GS Notes

6. Economics Notes 14

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Based on the provided topic summary, here are the detailed academic notes.

Elaborate Notes

Trade-Related Aspects of Intellectual Property Rights (TRIPS)

The TRIPS Agreement, which came into effect on 1 January 1995, is a cornerstone of the World Trade Organization (WTO). It was negotiated during the Uruguay Round (1986-94) and introduced intellectual property rules into the multilateral trading system for the first time.

  • Shift from Process to Product Patent:

    • Historical Context: Prior to the TRIPS agreement, many developing countries, including India, operated under a ‘process patent’ regime, particularly for pharmaceuticals and agrochemicals. Under the Indian Patents Act of 1970, a company could produce a patented drug using a different manufacturing process. This legal framework was instrumental in the rise of India’s generic drug industry, making it a major supplier of affordable medicines to the developing world, often referred to as the “pharmacy of the developing world.”
    • TRIPS Mandate: The TRIPS agreement mandated a shift to a ‘product patent’ system. Under this system, once a product is patented, it cannot be manufactured or sold by others for a period of 20 years, regardless of the process used. This provides a stronger monopoly to the innovator company. This change was heavily advocated by developed nations, home to major pharmaceutical corporations, who argued it was necessary to incentivize research and development (R&D).

  • Scope of Intellectual Property Rights (IPR): TRIPS significantly broadened the scope of IPR to be protected by all member nations. This included:

    • Patents: Protection for inventions.
    • Copyrights and Related Rights: For authors, artists, and performers. Protection is typically for the author’s lifetime plus 50 years.
    • Trademarks: Signs capable of distinguishing goods or services.
    • Geographical Indications (GI): Identifying goods as originating from a specific place where a given quality or reputation is attributable to that origin (e.g., Darjeeling Tea).
    • Industrial Designs: Pertaining to the ornamental or aesthetic aspect of an article.
    • Layout-Designs of Integrated Circuits.
    • Protection of Undisclosed Information (Trade Secrets).

  • Special and Differentiated Treatment (S&DT): Acknowledging the different levels of development, the TRIPS agreement provided transition periods for compliance.

    • Developed countries had to comply by 1996.
    • Developing countries, like India, were given until 1 January 2005.
    • Least-Developed Countries (LDCs), like Bangladesh, were initially given until 2006, which was later extended to 2016 for pharmaceuticals and subsequently to 1 July 2034.

India’s Compliance and Safeguards: The Patents (Amendment) Act, 2005

To meet its WTO obligations, India amended its Patents Act of 1970, culminating in the Patents (Amendment) Act, 2005. While introducing the product patent regime, India strategically incorporated certain flexibilities permitted under the TRIPS agreement to balance public health needs with IPR protection.

  • Section 3(d) and Prevention of ‘Evergreening’:

    • Section 3(d) of the Act is a crucial provision that prevents the ‘evergreening’ of patents. Evergreening is a corporate strategy to extend the patent life of a drug by making minor modifications to it.
    • The section states that “the mere discovery of a new form of a known substance which does not result in the enhancement of the known efficacy of that substance” is not a patentable invention.
    • Landmark Case: The Supreme Court of India’s judgment in Novartis AG v. Union of India & Others (2013) upheld the constitutionality of Section 3(d). The court rejected Novartis’s patent claim for a new version of its cancer drug, Gleevec (Imatinib Mesylate), ruling that the new form did not demonstrate significantly enhanced therapeutic efficacy.

  • Compulsory Licensing (CL):

    • This provision allows a government to license a third party to produce a patented product without the consent of the patent holder in situations of national emergency, extreme urgency, or public non-commercial use.
    • Context: The Doha Declaration on the TRIPS Agreement and Public Health (2001) explicitly affirmed the right of WTO members to use TRIPS flexibilities, including compulsory licensing, to protect public health.
    • Indian Example: In 2012, India issued its first and only compulsory license to the domestic firm Natco Pharma for the production of a generic version of Bayer’s advanced kidney cancer drug, Sorafenib Tosylate (brand name Nexavar). The decision was based on the grounds that the drug was not available at a reasonably affordable price. Natco was required to pay a royalty to Bayer. India has since shown restraint, for instance, by not issuing a CL for the cancer drug Dasatinib despite recommendations.

  • Parallel Imports:

    • This allows for the importation of a patented product from a market where it is sold at a lower price without the permission of the patent holder. It is based on the principle of ‘international exhaustion’ of rights, where once a product is sold in one market, the patent holder’s rights over its resale are exhausted. This measure can be used to counter differential pricing strategies by multinational corporations.

General Agreement on Trade in Services (GATS)

Negotiated during the Uruguay Round, GATS is the first multilateral agreement covering trade in services. It categorizes the international supply of services into four modes:

  • Mode 1: Cross-border Supply: The service itself crosses the border, while the consumer and provider remain in their respective countries.

    • Examples: Business Process Outsourcing (BPO) services from India to the US, distance learning, telemedicine consultations.

