Dynamic Gains from Trade Agreements with Intellectual Property Provisions

Abstract

I study the short-and long-term effects of regional trade agreements (RTA) with strict intellectual property (IP) provisions. An empirical analysis using gravity methods suggests that regions signing these agreements share more technology in the form of technology licensing following the year of enforcement. I set up a multi-country model with endogenous productivity through innovation and adoption to quantify the effect of such agreements on innovation, growth and welfare. Adopters pay royalties to innovators for the use of their technology; the model allows for various degrees of IP rights enforcement ranging from pure imitation to perfect enforcement of IP rights. An improvement of IP protection in exchange for market access increases welfare, growth and innovation in the world. Developed countries benefit from a higher return to innovation and a lower home trade share, accruing welfare gains both in the short and long term. Developing countries are impacted through three channels: (i) internal IP reforms increase the return to domestic innovators,(ii) lower trade costs increase profits from exports, and (ii) higher royalty payments reduce the return to adopters. A counterfactual exercise shows that while the first two forces dominate in the long run, there are short-term losses from a lower return to adoption.

Trade, Innovation and Optimal Patent Protection

“…And although this trade-off is at the heart of policy debates over intellectual property rights, there are other channels through which patent policy may affect economic outcomes. Future research could extend our analysis by allowing patent protection to impact export market entry (Ivus 2015, Cockburn et al 2016, foreign investment choices (Branstetter et al 2011, Bilir 2014, knowledge spillovers (Moser andVoena 2012, Hegde et al 2023), technology transfer within multinational firms (Branstetter et al 2006) and/or investment in imitation and technology adoption (Santacreu 2023). It would also be interesting to shift the focus from multilateral to bilateral policies and study the TRIPS-plus provisions in many recent free trade agreements that further strengthen intellectual property rights (Mercurio 2006).…”

“…In related work, Jakobsson and Segerstrom (2016) find that TRIPS raises welfare in a two-region product cycle model of foreign direct investment. And Santacreu (2023) analyzes the joint determination of tariffs and intellectual property rights in bilateral trade agreements when intellectual property protection affects revenue from technology licensing. But none of these studies models patenting choices.…”