The quadruple tax system of patent monopolies

The quadruple tax system of patent monopolies

By: Nicholas Shaxson
Date: 5 July 2022
Campaigns: Food, Pharma, Trade

A lot of people understood perfectly well in 1994 that TRIPS was a mass death sentence. Now everybody else does, too.
Alexander Zaitchik, journalist

“If we would not submit to an emperor, we should not submit to an autocrat of trade”
– US anti-monopoly senator John Sherman

“Let’s do insulin next”
Alexandria Ocasio-Cortez

Our monopoly economy

A few years ago, economists who followed these things noticed a weird thing happening in Ireland: a staggering 26 percent jump in the size of its economy in 2015, and a bunch of other indicators going haywire[1]. Nothing stranger than usual was happening on the streets of Dublin – so what the hell was going on?

After a bit of digging, the answer became clear. Ireland, a corporate tax haven, had changed its tax rules, encouraging Apple and a bunch of other multinationals to shift their corporate structures and bring a trove of “intellectual property” such as patents, brands and trade secrets into their affiliates in Ireland. An estimated 250 billion Euros’ worth of these “intangible assets” had suddenly whooshed in, though it hardly touched the sides – except for perhaps helping a handful of Irish tax advisors to upgrade their Porsches. It made the Irish national statistics a laughing stock: the economist Paul Krugman dubbed this tax haven activity “Leprechaun Economics.”

We now live in a global economy which transfers resources on a vast scale from ordinary people to billionaires, from the productive economy to the financial sector, from the public to the private sectors, in ways that both redistribute wealth upwards and reduce prosperity. They can do this, in particular, by monopolising markets and dodging taxes. In reality, this is what the so-called “free” market increasingly looks like – a system of offshore monopoly capitalism. Intellectual property (IP) – essentially, the business of government-enforced monopolies over ideas and inventions – sits at the core of this system.

IP has become a lifeblood of our modern global economy, sewn into its fabric via a nest of legal rules and heavyweight political protection. These monopolies over patents, copyrights and trademarks constitute a hidden private tax system levied by private interests over wider populations. Every time we take a pill, binge on a Netflix series, eat a thigh from a mass-produced chicken, watch a football game, or speak on an iPhone, we’re plugging into in an invisible superstructure of intellectual property rights suffused with excessive market power, which increases the amount we pay for this thing we are consuming, far above what any open and fair market would allow.

There is a role to play for patents in a modern economy, but the system has been rigged by vested interests. In an earlier age, when government policies in many countries struck a better balance between private property rights and the interests of citizens, there was a surge of new wonder drugs under development. The rise of private power to exert choke holds over markets has dramatically tightened the innovation tap.

At the heart of tax injustice

We’re often told that tax is bad: that the less tax we pay, the freer we are. This ideology has helped vested interests push official levels of corporate and personal income taxes down to very low levels. As the heiress Leona Helmsley once said, tax is for the little people. She was right. Worse, many of us pay large private taxes on top of our normal taxes, through the power that intellectual property gives to big business.

We pay four layers of these hidden private taxes for these knowledge monopolies, in fact.

First, nearly all the high-technology goods and services we consume were funded, to a large degree, by taxpayer-funded public research, which citizens ultimately pay for. The private sector typically only invests after the “entrepreneurial state,” as the economist Mariana Mazzucato puts it, has made the bold, high-risk investments. To take a recent example, it’s estimated that $100 billion of public money has been pushed into the research and production of Covid-19 medicines.

The second layer is what Leprechaun Economics measures: the way multinational firms can park their intellectual property in tax havens to escape paying their taxes – free-riding on the taxes that the rest of us, in countries rich and poor, then essentially must pay on their behalf.

The third tax is bigger. Companies routinely use these super-strength monopolising patents and trademarks to make us pay more as consumers, just as tollkeepers at key road junctions used to (and sometimes still do) shake down hapless travellers and traders passing by. According to an estimate by the US economist Dean Baker, Americans paid $315 billion more in 2018 for prescription drugs than they would have in a competitive market with the patent protections relaxed. Add in software, pesticides, medical equipment and all the rest, and he estimates the cost at $1 trillion annually, over $3,000 in monopoly taxes for each American citizen, each year.

There is a fourth tax on top of this, which is the result of this monopolistic system reducing economic growth and stunting innovation and economic dynamism. This happens through various economy-wide effects. For example, if monopolistic companies generally set their prices far above what an open market would warrant, people buy less, firms produce less, and they demand less labour. This not only pushes wages down – but it also shrinks the economy. Or when fierce patent rules shift money from poor people, who consume a high share of their income, to rich people, who consume a lower share, then consumption and economic activity shrinks. Or, most pertinent for climate change or Covid drugs, these restrictive systems smother innovation.