  • Mode 2: Consumption Abroad: The consumer moves to the country of the service provider.

    • Examples: A tourist from Germany visiting India (tourism), a student from Nepal enrolling in an Indian university (education), a patient from the Middle East seeking treatment in an Indian hospital (medical tourism).

  • Mode 3: Commercial Presence: The service provider establishes a physical presence in the consumer’s country through Foreign Direct Investment (FDI).

    • Examples: A foreign bank like HSBC setting up branches in India, a hotel chain like Marriott opening hotels in Indian cities.

  • Mode 4: Movement of Natural Persons: An individual (the service provider) moves temporarily to another country to provide a service.

    • Examples: An Indian IT professional working on a temporary visa (like H-1B) in the United States, a foreign architect or consultant working on a project in India.
    • Developed vs. Developing Country Stance: Developed countries generally push for liberalisation in Mode 3 (where their capital-intensive firms have an advantage) and Mode 2. Conversely, they are often restrictive on Mode 4 due to immigration and domestic labour market concerns. Developing countries like India, with their large pool of skilled professionals, have a comparative advantage in Mode 4 and Mode 1 and advocate for greater liberalisation in these areas.

Trade-Related Investment Measures (TRIMS)

The TRIMS Agreement addresses investment measures that have a restrictive or distorting effect on trade. During the Uruguay Round, developing countries resisted a broader US proposal for a comprehensive investment treaty that included ‘national treatment’. The final agreement is narrower and prohibits specific measures that violate GATT principles. Prohibited TRIMS include:

  1. Local Content Requirements: Mandating that a foreign investor must use a certain amount of locally produced inputs in their production. This is seen as discriminating against foreign goods in favour of domestic goods.
  2. Trade Balancing Requirements: Restricting an investor’s imports to an amount related to the value or volume of their exports.
  3. Export Performance Requirements: Forcing an investor to export a specified percentage of their output. (Note: The summary mentions “Export Restrictions,” but the agreement primarily restricts mandatory export performance requirements).
  4. Foreign Exchange Restrictions: Limiting an investor’s access to foreign exchange for imports related to their production, which can act as a quantitative restriction on imports.

Transition periods were provided for phasing out these measures: two years for developed countries, five for developing, and seven for LDCs, starting from 1995.

Agreement on Agriculture (AoA)

The AoA, a major outcome of the Uruguay Round, aims to establish a fairer, market-oriented agricultural trading system. It is structured around three main pillars: Market Access, Export Subsidies, and Domestic Support. The summary focuses on Domestic Support.

  • Domestic Support Framework (The ‘Box’ System): Subsidies are categorised based on their trade-distorting effects.
    • Amber Box: Includes all domestic support measures considered to distort production and trade (e.g., Minimum Support Price (MSP), subsidies on inputs like fertilisers, electricity, and irrigation).
      • Aggregate Measurement of Support (AMS): This is the total value of trade-distorting subsidies.
      • Reduction Commitments: Developed countries agreed to reduce their AMS by 20% over six years. Developing countries were to reduce it by 13.3% over ten years.
      • De Minimis Provision: A crucial exemption allows countries to avoid reduction commitments if their Amber Box subsidies are below a certain threshold: 5% of the total value of agricultural production for developed countries and 10% for developing countries.
    • Green Box: Subsidies that have minimal or no trade-distorting effects and are not linked to current production levels. There is no limit on spending under this box.
      • Examples: Support for research and development, environmental protection programs, rural infrastructure development, domestic food aid, and income support de-linked from production (like India’s PM-KISAN scheme).
    • Blue Box: An exception to the Amber Box for subsidies that are linked to production but under programs that limit it (e.g., payments based on fixed area or yields, or payments to limit livestock numbers). This was largely a compromise to accommodate policies of the EU and the US.

Prelims Pointers

  • TRIPS: Stands for Trade-Related Aspects of Intellectual Property Rights.
  • TRIPS mandated a shift from Process Patents to Product Patents.
  • The minimum duration for a patent under TRIPS is 20 years.
  • The duration for copyright is generally the author’s life plus 50 years.
  • Indian Patents Act, 1970: Allowed process patents.
  • Patents (Amendment) Act, 2005: Introduced product patents in India to comply with TRIPS.
  • Section 3(d) of the Indian Patents Act is an anti-evergreening provision.
  • Compulsory Licensing (CL): A government-authorized license to produce a patented drug without the patent holder’s consent.
  • India’s first CL: Issued in 2012 to Natco Pharma for Bayer’s cancer drug Nexavar.
  • Parallel Imports: Importing a patented product from a cheaper foreign market.
  • Doha Declaration (2001): Affirmed members’ rights to use TRIPS flexibilities for public health.
  • GATS: General Agreement on Trade in Services.
  • GATS Mode 1: Cross-border Supply (e.g., BPO, telemedicine).
  • GATS Mode 2: Consumption Abroad (e.g., tourism, medical tourism).
  • GATS Mode 3: Commercial Presence (e.g., FDI, a foreign bank setting up a branch).
  • GATS Mode 4: Movement of Natural Persons (e.g., temporary work visas for professionals).
  • TRIMS: Trade-Related Investment Measures.
  • Prohibited TRIMS include local content requirements and trade balancing requirements.
  • AoA: Agreement on Agriculture.
  • Three Pillars of AoA: Market Access, Export Subsidies, Domestic Support.
  • Amber Box: Trade-distorting subsidies (e.g., MSP, input subsidies).
  • De Minimis Level: The permissible limit for Amber Box subsidies without reduction commitments (10% of production value for developing countries, 5% for developed).
  • Green Box: Non-trade-distorting subsidies (e.g., R&D, environmental subsidies, PM-KISAN). No spending limits.
  • Blue Box: Production-limiting subsidies.
  • AMS Calculation Base Period: The external reference price for calculating AMS is based on the years 1986-88.
  • Peace Clause: Agreed upon at the Bali Ministerial Conference (2013), it protects developing countries’ food procurement programs from being challenged at the WTO, even if they breach subsidy limits.

