1. Key issues
2. Intellectual property

TRIPS, bilateralism, multilateralism & implications for developing countries: Jordan’s drug sector

Manchester Journal of International Economic Law
Volume 2, Issue 1, April 2005

TRIPS, Bilateralism, Multilateralism & Implications for Developing Countries: Jordan’s Drug Sector*

Hamed El-Said**
Mohammed El-Said***

ABSTRACT

This paper examines the impact of TRIPS as embodied in both bilateral and multilateral agreements on developing countries. It provides new evidence, derived from the experience of Jordan’s pharmaceutical sector, which supports the general view that cautions against the negative effects of TRIPS on developing countries. The paper argues that the expected benefits from bilateral agreements between developed and developing countries have been largely overestimated while the costs underestimated. It warns that industrialised countries are using bilateral agreements to extract more concessions from developing countries than those obtained under the Multilateral System of the WTO. This has significant implications not only for future bilateral agreements between developed and developing countries, but also for the multilateral trade system of the WTO as a whole.

Introduction

Less than a decade since the creation of the World Trade Organisation (WTO) in 1995, multilateralism is in decline, while bilateralism is on the rise. This is evident from the explosion in the number of bilateral agreements which the world has recently experienced, particularly between developed and developing countries. For example, the European Union (EU) has recently completed more than thirty Bilateral Preferential Agreements with countries located in the Middle East and North Africa (MENA) (including Jordan, Morocco, Tunisia, Egypt and Lebanon) and Eastern Europe. The US has also completed nine free trade deals, four of which are with countries located in MENA (Israel, Jordan, Morocco and Bahrain), while currently negotiating fourteen bilateral agreements with several other developing countries in various regions of the world. [1]

These developments reflect a major shift of direction in the stance of industrialised countries, particularly the US. The latter played a prominent role in the creation of a multilateral system embodied in the WTO to overcome what was then perceived as serious “shortcomings of... bilateral era” that characterised the pre-1995 period. [2] The collapse of multilateral trade negotiations in Seattle and Cancun in November 2001 and September 2003, respectively, seem to have triggered a shift in the policy stance of industrialised countries. Having failed to advance their agenda in the post-1995 multilateral system, industrial countries are now seeking to reverse the centre of gravity away from the WTO.

The shift back towards bilateralism not only comes at a time of an impasse in the WTO’s multilateral framework over the so-called ‘new issues’, but also against a background of unfulfilled promises made by the industrialised countries to the developing countries during the Doha Round of negotiations. These promises extend to several sectors, including commitments to reduce barriers to trade in goods (particularly agriculture and textiles), services, and making use of flexibilities within TRIPs to enable WTO’s members to produce critically important medicines at affordable prices to the poor. [3] The shift back towards bilateralism will have grave consequences for the future multilateral system of the WTO. Not only it will undermine the current opposition by developing countries to ‘new issues’, but will also facilitate the incorporation and migration of ‘new issues’ from bilateral agreements to the WTO’s multilateral system itself.

The WTO, which was created in 1994 following the end of the arduous Uruguay Round of trade negotiations and came into force in 1995, has been described as the “greatest trade agreement in history”. [4] It is usually portrayed as a body with three legs: Trade-Related Aspects of Intellectual Property Rights (TRIPS), Trade Related Services (GATS), and the former General Agreement on Tariffs and Trade (GATT), with the latter strengthened and extended to include agriculture and textiles. [5] Membership in the WTO meant that countries had to adhere to all the covered agreements. Each of these agreements is important in its own right, and will have significant consequences for developing countries. Space limitations, however, require specification. This paper, therefore, focuses on one important aspect of bilateral and multilateral agreements, that is, Intellectual Property Rights (IPRs) embodied in the TRIPS Agreement. “It is... fairly well recognised that there was limited empirical data on which to base an economic analysis of the potential implications of TRIPS Agreement. Trade specialists were uncertain during the Uruguay Round, and are uncertain now, as to what economic effects of the TRIPS Agreement will be” on developing countries. [6] In fact, Arab States which have already joined the WTO and/or signed FTAs with the industrialised countries had little appreciation or even understanding of the implications of TRIPS on their economies; they simply "sign[ed] up on commitments that they did not fully understand". [7]

