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International agreements are usually sacred; they have to be followed. If they are violated, the violating country loses credibility and may find it difficult to have other dealings with the international community. But many times, nations have to protect self-interest and balance the detrimental effects of the agreements as against following them to the letter.
Even the most developed countries protect self-interest and violate agreements. For example, all importing countries had agreed that the multi-fibre agreement and the detailed textiles and garments quotas that resulted from it, would expire in 2005. This was an important feature of the so-called 'Dunkel Draft' that led to the World Trade Organization agreement. It was expected that the freeing of textiles and garments exports would lead to greater imports and thus benefit the developing economies.
The biggest beneficiary would be China whose exports of these products would zoom. Europe and the United States of America found that their imports from China shot up dramatically from the beginning of this year. Europe soon set limits on imports from China and the US is pressuring China to cap its garments exports to the US. This is a good example of an agreement that was violated by the developed countries because they could not tolerate the impact of the rise in exports on their balance of payments and domestic producers. There are more authoritarian examples as when the US tried to limit imports of some products from Europe. But the threat of massive retaliation compelled the US to retreat.
The best examples of how agreements are broken with impunity but with little danger of retribution from one of the regulating world organizations like the WTO is when countries that have complied with tariff reductions, develop non-tariff barriers to restrict cheap imports and protect their local producers.
Some years back, when France was upset at the flood of electronic entertainment products coming in from Japan, the rules were changed and all such imports were required to first be off-loaded at a remote location in inland France that was designated for customs clearance. The available transport was limited and time consuming. The local customs office was poorly staffed. Imports languished at the point of clearance for months, with additional costs because of the unsold stocks and loss of customers because of the delays.
Of course, there are barriers that affect all: poor roads, long turnaround time in ports, holdup of trucks at octroi nakas and state boundaries. Non-tariff barriers are selective to country and product.
Periodically, the US slaps restrictions on imports of Indian prawns because of suspected salmonella infection. This is a serious infection if it exists and stopping imports is an obvious answer. But prawn export units in India are approved and frequently inspected by the US's Food and Drug Administration inspectors. Indian exporters are not so stupid as to endanger their business by carelessness about salmonella.
The real reason for using this method is to restrict imports and protect local fishermen. After a lapse of a few weeks and high-level interventions, the exports resume. Presumably the salmonella have now been destroyed. Meanwhile there has been some setback to the exports of prawns from India.
Dumping is another charge used by domestic producers who are unable to compete. India has the record for the number of such anti-dumping charges awaiting hearing at the WTO. Thus, domestic producers are able to restrict imports and enjoy protection for a little longer.
Non-tariff barriers are a collaborative effort by governments and domestic producers to delay the impact of tariff reductions. The producers are readying themselves for the day when they must face up to cheaper imports. Governments help them get that time by imposing non-tariff barriers.
A good example of how governments can foster domestic industry and innovation is in the enforcement of intellectual property rights. Almost all countries have now signed agreements recognizing these rights and promise to enforce them with laws, inspections and penalties.
But stealing intellectual property through copying, reverse engineering, faking brand names on cheap alternatives have been common since the last century. The earliest and most organized example was Japan. Japan, before and after World War II, would send myriads of teams from their factories to visit factories in the US and Europe. These teams would avidly write detailed notes about everything they saw. Repeat visits by other teams to the same factories ensured a deeper learning. Where there were secrets that could not be seen merely through visits, the Japanese would try to find willing collaborators who would pass on the information for a fee. This habit has not disappeared. Only a few years ago a leading Japanese company was heavily fined in the US for having appropriated a US invention without permission or formal payment.
A legal framework for copying could be created to enable domestic industry to develop. A good example was the Indian Patents Act as it applied to pharmaceuticals, chemicals and processed food products, until it was amended last year. The law recognized process but not product patents. So it was possible for Indian ingenuity to find other ways of making newly discovered pharmaceuticals and marketing them. Many Indian pharmaceutical giants of today grew through this route devised by the ingenuity of the Jaisukhlal Hathi committee.
Ranbaxy made money by introducing Calmpose, using diazepam that was a patent of Roche and Burroughs-Welcome which had not introduced their Valium and Librium brands into India. Also, Ranbaxy brought doxycycline hydrochloride that was discovered by Pfizer, which had postponed introducing it in India because it was making good profits from the older broad spectrum antibiotic tetracycline (brand being Terramycin) These copies made substantial fortunes for Ranbaxy, which invested in modern research and development. They now are strong votaries of product patent protection since they are themselves inventors and no longer copiers. By giving them time to copy, earn profits, invest in R&D and make their own discoveries, the law enabled some Indian companies to become excellent pharmaceutical manufacturers, competing on innovation, quality and cost.
In the Sixties and early Seventies, the Indian pharmaceutical industry was small. Multinational companies dominated the market. They were supposed to be research-based, with rigorous production, quality and testing standards. Their margins were good and so was their marketing. High expenses for detailing to doctors, giving them free samples and supporting the leading ones with trips abroad and other incentives, gave them additional advantage. Today these companies lag behind Indian ones and are facing competition in their own and in other countries.
China has a large industry and employment that lives on copying internationally known brands. The products are good copies, priced low and (illegally) use international brand names. Over time, some of these manufacturers will build themselves to stop using other brand names and use their own, making life really competitive for the high-priced international names that are little better in quality.
China has calibrated its response to the intellectual property regime that it has signed to as part of the WTO membership. Selected domestic industries face a less rigorous enforcement of IPR while they develop by copying to become large producers which can then become innovators. This is the Indian pharmaceutical story being repeated on a larger scale in China, but the method is by poor law enforcement and not a legal framework.
India must develop strategies to selectively implement international agreements, so that there is an environment that is conducive to domestic entrepreneurship.