Antigua Defeats U.S. in WTO Battle

Antigua was unhappy because the U.S. banned offshore online gambling, which provided a lot of revenue for the island. The U.S. claimed that it was absurd for Antigua to take this dispute to the WTO, since regulating gambling comes under the jurisdiction of the U.S. government, not the WTO. The U.S. case makes intuitive sense, but it seems to violate WTO rules to which the U.S. agreed, so Antigua won the case. Now the U.S. has to either ban ALL online gaming -- including horse-bettering and lottery programs which are currently legal -- or allow Antiguan online casinos access to U.S. customers, or pay billions in restitution. Traditionally, this restitution comes in the form of punitive tariffs. But Antigua is too small to inflict any noticeable damage to the U.S., so Antigua asked for permission from the WTO to violate U.S. intellectual property, presumably through piracy of movies, music, technology, or something else. So far as I know, the WTO hasn't issued a final ruling on that point.

It's an interesting case, because it directly challenges the authority of U.S. lawmakers to pass laws in the age of the internet. It also could effect online casinos based in Malta and other countries which have been harmed by the U.S.'s online gambling ban. It also has ramifications for the expansion of intellectual property protections in the Doha negotiations, for which the U.S. is pushing hard.

Dani Rodrik has some commentary here.

More on the HRC/Obama China Tariff...

... which I first blogged about here. Matthew Yglesias reads Brad DeLong and wonders:

Now where I tend to lose the plot is this. If mainstream economists like Brad think it's a bad idea to use threats of tariffs to push China into changing its exchange-rate policies, how come the economics mainstream seems to have so few complaints about the fact that it's completely normal for US trade negotiators to use exactly this sort of leverage to try to get other countries to change the intellectual properties policies or to privatize their water systems or what have you? Why is the threat to shoot ourselves in the foot okay when made on behalf of pharmaceutical companies and movie studios, but not when made on behalf of import-competing manufacturers? Often when I see this argument made, I feel like the point is -- aha! hypocrites! you should support our China bill after all! -- but I really do think Brad's right, this is a bad bill. But by the same token, the people who complain about this sort of thing ought to complain about the other sort of thing as well.

There are a couple answers to this:

1. Most in the "economics mainstream" -- i.e. the orthodox theories and those who espouse them -- do oppose using these tactics in bilateral or multilateral trade negotiations. It's "normal" for US trade negotiators to use these tactics, but not because economists approve of it. It's common for US trade negotiators to use these tactics because their job isn't to enact good economic policies; it is to extract concessions from other countries so that trade agreements will be more politically feasible. But usually, we would never put tariffs on another country unless they are violation of WTO rules.

2. The US trade negotiators have different rule sets when negotiating with, say, Chile than they do when negotiating with China. We can easily do without having Chile as a trading partner, and we have the upper-hand in any negotiations with them because they need access to our markets much more than we need access to theirs. So we can browbeat them into doing just about whatever we want them to do by threatening tariffs or other punitive punishments. With China it's not so easy. We do rely on China much more than other countries. Not only do they provide a lot of our consumption, but they also hold a lot of our debt. Because of that, and past military tensions, we view them as a threat to our hegemony (or, at least, some people do). So, threats of tariffs are made, despite the fact that it would hurt us more than China (but they still will hurt China). And, unlike Chile, China isn't going to do whatever we want whenever we want it, so we've got to act like we've got a big stick. We don't have the same sort of leverage against China that we have with Chile.

Also, we do threaten tariffs and other punitive punishments against China for violating intellectual property laws (e.g. pirated software and movies). And part of the reason why Doha has failed so far is because of the US's insistence on the inclusion of intellectual property reform in the developing world. Most economists disagree with that line of logic, although the patent system and intellectual property laws are a wholly separate beast from import-competing manufacturing. After all, in the former cases, Chinese producers aren't producing a product at lower cost than American producers can; they're just free-riding on American innovation without paying anything at all for it. In some cases, they are stealing our products outright. It's a difficult and complex issue, and not easily comparable to standard international trade logic.

The Trouble with Patents

Matthew Yglesias channels Tim Lee. Both of them are dead-on, and this isn't a small problem:

My friend Tim Lee makes the case against software patents in The New York Times. An old Bill Gates memo makes for a good framing device:

Microsoft sang a very different tune in 1991. In a memo to his senior executives, Bill Gates wrote, “If people had understood how patents would be granted when most of today’s ideas were invented, and had taken out patents, the industry would be at a complete standstill today.” Mr. Gates worried that “some large company will patent some obvious thing” and use the patent to “take as much of our profits as they want.”

Mr. Gates wrote his 1991 memo shortly after the courts began allowing patents on software in the 1980s. At the time Microsoft was a growing company challenging entrenched incumbents like I.B.M. and Novell. It had only eight patents to its name. Recognizing the threat to his company, Mr. Gates initiated an aggressive patenting program. Today Microsoft holds more than 6,000 patents.

It’s not surprising that Microsoft — now an entrenched incumbent — has had a change of heart. But Mr. Gates was right in 1991: patents are bad for the software industry. Nothing illustrates that better than the conflict between Verizon and Vonage.

Read the whole thing. I guess I'm not thrilled with the word choice around "bad for the software industry." Patents are bad for the development of new software. If you define "software industry" as "incumbent for profit software firms" it may be good for the "industry." The thing to keep in mind with any sort of IP protection is that strong IP creates, on the one hand, an incentive for innovation but at the same time it also creates a barrier to innovation. In the case of software patents, the balance tips overwhelmingly in the direction of creating barriers — indeed, the main incentive it creates is merely for the innovative production of patents rather than of actual products.

The problem is fairly severe, especially since the U.S. demands very strong IP protections from every trade agreement it enters. In this case, innovation and incentive do seem to be trade-offs: more of one will reduce the other (although the proliferation of open-source technology might be an argument against the idea). Perhaps there's a Laffer curve of the appropriate level of patent protection which will maximize innovation. But, as always, figuring out exactly where we are on that curve is impossible.

Also keep in mind that almost all of the arguments for or against patent protection for software applies to the prescription drug industry. The big difference is that the software industry has MUCH lower fixed costs than the drug trade.