Why having a trade surplus in IP may not be such a good thing

Ask Kat readers what are their top 10 IP issues for 2016, and trade flows and intellectual property will not likely receive much mention.

[Merpel thought so as well, until we shared a draft of this post.] That is too bad. While IP trade flows may not have any immediate impact on IP practice, they point to longer-term trends that should be of concern to the IP community, namely that IP is threatened with being lumped together with other factors that are claimed by some as responsible for the increasing social and economic inequality that has come to dominate public discourse. We ignore this issue at our collective peril.

What triggered this Kat’s interest was a commentary by Justin Fox on Bloomberg radio. Fox noted that while the US trade deficit for goods does not show any sign of going away in any foreseeable future, there is a trade surplus for services. This means that while the US imports more goods than it exports, it exports more services than it imports. According to Fox, the main source for the trade surplus in services is intellectual property. The world continues to be willing to pay for the right to use and enjoy intellectual property emanating from the US, much more than the US uses and enjoys intellectual property coming from abroad.

One way to better understand this is to consider the discussion about tradeable and non-tradeable goods. We more and more hear, led by the Nobel Laureate Michael Spence, about the distinction between them. Goods and services are tradeable if they can be sold both in the US and abroad and are subject to import competition. Goods and (primarily) services are not tradeable if they pretty much have to be done locally; notable examples are government services and health care. Job growth (but stagnant incomes) has come largely from the non-tradeable sector, while income-correlated growth (but not job creation) has come from the tradeable sector. In the words of the Washington Post columnist, Steven Pearlstein, in taking them together--

“… the very unequal employment growth and nearly-equal output growth — and what you get is an economic tale of two cities, one that is growing in terms of jobs but not income, another that is growing income but not jobs. In short, a recipe for increasing inequality and social and political polarization.”

Recall that, as reported by Fox, the trade surplus in the export of services is due in no small measure to the propensity of persons abroad to consume US-sourced intellectual property, be it the functionality and design of a product, a blockbuster movie, or a franchised brand. However, the next unit of value extracted from the use of such IP does not generate a commensurate increase in jobs (although those employees who benefit from this state of affairs area likely to enjoy continued wage gains). In the current political climate and against the backdrop of voluble criticism over social and economic inequality, there are those who might argue that IP is on the wrong side of this divide. Under this view, it is not enough that IP is challenged as disproportionately favoring private over public interests and being inimical to innovation. To this might now be added the claim that IP protection contributes too little to the creation of domestic employment of the high-paying variety and it merely favors a narrow class of entrepreneurs who are capable of exploiting IP protection for their personal gain, at the expense of broader social and economic interests.

This is not to suggest that IP protection will suddenly be wholly abrogated by legislative fiat or judicial decision in response to an increasingly vocal public chorus of criticism. But it does ask whether public support for IP might begin to be eroded and, if so, how might this erosion of confidence begin to manifest itself in unexpected and harmful ways. Fox concluded his radio commentary on a less than optimistic note. He recognized that trade flows in services/IP were doing relatively little to ameliorate domestic economic and social challenges, but he offered no solutions. In his view, it is still better to have a trade surplus, rather than a deficit, in services, even in the current circumstances. As for the future of IP, one wonders whether this state of affairs will be enough.