Monopolising patents are used routinely to block new technologies and potential rivals. Thickets of multiple, obscure, overlapping patents often surround profitable products, any one of which can trip up others trying to enter the market or build upon earlier technologies. A company can easily refuse to licence others who they fear might develop the understanding and know-how that goes along with producing something, and subsequently become rivals. The spread of innovation is slowed, often very vividly between rich and poor countries – whether that shows up in access to vaccines and medicines or being stuck with old, off-patent climate technologies when we need the whole planet to be using cutting edge solutions as fast as possible.

In short, the first three private taxes redistribute the pie unfavourably; the fourth shrinks the pie.[2] The rigged system stifles innovation, worsens inequality, threatens jobs, undermines democracy and harms the planet.

Enshrined in international law

The global system of intellectual property, underpinned and enforced by global trade rules, has at its heart a system called TRIPS (Trade-Related Aspects of Intellectual Property Rights). It was one of the foundational agreements in the newly formed World Trade Organisation in 1995, turning the patchwork of intellectual property rules which existed up to that point into a single, binding piece of international trade law.

TRIPS is a billionaire factory, a monopolists’ charter, which forces countries around the world to accept rules that allow multinationals to barricade their goods and services with ferocious legal fortresses, to exclude anyone else from using their inventions, for exceptionally long periods. Why do countries accept this bitter medicine? Below we look at the history of TRIPS to explain. But right now, things may be changing.

TRIPS received a shocking jolt last year when the US Trade Representative Katherine Tai announced in May that her administration would support a waiver of the IP protections for Covid vaccines. This followed similar demands from a range of other countries, from scientists, from medical experts and from a wide spectrum of campaigners, for an exemption from TRIPS. For decades, the United States had led a granite-like global resistance to any weakening of TRIPS, so experienced activists were stunned by Tai’s words. As one of them, Cory Doctorow, said: “I’ve been in global IP circles for nearly twenty years now, and I’ve been in rooms with the US trade representative many times. I have never seen a [US trade representative] – let alone the head of the USTR – make a statement that was in the same galaxy as this one.”

US trade representative Katherine Tai. Photo: US Mission photo/Eric Bridiers (CC BY-ND 2.0)

Almost immediately a chorus of lobbyists for Big Pharma companies and for the broader global IP regime – boosters ranging from the software monopolist Bill Gates, via a multitude of commercial lobby groups, to the then German leader Angela Merkel, came out of the woodwork, to attack the US’s heresy. The big pharmaceutical firms won’t invest if their patents aren’t safe and strong, they cried. These big firms have the vaccine roll-out all under control: we must just trust them to do a good job! The IP waiver won’t work because nobody else can ramp up production like it’s needed! Bad factories will produce dodgy vaccines! Don’t mess with the free market! We will become uncompetitive if we relax the rules! It’s a slippery slope to Marxism!

The hue and cry was hardly surprising, in light of the $140 billion in shareholder dividends and stock buybacks since 2011 – just for one pharmaceutical company, Pfizer. Pfizer generated $36.8 billion sales for its vaccine this year, and expects to rake in another $32 billion next year.[3] And this is the tip of the iceberg. The mRNA technology behind Pfizer’s jab, largely made with public resources, could revolutionise medical technology, with potential for HIV, Malaria and even cancer vaccines. Pfizer is determined to control this giant money-spinner technology for the foreseeable future.

Monopoly money is enough to buy the world’s finest lobbyists and politicians: a story as old as economics. As Adam Smith said:

“the monopoly which our manufacturers have obtained . . . has so much increased the number of some particular tribes of them, that, like an overgrown standing army, they have become formidable to the government, and upon many occasions intimidate the legislature.”

No matter that every single one of the arguments against a Covid waiver is bogus – demonstrably false the smokescreens put out by this ‘overgrown standing army’ has been enormously effective. Tai’s efforts to change the story hit heavy political waters, almost as soon as she uttered the words. And indeed, over the course of the last year, the corporate lobbyists managed to water the waiver proposals down to until there is basically nothing left.

Those who have been campaigning against the system for decades, who have never been able to get traction on this Teflon issue, may feel disheartened at the pushback. Yet now is not the time for despair, for at last we see a chance, an opening, for true change. This rigged system, which has literally killed millions of people and impoverished hundreds of millions of others, has now been exposed and is still vulnerable.

