Market observers of all political persuasions believe that President Trump’s trade war with China imposes ankle weights on an otherwise fast-moving economic gazelle. It’s in our interest to end the uncertainty of 25 percent tariffs on imports from China, a threat which hangs like a Sword of Damocles over American manufacturers. The question is, how to end it?
The key might be in the area of intellectual property protections. China has a long history of bad acting here, from stealing the latest Hollywood blockbuster to the hottest new designer jeans. A new report from the U.S. Chamber of Commerce’s “Global Innovation Policy Center” ranks China 25th out of 50 major countries in the area of intellectual property protections. The report notes that China still has a long way to go on IP law international best practices, and putting an end to government meddling in licensing agreements.
A 2011 report by the U.S. International Trade Commission says that American firms lost $48 billion in IP to Chinese theft in 2009 alone. If there’s a single reason for Trump’s trade war with China, that’s it.
But, if we’re going to insist on China as a better actor on IP, we have to put our money where our mouth is. The U.S. government has to not only insist that our companies have their IP rights protected in emerging markets like China, but also here at home and among more traditional trading partners. U.S. manufacturers in particular are increasingly vulnerable to IP theft and abuse, from turbines to airplanes to pills.
One area where we’re beginning to fall down on the job is with respect to pharmaceutical manufacturers. The Trump administration often points out how European countries have “negotiated” lower prescription drug costs than what we pay here in the U.S. Lost in that is the essential context that these European governments “negotiate” under threat of patent theft, politely known as “compulsory licensing.” If the American drug manufacturer doesn’t agree to the European government price control demand, the government, implicitly or explicitly, threatens to steal the formula and make knockoff drugs themselves. That can’t be allowed to continue, and it’s exactly the type of shenanigans we would never tolerate from China.
Nor can we let patent trolling happen here at home. The Trump administration has dramatically improved the Patent and Trademark Office’s IP enforcement. The U.S. Chamber in that IP report above notes that the U.S. rose from 12th to second ranked globally on patent enforcement in just one year. That’s good news for manufacturers in all industries that rely on patents to recover the high cost of research and development.
An important step in shoring up patent rights in the U.S. was the recent introduction of the “Hatch-Waxman Integrity Act of 2018” by Sen. Thom Tillis, R-N.C., and Rep. Bill Flores, R-Texas. Their bill allows generic drug companies who want to challenge a name-brand patent a choice between doing so in district court, or doing so via a relatively new process called “Inter Partes Review.” Under current law, a manufacturer can have their patent challenged in both forums, which is an unfair double jeopardy exposure we would rightly demerit a country like China for allowing.
The U.S. has established a pretty good model for patent rights in the drug space with the Hatch-Waxman law. Dating back to 1984, the law — named after former Sen. Orrin Hatch, R-Utah, and former Rep. Henry Waxman, D-Calif. — carefully balances a need for the innovator company to benefit from patent exclusivity for a sufficient period of time, to make back research and development costs and a reasonable profit, with the public good of having the drug more affordably available to the public in generic form.
A company which invests billions to develop a drug and bring it to market is given a set period of exclusivity to sell the medicine. After that period has ended, the drug is made available for sale by generic drug companies. This model has worked.
The NYU Journal of IP and Entertainment Law reports that between 1984, when Hatch-Waxman became law, and today, the generic share of the drug market rose from 19 percent to 90 percent. Health consumers have saved $1.7 trillion as a result. For their part, name-brand companies have invested more than $500 billion in research and development this century. Each side has the proper incentives.
Americans have access to more affordable medicines than ever before, and it’s because the U.S. led the way in balancing the patent demands of name-brand and generic drug companies.
Tillis and Flores deserve a lot of credit for proposing a bill to make sure this delicate balance is maintained. If generics can expose name-brand companies to double jeopardy by challenging patents in two legal processes, that upsets the good that the original Hatch-Waxman achieved.
Go too much on the side of the name-brand companies, and you end up hurting consumers who will be denied timely access to cheaper generic drugs. Go too much on the side of generics, and you take away any incentive for name-brand companies to invest the billions of dollars it takes to produce the next miracle cure. This is a see-saw that requires constant tweaking and maintenance by the Congress.
Our Constitution gives patent lawmaking authority to the federal government. The Founding Fathers gave Congress the power to “promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries.” Hatch-Waxman does that, and we should expect European and Chinese trading partners to do the same.
China needs to pledge to President Trump that they are mending their ways on IP issues if he’s going to be comfortable calling off this destructive trade war. But the Trump administration needs to continue to pursue patent integrity here at home and with our more traditional trading partners if we’re going to make those demands on China with any credibility.
Ryan Ellis (@RyanLEllis) is president of the Center for a Free Economy.