This paper fills an important gap in the literature by attempting to analyse the economic impact of TRIPS Agreement on developing countries. The papers uses Jordan’s pharmaceutical sector as a case study to demonstrate the potential impact of TRIPS on poor developing countries. Jordan not only joined the WTO in 2000, but also signed an Association Agreement with the European Union, and was the first Arab state to sign a FTA with the USA in 2001. Few developing countries, not only in the Arab World but also outside it, have moved “quickly or more courageously... than Jordan” in opening up and linking its economy with industrialised countries through a complex web of bilateral and multilateral agreements. [8] Therefore, Jordan’s experience with multilateral and bilateral agreements can provide important lessons for other developing countries wishing to join the WTO or sign bilateral agreements with more advanced and industrialised countries. The focus on pharmaceuticals stems from the fact that this sector is expected to be the most severely affected as a result of the TRIPS Agreement. [9]

This paper cautions against the current rush into signing bilateral agreements with industrialised countries. It argues that developed countries are using bilateral agreements to extract more concessions from LDCs, and to compel them to implement TRIPS ahead of the time established in 1995, grant industrialised countries’ enterprises broad rights to limit competition from developing countries, and also to build more extensive protection for their IPRs than set out by the WTO.

The paper proceeds as follows. Section Two provides a general framework by looking at the rationale for TRIPS and stronger protection for IPRs. Section three looks at the political economy of multilateral and bilateral agreements by analysing the general environment under which Jordan signed her bilateral and multilateral agreements. This is followed in section four by a review for Jordan’s IPRs rules and regulations before and after joining the WTO, signing on Association Agreement with the EU, and FTA with the US. We then evaluate the hitherto impact of TRIPS on Jordan’s pharmaceutical sector in section five, starting by shedding some light on the significance of the drugs sector in Jordan’s economy. Section six analyses the main implications of the rise in bilateralism for the WTO’s multilateral system. The final section sets out our conclusions.

The rationale behind TRIPS

The subject of IPRs protection is not a new issue. It has been the cause of heated discussion and debate between owner (inventor) and user of an invention for more than two centuries. [10] It acquired renewed significance in recent years, particularly following the establishment of the WTO in 1994 and its adoption of a global and comprehensive agreement for the protection of intellectual property rights, TRIPS. Since then few other economic subjects have generated more controversy and debate.

The adoption of the TRIPS Agreement was dictated by large Japanese, European and particularly American Multinational Enterprises (MNEs). During the last quarter of the twentieth century, businesses based on intellectual property, such as pharmaceuticals and film industry, grew exponentially, with new technologies facilitating and promoting more integrated global business strategies. Increased government policies, new competition and recession in the industrialised countries in the late 1970s and early 1980s forced companies into seeking access to the wider global market. With the opening up of the world market, which provided new opportunities for MNEs, it was becoming clear that a stronger global IP protection regime was needed to replace what was then perceived as a weak international IP protection system provided by the Paris and Berne Conventions. In most developing countries, IP regimes were geared towards supporting national economic development, and therefore offered low levels of IP protection with weak enforcement mechanisms. Western-based MNEs began complaining about the loss of hundreds of billions of dollars every year to piracy in developing countries. [11]

Chorus of researchers described how problems faced by US businesses in the late 1970s and early 1980s turned them into powerful business networks lobbying instrumentally for stronger international IP protection system. [12] In this context, one of the most important inventions of the lobbyist (Western MNES) was to make a link between IP and trade. Such a process allowed developed countries’ governments to, first, use existing international institutions as forums to negotiate the building of IP regime into trade agreements. Second, it facilitated the use of trade issues as a leverage to achieve this goal. [13] The United States and the EU went further to pursue a unilateral and a bilateral agenda to bring about the desired tougher levels of global IPRs protection regime. For example, the US used its 1988 Section 301 to exert unilateral pressure against countries opposed to its trade and IPRs agenda, including the imposition of trade sanctions and suspension of aid, or the threat of them. [14]

During negotiations in the Uruguay Round, developing countries initially strongly resisted developed countries’ insistence on the inclusion of the TRIPS Agreement on the basis that it would lead to higher prices for their consumers, and have detrimental effects on the development of their domestic industries. However, developing countries ultimately accepted the TRIPS Agreement. This acceptance stemmed from three main factors. First, was the fear of potential trade and aid sanctions by the US and EU. Second, it was as part of a bargained-for exchange in return for concessions made by industrialised countries in other areas (particularly textiles and agriculture). Finally, and most importantly, most developing countries signed up to TRIPS because they believed that the industrialised countries, particularly the USA, would cease its use of unilateral action under Section 301. [15] In short, developing countries signed up to TRIPS “not because they concluded that the Agreement, as a stand-alone, matter was necessarily in their best interests”. [16]