Policies on international trade or tax change only very slowly, but with immense momentum. Once a new direction is set, it is very hard to deflect. Katherine Tai’s words are less important in themselves, than in the fact that they reflect a deep and enduring sea change in the global public mood, which has steadily in recent years been turning against the outdated old ideologies of low taxes, weak regulations, lax enforcement, and strong protections for IP monopolies.

In an earlier age, millions of people in rich countries felt it was necessary to protect “their” big patent-owning companies, hoping there would be some ‘trickle down’ to them – while sweeping under the carpet the distasteful thought that their champions were exploiting people in lower-income countries. Yet today, ever more people in rich nations are coming around to the idea that “this hurts us too” – that the battle isn’t one that pits rich countries and their home multinationals, against poorer countries to be exploited, but instead is a battle pitting the 99.9 percent majorities in countries rich and poor, against capital-owning, offshore-diving, law-escaping, unaccountable, monopolising global élites.

Covid, and the climate crisis, underline this all too clearly. The longer we take to roll vaccines out around the world, the higher the chance that a new super-strain of Covid will emerge that overcomes our existing vaccine defences, and we are all forced into devastating lockdowns again, amid a new wave of deaths. A Covid vaccine waiver would have been by far the fastest, best and cheapest way to do this. The International Chamber of Commerce, hardly a left wing organisation, has estimated that a failure to roll out Covid vaccines around the world could cost over $9 trillion, with rich countries taking the biggest hit. The costs of delaying technology to tackle climate change will ultimately be bigger.

We must use this platform to go far beyond Covid, to take aim at the monopolists’ charter of TRIPS itself. On climate change, rich countries in many cases offshored their carbon emissions to lower-income countries in their supply chains: now we are pushing them to make the expensive carbon transition too, while also forcing them to pay rich-country multinationals for the IP for climate technology, via the private quadruple tax.

Adding to the hypocrisy, lower-income countries were told that their trade protections were unfair, while the trade protections via monopolising IP protections were inviolable. From climate technology, to software, to genetically modified corn, to computer algorithms, the money drain away from main street and high streets to Wall Street and the City of London is immense. This upwards drain has a geographical dimension too, as money is sucked out of poorer often rural areas and already blighted urban zones, and delivering it to a small section of the population largely based in rich parts of big cities, overseas, and offshore. No wonder people are angry.

There is an opening here, which we haven’t seen for a very long time. It is time to get our collective foot in this crack in the door, organise, and push hard.

What is intellectual property (IP?) What are patents, trademarks, and copyrights?

Patents, Copyright, Trademarks

In short, copyrights are legal protections for creative works like books, films, music, sculpture, fashion designs and so on. Patents are protections for inventions: a new machine, a vaccine, a new piece of climbing equipment, and so on. Trademarks protect symbols, identifiers, brands and so on. Nike or Coca-Cola are trademarks, for instance.

The most accurate collective term for these different things would be something like “creators’ monopolies,” which also illustrates the privilege, and the potential for harm in the concepts. These privileges – a right to exploit an idea or creation, while disallowing competitors from using it in the market, were originally handed out by royal sovereigns as a form of patronage: often a reward for loyalty.  To hide the royal origins of monopoly, the beneficiaries of these legal protections have promoted a different term that was reportedly coined in post-Revolutionary France: “Intellectual Property,” or IP.  The idea of personal property is popular: the idea of monopolies is not.

As the historians Fritz Matchlup and Edith Penrose explained, French royalists “in deliberate insincerity ‘construed the artificial theory of the property rights of the inventor’ as a part of the rights of man.”

If you spend your time and money inventing a brilliant machine to pick cranberries more efficiently, your government might decide that you deserve some legal protection – a patent – to stop the next person taking your invention, getting rich and cutting you out of the market.

Patents, copyright and other forms of intellectual property are, in principle, necessary. But saying this is like saying prisons are necessary. They are, but that’s not the big question. The big questions are: for what reasons should we send people to prison, and in each case, what kind of prison, and for how long? When should we use non-prison alternatives, which often work better?

Likewise, with IP. How long should your protection for your cranberry-picking machine last? A year? Seven years? Seventy years? A thousand years? What should be the penalty for infringement? A lettuce-leaf slap on the wrist? A hefty fine? Prison? The Electric Chair? Are there other ways to induce you to invent your machine?

