Innovation fuels the U.S. economy. And the protection of intellectual property (IP) — the ownership of ideas instead of physical assets — is what fuels innovation. For two years now, the United States has been negotiating with 11 other trading partners who also border the Pacific Ocean to create a comprehensive trade agreement known as the Trans-Pacific Partnership (TPP). These negotiations are set to conclude in the coming year.
The TPP would go well beyond the usual dismantling of tariffs and import quotas, and include a range of new and emerging issues that are assuming more and more importance in the 21st century. Among these are the protection of IP afforded through copyrights, patents, regulatory data safeguards, trademarks, and trade secrets. Innovation thrives when inventors and investors are rewarded for their efforts to develop new products and services that people want to buy, not when their ideas are stolen as soon as they go to market.
Expanding the legal framework that supports robust IP protections in the United States is crucial to the success of the TPP, whose members include some of the world’s fastest-growing economies, and together have a combined gross domestic product of $27.5 trillion — about 40 percent of the world economy. The twelve countries in a prospective TPP, which stretches from the Western Hemisphere to Asia, are Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States and Vietnam.
IP-intensive industries — those that rely far more heavily on IP than others — take up a vast swathe of the economy, and include pharmaceuticals, aerospace, computers and the software to run them, electronics, medical equipment, chemicals, and automobile manufacturing. These industries, in turn, have a far higher rate of innovative research and development. Not surprisingly, a host of studies have shown that these IP-intensive industries generate more skilled jobs, pay higher wages, and produce more than double the sales per employee of non-IP-intensive industries.
Trade policy is by its nature political, and over the years, virtually every country in the world has built up a labyrinth system of taxes and tariffs and import quotas and licenses to protect favored industries. Eliminating those taxes — removing a tariff on imported shoes, for example — and removing or at least lessening the burden of licensing and import quotas in competing markets, is the whole point of the dozens of free trade agreements now in place in the world among two or more countries.
This report quantifies the extent to which IP-intensive manufacturing industries have contributed to the additional economic growth that is a result of the ten free trade agreements (FTAs) already in effect between the United States and 16 other countries in five continents. Then, using the historical data, quantifies the impact that IP-intensive manufacturing industries would have on the economic growth created by a prospective TPP. Among our main findings:
- Innovation — the creation of something new or improved, or a new market practice — has made a significant contribution to the ten FTAs between the United States and other countries studied in this report. By eliminating tariffs and including IP provisions based on U.S. law and standards, these FTAs boosted manufacturing exports in IP-intensive industries by 10.9 percent and pharmaceuticals and medicines by 15 percent, compared to an average of 7.3 percent in all industries and just 3 percent in non-IP-intensive industries.
- Based on our findings about innovation and the existing FTAs, we estimate that the formation of the Trans-Pacific Partnership would increase U.S. manufacturing exports by $26 billion and U.S. gross domestic product (GDP) by $11 billion, and lead to the creation of as many as 48,000 additional jobs. Two-thirds of these economic benefits would come from IP-intensive industries.
- As market access increases and trade barriers fall around the world, foreign affiliates of U.S. firms play an ever-more important role, something that is especially true in IP-intensive industries. American manufacturing companies currently sell some $424 billion worth of goods to their foreign affiliates, a figure that will increase by an additional $8 billion if the TPP is concluded. Since more than two-thirds of affiliates sales are in IP-intensive industries — which rely on patents, trademarks, and trade secrets — IP protections based on current U.S. law need to be adopted to secure long-term economic growth.
- U.S. sales to foreign affiliates have a direct and positive spillover effect on local economies by adding jobs and physical assets. Assuming a finalized TPP maintains the same protections for intellectual property as currently exist under U.S. law, the creation of a trans-Pacific trade pact would produce combined benefits in the 11 other countries of $27 billion in additional sales, $6.4 billion in additional GDP, and 68,240 new jobs.
Our findings underscore the benefits of free trade areas where countries eliminate and reduce trade barriers. It is equally clear that strong IP protection is an essential requirement for innovation, which in turn is fundamental to economic growth. IP protections have not only enhanced economic growth, but also technology transfer, foreign direct investment, and localized innovation in countries across all levels of economic development.
The stronger the protection of IP rights under the TPP, the greater the value of trade and investment in IP-intensive industries. It is these industries that are in particular the engines of economic growth, higher wages and more jobs. We cannot invest in our future without them.