Mains Insights

TRIPS: Balancing Innovation, Public Health, and National Interest

  • Cause-Effect: The introduction of the product patent regime under TRIPS (cause) led to higher drug prices and restricted access to medicines in developing countries, but was argued to incentivize R&D by providing monopoly protection (effect). India’s response, incorporating flexibilities like Section 3(d) and compulsory licensing into its 2005 Patent Act, was a direct effect of trying to mitigate these negative impacts while adhering to its WTO commitments.
  • Debate (North-South Divide): A persistent debate exists between developed nations (the ‘North’) and developing nations (the ‘South’). The North argues that strong IPR is non-negotiable for fostering innovation. The South, led by countries like India and South Africa, contends that the IPR regime must be flexible enough to address public health crises and ensure access to affordable medicines and technology. The COVID-19 pandemic reignited this debate, with India and South Africa proposing a TRIPS waiver for pandemic-related technologies.
  • Policy Analysis: India’s patent law is a case study in strategic policymaking. By using TRIPS-compliant flexibilities, India has attempted to create a ‘sui generis’ (unique) system that balances its international obligations with its domestic compulsions. The cautious use of these flexibilities (e.g., only one CL issued) demonstrates a diplomatic balancing act to avoid being labelled as IPR-unfriendly, which could deter foreign investment.

GATS and India’s Service-Led Growth

  • Geopolitical Economy: The GATS negotiations reflect the comparative advantages of member nations. Developed countries leverage their capital and established brands to push for liberalisation in Mode 3 (Commercial Presence). Developing countries like India, with a demographic dividend of skilled labour, advocate strongly for greater access under Mode 4 (Movement of Natural Persons). The resistance to Mode 4 liberalisation through stringent visa regimes and domestic regulations in developed countries remains a major impediment for India.
  • Challenges for India: While India benefits from Mode 1 (IT/BPO), its full potential in Mode 4 is unrealised due to non-tariff barriers like visa quotas, wage-parity conditions, and social security contribution requirements in host countries. This asymmetry in liberalisation is a key point of contention for India in WTO negotiations.

TRIMS and Industrial Policy Space

  • Sovereignty vs. Multilateralism: The TRIMS agreement illustrates the conflict between a nation’s sovereign right to formulate industrial policy and the rules-based multilateral trading system. Measures like local content requirements were historically used by developing countries to foster domestic industries and build supply chains (infant industry argument). TRIMS restricts this policy space in the name of free trade.
  • Contemporary Relevance: The principles of TRIMS are highly relevant to modern policies like India’s ‘Make in India’ and Production-Linked Incentive (PLI) schemes. The government must design these schemes carefully to ensure they are TRIMS-compliant and not challenged at the WTO. For example, any subsidy linked to using domestic content over imported goods could be deemed a prohibited measure.

Agreement on Agriculture: Food Security vs. Trade Rules

  • Structural Imbalance: The AoA is often criticised for being inequitable. Developed countries had historically high levels of subsidies, which they were allowed to maintain to a large extent, while also having the financial capacity to shift their trade-distorting Amber Box subsidies to the unlimited Green Box. Developing countries, with historically low subsidies, find their policy space constrained by the 10% de minimis limit.
  • The Problem of an Outdated Base Price: India’s major challenge is that its AMS is calculated using a fixed reference price from 1986-88. Due to significant inflation since then, the current value of India’s MSP appears to breach the 10% limit, even though the actual subsidy might be much lower. This is a fundamental flaw India is fighting to correct at the WTO.
  • India’s Stance: India, along with the G33 coalition of developing nations, advocates for a “permanent solution” for its public stockholding (PSH) programs for food security. India argues that PSH is a sovereign right and a necessity for feeding its vast population and supporting its small and marginal farmers, and should not be constrained by skewed trade rules. The ‘Peace Clause’ is a temporary reprieve, not a final resolution.

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