It’s all a question of degree, and balance. The core problem is that monopolists and their allies have violently tilted global IP rules, allowing a small class of people to, as one account puts it, “just lie in a hammock and come up with ideas, and other people will pay you rent on your ideas.” Or, more often, to buy other people’s (often public-funded) ideas, enclose them in IP fortresses, and then lie in hammocks and charge rent on them.

This article describes the dark history of how they became so unbalanced, far beyond the bounds of what any reasonable person would accept.

The heart of the problem lies in a regime called TRIPS, a set of ferocious protections for intellectual property that was launched as part of the World Trade Organisation in 1994. At its creation was no careful balance struck between the legitimate needs of business and the interests of broad populations. Instead, as one account puts it, TRIPS

“was born as a brute and profoundly undemocratic expression of concentrated corporate power – the work of “less than 50 individuals,” according to a US trade official present at the creation. One of that official’s reluctant Indian counterparts, Prabhat Patnaik, has described the TRIPS affair as “a parody of the wildest conspiracy theory.”

TRIPS has, if anything, tightened since then.

The winners of this system are a relatively few shareholders, lawyers, bankers, accountants and company bosses, mostly in rich countries, who get rich off the system. The damage from TRIPS is probably in the trillions each year: in each country, and globally, it not only redistributes the economic pie from poor to rich, but it also shrinks the pie, damaging economic growth, worsening inequality, harming the planet, hurting lower-income countries, worsening privacy, undermining democracy, rewarding unproductive rent-seeking, provoking political anger, and plenty more.

There are two main ways to make really big money in this world: make something brilliant that everyone wants to pay for – or build a global monopoly. Jeff Bezos, the world’s richest man, has combined both. So has Bill Gates, and most of the world’s richest people. But the lion’s share of their wealth comes from the global monopoly part. And TRIPS is the billionaires’ best friend.

Intellectual property, tax havens and the triple tax system

Why do multinationals put their patents, trademarks and so on into tax havens? The basics are actually pretty simple, and commonly use a technique called ‘transfer pricing,’ to escape tax.

Imagine an American tech giant, TechCo, has designed some new software, which it knows will make billions in profits, worldwide. So TechCo sets up an affiliate in a tax haven like Bermuda or Switzerland, a shell company called HavenCo, which owns the patent for that software, and employs just one part-time person to collect the mail and sweep the floor. HavenCo then charges all of the multinational’s other affiliates in other countries billions in royalty fees, for the privilege of using the patent nominally located in that tiny office.

As those other affiliates around the world channel huge royalty fees into HavenCo, it reaps huge profits – but because it is based in a tax haven, the tax rate on those profits is zero, so there is no tax bill there. Meanwhile, those other affiliates of TechCo in the high-tax countries like Germany or Bangladesh or Tanzania or Ecuador can record those royalty fees that flow outwards to HavenCo as costs, thus reducing their profits, and thus cutting the tax payments of those affiliates in those countries – very often, cutting them to zero.

In short, profits have been shifted out of the high-tax countries, reducing tax payments there, and into the tax haven, where they pay zero tax.

Note that nothing productive has happened here: wealth has simply been shifted from taxpayers in a range of countries, to TechCo’s private shareholders. It is a vast waste of resources, and it boost inequality.

International tax rules are supposed to tackle these shady practices, but they are leaky and hard to enforce. After all, what should the royalty rate be for a unique piece of business software, that is probably being updated every month and has nothing comparable anywhere else in the world? The answer to that question is, very often: the rate is whatever the multinational’s accountants say it is. Skilled tax authorities in rich countries like the United States or Germany have a hard enough time enforcing these tax rules: imagine how much harder it is for a developing country like Bangladesh, Tanzania or Ecuador.

It is important to understand something about these shenanigans. This game does not only hurt those lower-income countries: it also hurts the country where the multinational has its headquarters: in this case, the United States.

History is littered with these transfer pricing shenanigans. One example involves the media companies Viacom and CBS, now joined together as ViacomCBS. From 2002 these firms shifted their television IP rights through a daisy chain of corporate tax havens from Curaçao, the Netherlands, Bermuda, Luxembourg and most recently into the United Kingdom. The strangest part of this is that the UK had changed its tax rules so as to set itself up as more of a corporate tax haven, in order to attract exactly this kind of activity – yet, according to a detailed investigation by the Dutch organisation SOMO, the UK will lose $1.2 billion in tax revenues from the shifting of IP rights into the UK.

