The U.S. is participating in two trade agreement negotiations that, if successfully concluded, will meaningfully improve our nation’s economic future. The Trans-Pacific Partnership (TPP) would create a trade agreement amongst Pacific Rim countries including the U.S., Japan, Canada, Australia, and Mexico. The Transatlantic Trade and Investment Partnership (TTIP) is a trade agreement being negotiated between the U.S. and our allies in the European Union.
While the negotiations will discuss many issues there is a growing trade impediment that should also be addressed — state sponsored patent trolls, officially known as Sovereign Patent Funds (SPFs).
Like other patent trolls, SPFs exploit loopholes in the current patent system for the sole purpose of extorting royalties from innovators who are actually using the new technology in their production processes.
Patents, of course, serve a valuable purpose — they enable the creation of better products, new markets, and new technologies.
Invention is a long, costly, and risky process. The process invokes images of Alexander Graham Bell or Thomas Edison passionately risking everything — their time, their money, and their reputation — in the pursuit of making the currently impossible, possible. And, our modern economy owes its very existence to the efforts of pioneers who have willingly traversed this difficult path.
While invention is hard, copying an invention is relatively cheap and easy. Without some legal protection against imitators, inventors face an insurmountable problem. Imitators have not invested the time and costs (nor borne the risks) that a product’s inventors have. With lower cost structures, imitators are able to undercut the prices charged by inventors, severely diminishing the incentive for innovation.
Patents, in many instances, solve this problem: patents empower inventors to earn a financial return that is sufficient enough to compensate these innovative entrepreneurs for the money they invested and the risks they endured. When used for these purposes, patents help establish new markets for goods and services that would have been unheard of just a few years earlier — smartphones being the quintessential example.
But, there is a dark side to this beneficial process — patent trolls.
Patent trolls impose a significant economic cost on the U.S. economy and targets the economy’s most productive sectors — such as the telecommunications and computer industries. According to William Watkins of the Independent Institute, the lawsuits filed by patent trolls has already destroyed more than $500 billion worth of wealth between 1990 and October 2010.
SPFs worsen an already disturbing problem. SPFs rely on tax dollars to seed their operations — lowering their operating costs and creating a subsidy that allows state sponsored patent trolls to pursue even more dubious patent claims.
Government Sponsored Patent Trolls also have a mission beyond the fleecing of productive companies in order to earn a profit. By targeting foreign companies, SPFs raise the operating costs of foreign competitors relative to their domestic champions. These actions create a subsidy for domestically-based companies while handicapping foreign competitors — and if the SPF is lucky, it will also earn a hefty payout.
Unlike other non-tariff trade barriers, government sponsored patent trolls will adversely affect foreign competitors profitability not just in the country imposing the anti-free trade policies. By raising the overall costs of doing business, a company’s overall global operations can be adversely impacted. Consequently, the negative impacts on trade and economic growth including less job creation, slower income growth, and diminished consumers benefits are all amplified.
Unfortunately, the use of SPFs is growing. For instance, Taiwan has a SPF called the Industrial Technology Research Institute, which holds nearly 19,000 patents! In South Korea, the SPF is known as Intellectual Discovery, while the Innovation Network Corporation performs the state sponsored patent troll function in Japan.
Not to be outdone, China has seeded its version of the state-run patent troll — the Ruichuan IPR Funds — with $50 billion. And, state sponsored patent trolls are not confined to Asia either. France has created France Brevets, which operates with the same purpose as its Asian counterparts — to acquire patents from targeted jurisdictions across key high-technology industries.
SPFs are a means for governments to exploit gaps in the patent system in order to disadvantage companies from other countries. Not only is this practice unfair, it diminishes the vibrancy of the most innovative sectors of the global economy and makes us all poorer.
Due to the negative consequences of SPFs, the U.S. should push for the dissolution of SPFs in the Trans-Pacific Partnership and the Transatlantic Trade and Investment Partnership negotiations.
Instead of joining the patent trolls, the best way for any government to promote growth is to leverage opportunities such as the TPP and TTIP trade agreements and promulgate rules that foster innovation and encourage greater entrepreneurship.
This piece originally ran at Forbes.com and is part The American Spectator’s developing Free Market Accountability Project, which will monitor growing threats to America’s economic freedom.
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