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Might vs. Right: Economist Tests Trade Rules
The World Trade Organization’s rules
governing the multilateral trading
system may pass legal litmus tests,
but from an economic standpoint, do
they work?
Kamal Saggi, chairman of SMU’s Department
of Economics, has been examining
international trade and the effects of
multinational companies on developing
countries since graduate school at the University
of Pennsylvania. Lately he’s also been delving into the legal
layers of trade. A recent research focus has been India’s burgeoning
pharmaceutical industry.
“India has one of the most advanced pharmaceutical industries
in the developing world and is poised to be a world player,” says
Saggi, Dedman Distinguished Collegiate Professor of Economics
and a 2003 Ford Fellowship recipient. “But pharmaceutical patents
have been a big area of controversy.”
Divergent approaches to intellectual property (IP) have often
caused friction between Indian and global pharmaceutical companies.
“In India, you could patent a process but not a product,”
says Saggi, who grew up in India.
By developing alternative production
procedures, Indian companies cleared their country’s
legal hurdle to produce cheap, generic drugs that could meet local
demand and be exported to other developing countries.
In 1995, member countries of the World Trade Organization
(WTO) successfully negotiated a multilateral agreement that
“basically says all members have to adopt the same rules and regulations
regarding patents, trademarks and copyrights,” he says.
The WTO ruling protected the status quo for U.S. and European
enterprises, but the benefit to firms in emerging economies was debatable,
Saggi says. “Developing countries were asked to ratchet up
their legal coverage of IP, but the question was: Why should they?”
His study of that complex issue appears in the paper “Intellectual
Property Rights, Imitation, and Foreign Direct Investment: Theory
and Evidence” (National Bureau of Economic Research, 2007).
Saggi, who chose a career in economics over engineering, built a
mathematical model that captured the essence of the problem –
was it economically worthwhile for developing country members
of the WTO to adopt its new rules regarding IP?
He and three co-authors – Lee Branstetter, Carnegie Mellon
University; Raymond Fisman, Columbia University School of
Business; and C. Fritz Foley, Harvard Business School – then
plugged firm-level data on U.S. multinational companies collected
by the Bureau of Economic Analysis into the model to “theoretically
and empirically analyze the effect of strengthening intellectual property rights in developing countries.”
The economists determined that there were more gains than
risks to the budding economies. “In some instances, it may be a
case of trading apples for oranges. For example, a developing
country may say, ‘If we reform our IPR, then you’ll open up agricultural
trade to us,’” Saggi says.
Or, as in the case of Indian pharmaceuticals, it may be an apples
for apples exchange. “We found IPR reform in developing countries
had a pretty substantial effect,” he says. “Where the IP laws
have been strengthened, there has been a measurable increase in
multinational investment.” For example, some multinationals split
aspects of research and development, such as clinical trials, into
separate operations in collaboration with Indian companies.
He’s investigated numerous other angles of international trade
regulation including “Tariff Retaliation versus Financial Compensation
in the Enforcement of International Trade Agreements,”
the subject of a co-authored paper published in the Journal of International
Economics (2008), for which he is an associate editor;
and the consequences of the Most Favored Nation (MFN) clause,
which levels the playing field among competing international exporters
in WTO member countries.
A frequent World Bank consultant, Saggi presented an economist’s
perspective on case studies of two international trade disputes
– one involving olive oil, the other concerning stainless steel
– in June at the American Law Institute WTO Case Law Project
meeting in Geneva. Later in the month, he delivered a keynote
address on the theoretical rationale of the WTO’s MFN clause at
the Valuing International Trade Rules Conference in Zurich.
Saggi continues to explore the ramifications on the developing
world of policies defined by the WTO’s General Agreement on
Tariffs and Trade (GATT) and other negotiations. “Are these
good rules from an efficiency point of view? Why do we have
them? Asking these kinds of questions and finding some answers
– that’s my broad research agenda.”
For more information:
faculty.smu.edu/ksaggi