Why would the UK subject itself to such self-flagellation? UK citizens pay all these private taxes – the fruits of public investment snaffled by multinational shareholders; excessive private tolls levied for consuming these goods and services; economic shrinkage; and now these additional tax losses due to the UK attracting this IP.

The main answer to this riddle is that the winners from this game are big accounting firms, big law firms, multinationals, and others who have an oversized influence in designing the UK’s tax policies. Power lies where the money is.

A history of TRIPS and intellectual property

Intellectual property protections has its origin in systems of political patronage, which are most salient in lower-income countries today, and which often gets called “corruption.” In Britain, Queen Elizabeth awarded Sir Walter Raleigh, a court favourite, monopolies in cloth, tin, wine, and more. According to one account:

“The immediate goal of such arbitrary bestowals of power – a goal very much intended by the sovereign – was to atomize both the aristocracy and the people and to keep them hustling for place and pennies, in concentric circles, around the court.

The inevitable result of such arbitrary bestowals was to deprive – sometimes suddenly –many ordinary people of their ability to pursue their work, such as the manufacture of cloth or tin or playing cards, or the importing of wine. As Edward Coke put it in Parliament in 1614, ‘The monopolizer engrosseth to himself what should be free to all men.'”

In 1624 the English parliament struck a landmark blow for the people when it declared ‘royal patents’ illegal. The United States’ attachment to “freedom” or “Liberty” is, historically speaking, designed to check concentrations not just of autocrats, kings and public power, but also of those who would wield excessive private power.

This second meaning of liberty came to the fore as western nations picked themselves up from the rubble of the Second World War, the US-led occupying powers in Germany and Japan began setting up the political and economic machinery to ensure that these two aggressor nations would not fall again into fascism and militarism. US military authorities in 1947 promulgated Law 56, aiming to eliminate from the German economy at the earliest opportunity “concentrations of economic power as exemplified, in particular, by cartels, syndicates, trusts, combines and other types of monopolistic or restrictive arrangements which would be used by Germany as instruments of political or economic aggression.”[4]

Even before the War, though, it was well understood that monopolies were core ingredients of fascism. “The liberty of a democracy is not safe if the people tolerate the growth of private power to a point where it becomes stronger than their democratic state itself,” US President Roosevelt declared in 1938, as war loomed. “That, in essence, is Fascism – ownership of Government by an individual, by a group, or by any other controlling private power.”[5]

After the War, bloodied workers in countries across the new transatlantic alliance were in no mood for compromise with their élites, and leaders around the world agreed at a meeting at Bretton Woods in to set up a remarkable, stunningly progressive system of international co-operation, with many interlocking pieces. Top income tax rates on the richest were incredibly high – between 80 and 100 percent in many countries, and public healthcare systems spread widely. Finance, and especially speculative financial flows across borders, were heavily regulated and suppressed, under the knowledge that deregulation, free financial flows, and enormous financial concentration had helped cause the crash of 1929. And, especially in the United States, monopolies were broken up and regulated heavily, to prevent domination of any sector of the economy.

All these policies would be unthinkably radical today. Yet for the roughly quarter-century after the Second World War when they were implemented robustly, economic growth was higher and more broad-based than at any time in world history, before or since.

The TRIPS trap

That period of immensely progressive economic policies, sometimes known as the Golden Age of Capitalism, had its own chapter for the subject at hand: patent monopolies, intellectual property monopolies, and the global TRIPS framework that underpins it all.

TRIPS has a particularly grubby back story to it: a tale of powerful nations using their economic power to make the world safe for their monopolists, not just against the citizens of other countries, but against their own citizens too.

This chapter of the tale begins in 1951, when Jawaharlal Nehru, India’s president, decided to build a local factory to produce the wonder drug penicillin. India got help from the World Health Organisation, which wanted to set up an international network of penicillin production and training facilities. By the mid-1950s India was already producing major quantities of the antibiotic. But the western pharmaceutical companies were unhappy: most refused to invest in Indian production, because they did not want to transfer the technology and know-how (Merck did agree to build an actual factory – though only if the Indian side would agree to a set of onerous conditions.)

In 1955 Jonas Salk, who developed the polio vaccine, gave away the patent for free, and trained scientists around the world to boost supply. When asked who owned the patent, he was incredulous. “Well, the people, I would say. . . “could you patent the sun?” The day after his vaccine was declared a success, the administration of Republican President Dwight Eisenhower offered to share all the intellectual property with any country that requested it, including its arch-foe, the Soviet Union.

