however, a situation with a massive trade imbalance. There may be insufficient volume of trade going in one direction to adequately compensate claimant nation if "damages" are high. This can be a serious problem for small and developing nations that run persistent trade imbalances with specific trading partners.

One solution to this problem with asymmetry is to find other kinds of remedies besides raising tariffs. Enforcement of intellectual property rights (under the TRIPs agreement) is one such possibility. As you might imagine, however, using asymmetric remedies like this poses serious challenges, and it is not at all clear how Brazil might go forward implementing these specific rights. If this dispute is resolved successfully, it may open up other asymmetric remedies in the future.

Just for the record, there are other possibilities of resolving this kind of problem. I actually wrote a paper in grad school (Political Economy class) on one proposal made by Mexico a number of years ago that would allow successful claimants who were unable to retaliate via traditional means to trade their retaliation rights to third party nations whose trade with respondent was sufficiently robust. Fascinating issues there, although the proposal was never more than theoretical — good for grad school papers, not so useful in the real world. I think it was the one and only time I actually used game theory in a paper, which was painful for a simple country lawyer like me.

Would China ever seek permission to retaliate on IP grounds? Anything's possible, but China's image with respect to IP is a fragile thing, and I doubt that Beijing would want to do anything that would further damage that image. Given that China is a monster exporter that runs surpluses with some nations, however, it is possible that some day in the future, it may wish to use asymmetric remedies.

Stay tuned.

Tags: Intellectual Property, International Trade