His successor, John F. Kennedy, enraged pharma firms with a memorandum on patents (pp10943) in 1963 which said that when inventions were substantially the fruit of public research, especially when it came to medical inventions, then the government should usually have worldwide rights to them, and that this research should be shared with foreign countries. Britain established a public National Research Development Corp (NRDC) to commercialise national inventions, with a mandate for the agency to hold any patents stemming from the research.

Then, in 1964, the world’s 134 poorest countries formed the G77 group, a voting bloc to advance their interests at the United Nations, just as many countries were freeing themselves from colonialism. Patent monopolies were high on the G77 agenda. By 1970, India had drafted a new patent law to replace the British colonial version, allowing patent protection for some processes such as manufacturing methods, but not for products like vaccines or foods. It limited patent protections to seven years; and it allowed “compulsory licensing” where governments could overrule patent protections. The companies hated this post-colonial ‘heresy’ so much that the Merck CEO, John Connor, branded it “a victory for global communism”. Other countries followed India’s lead, weakening laws on patents and other knowledge monopolies, aiming to build up local production capacity. So when new drugs came onto the world market, India saw them introduced into the domestic market at a fraction of the world price. This laid the foundations for India’s modern pharmaceuticals industry.

The Chicago-Pfizer axis

Unfortunately, the 1970s were an inauspicious time for the world’s developing countries to move. With the OPEC oil embargo and rising inflation, the Golden Age was approaching an end. New pro-corporate ideologies of “shareholder value” and ‘neoliberalism,’ were fast gaining popularity.

The Chicago School had a particular strand of thinking that favoured monopolies and concentrated corporate power. A small band of people, led by the controversial jurist Robert Bork, argued that we should stop worrying about corporate size, corporate power, corporate influence on politics or democracy or on the rule of law, corporate power over workers or on namby-pamby concepts like inequality or fairness. Instead, Bork’s people argued, authorities should narrow the focus down to just two things that economists could easily measure: first, the internal efficiency of corporations, and second, the question of whether or not consumers were getting a deal, through low prices. Their argument was that big corporations could reap economies of scale and would be more efficient, and would pass those ‘efficiencies’ on to consumers via lower prices. Everyone, the argument went, would win. Monopolies, Bork argued, pretty much could not exist either because competitors would arrive in “sky-darkening swarms” to get a share of the profits.

It was a remarkable sleight of hand, airbrushing out power, inequality, democracy, citizenship, fairness or even macroeconomic considerations, from consideration. But this was where the big money wanted to go, and these ideas spread rapidly, taking over the regulators, courts, politicians and even public opinion, first in the United States, then in Europe, and with the help of the IMF, World Bank and OECD, further afield.

A wave of mega-mergers between corporations – many that would have been outright illegal in the Golden Age – unfolded. In this environment, it was inevitable that laws to protect IP monopolies would follow the global trend.

It was in 1972, the year India’s patent law came into force, when the multinationals’ counterattack began in earnest, just at the start of this period of rapid ideological change.

Pfizer’s CEO Edmund T. Pratt Jr. led the charge against the G77, with an audacious plan to dominate global markets for agricultural products and medicines. Pfizer was already known for its aggressive lawyers, who had already launched a series of lawsuits against governments that had banned medical patents.

In 1978 Pratt began assembling a group of interested parties to take the fight forwards. The G77 solidarity was too strong, so they took two new approaches. First, they began to persuade officials in the United States that, as Pratt put it, “Intellectual property rights are extremely important to the competitiveness of the US and other post-industrial economies.” The word ‘competitiveness’ in this context rests on intellectual fallacies and economic nonsense, as we’ll see below, but it sounded good to persuade a lot of people in the United States, fretting about economic decline. And it was combined with a major public-relations exercise to convince people that anyone who stood up to the rules was a rogue nation, engaged in piracy.

The second approach used the fist of state power. They shifted their focus away from the United Nations, where the G77 was dominant, into a less well-known forum, where patents and knowledge monopolies had not hitherto featured: the immense arena of international trade. Pratt served as a trade adviser for both the Democrat Jimmy Carter’s and the Republican Ronald Reagan’s administrations, and he was well placed to push the new agenda.

“Like the beat of a tom-tom, the message about intellectual property went out along the business networks to chambers of commerce, business councils, business committees, trade associations and business bodies,” wrote Peter Drahos and John Braithwaite in their book Information Feudalism. “Progressively, Pfizer executives who occupied key positions in strategic business organizations were able to enroll their support for a trade-based approach to intellectual property.”

In the “Tokyo Round” of trade negotiations in the late 1970s Pratt seized on a new concept being used, called “linkage,” which harnessing of non-trade issues to the global trade locomotive. The negotiations were supposedly all about free trade, while patents and other knowledge monopolies are about the pretty much the opposite: letting companies sew up markets and exclude competitors, with the legal backing of the state. The indefatigable Pratt persuaded CEOs from other parts of the knowledge economy – from software to entertainment to machinery – to join the push to break down patent freedom and let them monopolise on a global scale. They got their “linkage” – and, as the writer Alexander Zaitchik explains:

“This is why the TRIPS acronym – “Trade-Related Aspects of Intellectual Property Rights” – sounds so forced and clumsy. It was born in a shoehorn.”

The Reagan administration began supporting the Pratt push, against ferocious resistance from the G77 group, led by India and Brazil. Once inside the trade negotiations, though, the United States wheeled out what would prove to be the decisive weapon: a piece of US trade law called Section 301, which allowed for trade retaliation against countries with ‘discriminatory’ or ‘burdensome’ policies. A US trade representative called Section 301 the “H-bomb of trade policy,” because every country wanted to trade with the United States, and poor countries in particular could not afford to be locked out.

The G77 solidarity did not survive the trade battering ram for very long. Trade negotiators were bullied into acceptance. Brazil was the first leader of the coalition to buckle, agreeing to sign TRIPS in 1989 after the US imposed crippling tariffs on its imports; and India followed the next year. Democrat president Bill Clinton solidified the deal, triumphantly overseeing the birth of the World Trade Organisation (WTO) in 1994, with its own TRIPS agreement. A total of 124 countries signed on – as if they had any choice.

TRIPS and the competitiveness hoax

In 1994, the same year that the WTO came into being, the US economic Paul Krugman wrote a groundbreaking article in Foreign Affairs called “Competitiveness: A Dangerous Obsession,” which skewered a potent idea that had steadily gained ever-wider traction following the end of the Golden Age. The idea was that countries were in a kind of global race against each other, and that each country or state had no choice but to be ‘competitive,’ or they would lose out.

“People who believe themselves to be sophisticated about the subject take it for granted that the economic problem facing any modern nation is essentially one of competing on global markets – that the United States competes with Japan in the same sense that Coca-Cola competes with Pepsi – and are unaware that anyone might seriously question the proposition.”

Competitiveness sounds like a wonderful thing, and it had caught on, around the world. As Clinton himself put it, each nation is ‘like a big corporation competing in a global marketplace’ with, presumably, its president being likened to some sort of CEO, and the nation’s population as, perhaps the workers.

The way for a country to be ‘competitive,’ according to this agenda, was essentially to dangle incentives in the path of highly mobile global capital, for fear that without these lures the capital will run away to more hospitable shores, like Geneva or Singapore or the Cayman Islands. The lures were many: cut the corporate tax rates and introduce loopholes; move towards “light-touch” financial regulations; cut the budget for enforcement bodies; or relax laws on monopolies and abusive behaviour by large multinationals. One of those lures, which Pfizer’s CEO Edmund Pratt had promoted so vociferously in the name of ‘competitiveness’, was strong protections for patents, and especially the TRIPS rules. Countries felt they had no choice to give multinationals and financiers what they asked for, or they would lose out in this supposed ‘global race.’ The idea of losing out panicked many politicians into giving the owners of capital what they were demanding.

The problem was, as Krugman patiently explained, that the whole concept of ‘national competitiveness’ is a nonsense, built on intellectual fallacies and schoolboy economic howlers.

A first problem with the concept is this: countries are not remotely like companies. For example what would be the nation-level equivalent of a company that goes bankrupt and collapses? A failed state? That is a very different creature. Or what would be the corporate equivalent of a tax, or a central bank’s control of interest rates? The comparison does not compute. It is a nonsense.

But important people talk about ‘national competitiveness’ all the time – so what could it possibly mean? Well, one can imagine two possible meanings that might make any sense.

A first possible meaning of ‘national competitiveness’ is the version that you might call ‘downgrading’ – the version that Pratt was pushing for patents, and which can be generalised to any tax or regulatory system or enforcement strategy. This is the “exploit me” approach of a tax haven – cut corporate taxes, offer lax financial regulations or strong financial secrecy facilities, or ease up on enforcement of laws on financial crimes, or give firms licence to monopolise in domestic markets, in an attempt to attract “investment.” If you don’t let them exploit you, the idea goes, they won’t invest.

The biggest problem with this ‘downgrading’ idea is that putting up a neon sign in the global marketplace saying ‘Exploit Me’ seems like an odd formula for national development – or even for attracting investment. Take corporate tax cuts, for instance. If you cut corporate taxes, you get less revenue to spend on good things – like having a healthy or educated workforce, or good infrastructure – which are what you need for attracting investment. Survey after survey of corporate bosses confirms this – that corporate tax cuts are counterproductive, a fact violently underlined in 2021 when the UK’s finance minister Rishi Sunak admitted that a long programme of corporate tax-cutting had simply failed to deliver growth or even any investment.

Nearly always, corporate bosses know exactly where they want to invest, before going out and trying to persuade states to give them tax cuts, strong patent protections, or other public subsidies. “I never made an investment decision based on the tax code,” said Paul O’Neill, the former CEO of steel giant Alcoa, and later a US Treasury Secretary. “If you are giving money away I will take it. If you want to give me inducements for something I am going to do anyway, I will take it. But good business people do not do things because of inducements.”

Another problem with this ‘downgrading idea’ is that if you offer a subsidy like a corporate tax loophole, to tempt capital to your shores, other countries will follow suit, in a race to the bottom. The public subsidies to global tax owners will just keep piling up, with nothing to show for it.

The whole “downgrade for competitiveness” was a hoax, from the start. And on patent protections, the Indians knew this, the Brazilians knew this, and all the G77 nations knew it. So instead of accepting it willingly, they had it forced down their throats, via the H-bomb of trade, and Section 301.

Everybody knew how damaging it was for lower-income countries. But the funny thing was, US administrations from Reagan onwards, and large sections of the US media, thought it was good for America, because it helped US multinationals. Yet of course what is good for US multinationals is not necessarily good for the US. And TRIPS was essentially a licence for US and other multinationals to exploit everyone, including in the US. That trillion-dollar estimate of the annual cost to US citizens due to these monopolistic practices exposes where the true battle lines lie. This is a fight between the 99.9% of people who are forced to pay these private taxes, and the 0.1% of owners who are collecting them, in countries all over the world.

As Katherine Tai said more recently,

“This inequality isn’t fair or sustainable. It didn’t happen overnight. It is the result of a long pursuit of tax, trade, labor, and other policies that encouraged a race to the bottom; [we want] an economic policy, including a trade policy, that delivers shared prosperity for all Americans, not just profits for corporations.”

Our current system of patents and IP is not fixed and inevitable – it has been the outcome of constantly evolving political and economic forces. The ground is now shifting fast, and new political possibilities are opening up. The time to grasp them is now.

The pandemic has forced hard questions about IP onto the global agenda. Whether TRIPS does what its proponents claim it does in supporting innovation and thus access to medicines and vaccines, or whether it actually undermines them, has literally been a life or death question for millions of people over the past couple of years. But the question was not new, nor limited to Covid-19 or indeed just to health care. It applies to climate change, which needs an ongoing explosion of innovation, to give our planet any chance of avoiding the experts’ terrifying forecasts becoming reality. People have been asking those questions for years, and they have found many other possible answers out there.

Our approach to innovation doesn’t have to be a hidden private tax system over knowledge monopolies held by corporations. It can be one that supports the common good, and the health of the planet. And if we act now, we have the best chance in a generation to achieve that.

Nicholas Shaxson is a journalist, author of several books including The Finance Curse: How Global Finance is Making Us All Poorer, and co-founder of the Balanced Economy Project, a new anti-monopoly organisation.

Ninety-Nine issue 23 cover

Part of this article first appeared in the June 2022 issue of Ninety-Nine, the magazine for Global Justice Now members.

Join as a member today to receive it three times a year.


[1] For a good account of the explosive surge in various indicators at the time, see What Apple did next, Seamus Coffey, 24 January 2018. See also Change to intellectual property tax write-offs will boost revenues, Irish Times, 7 October 2017.

[2] This is a complex area, with several other dimensions, for example, as outlined below, enormous profits from monopolistic pricing are being channeled into unproductive buybacks and dividends, instead of towards investment. This, too, hurts growth. in addition, higher inequality, another outcome of excessive patent monopolies, is now widely accepted to reduce growth, not least by taking money out of the pockets of lower-income people to richer people, who tend to consume a lower share of their income.




Top photo: A funeral procession protest calling for a suspension of Covid-19 intellectual property rights, London, 2021. Image: Aaron Chown/PA Images/Alamy Stock Photo.