The main rationale behind protecting IPRs stems from their public good nature. That is, the use of an invention by one person does not preclude others from using it freely and without cost. It is hard for a producer of an intellectual output to control the use of that output and ensures that all who do use it pay for doing so. If not protected properly, disincentives are created, innovations are discouraged and creativity might even cease. It is the need to provide innovators with incentives to overcome this free rider problem and prevent the public from accessing new inventions freely that provides the main case for protection. [17]

What is not in dispute is the fact that producers of intellectual property need some incentive to do so, particularly considering the massive rise in the financial costs of new discoveries. The problem is deciding upon the best kind of incentive. The classical ’Reward Theory’ calls for societies to reward inventors by granting them monopoly and legal exclusive rights in exchange for their innovation and productivity. [18] Legal monopoly rights enable producers of intellectual property to price their holdings above marginal cost, hence allowing them to recover the large costs of research and development incurred while developing their products. Such a regime, it is argued, creates a powerful incentive to ensure the continuation of research and innovation in the future. [19]

Proponents also argue that not only developed but also developing countries will benefit, both directly and indirectly, from strong IPR protection. Indirectly, strong IPR protection will stimulate research and make innovations available to LDCs’ consumers and firms almost immediately and directly, by attracting inflow of foreign investment in exchange for sufficient protection for IPRs. [20] Even if LDCs do not gain immediately from stronger IPR protection, the pattern is self-correcting over time; that developing countries will benefit from increased inflows of FDI, that technology will be more freely licensed, and that LDCs will be able to create more intellectual property, therefore, the situation will correct itself. [21]

Despite its contribution and general appeal, the teachings of the ‘Reward Theory’ have been questioned on several fronts. To start with, TRIPS will only benefit firms and countries that are at the frontline of technology. Very few developing countries, hardly any in MENA, own any worthy IP or new innovations. [22] Secondly, it is doubtful whether stronger IPR protection in the South will stimulate further research and innovation in the North. The largest and wealthiest markets that provide MNEs with most of their profits actually exist in the North, where IPRs are already strongly protected. The South’s economic size and low income levels, on the other hand, can hardly support the combination of price and volume needed to make research and development projects commercially viable. [23] This led Deardoff (1990) to argue that global aggregate welfare may well be maximised if poor countries are actually exempted from requirements for IPR protection. [24]

Once established, monopoly protection has widespread implications. The potential gains from stronger IPR protection will depend on the comparative advantage of each country. In countries with strong imitation-based industry, as is the case in a large number of developing countries, including MENA, stronger IPR protection will destroy local production. In countries that lack domestic capacity to produce drugs locally and hence rely on imports for their supplies, higher IPR protection will certainly lead to higher prices of medicines due to monopoly power provided to international producers. Even if stronger IPR protection eventually enhances innovation in poor countries, global allocative efficiency would still be reduced if the effect of protection were to shift productive resources to innovation where a country has a comparative advantage in imitation-based production. Global welfare could also suffer from higher levels of IP protection if the effect were to slow the process, whereby products invented in the North are imitated and manufactured in the South at lower cost. [25]

During the Uruguay Round of negotiations, efforts of the industrialised countries and enterprises focused solely on the costs of IPR misappropriations and piracy in LDCs on their profits and markets. Little attention was paid to the developmental impact of stronger IPR protection on LDCs themselves. Today there is "uncontestable and solid set of studies... that consistently indicate... that developing countries are going to suffer from substantial price increases and other costs" as a result of TRIPS that provide monopoly protection to owners of IPRs. [26] Not only will there be a rent transfer from South to North, but this rent is unlikely to be substantial enough to constitute significant incentives to further innovation. In other words, the loss of imitation-based production in developing countries will still be more substantial than the marginal increase in rents to IPR holders.

Several trade specialists have already expressed their scepticism about the self-correcting thesis. [27] The available evidence does not lend any support to the existence of any link between TRIPS and foreign investment. The most seminal work in this area is the 1993 UN Transnational Corporations and Management Division’s study.

The “study concludes that there is little empirical evidence of a correlation between high levels of IPR protection and high levels of FDI. The countries with the weakest levels of IPR protection - the People’s Republic of China, Taiwan, Brazil, Argentina, Thailand, etc - over the past decade have routinely been recipients of the largest net FDI inflows.” [28]

Moreover, there is no guarantee that multinationals, even under a stronger protection system, will license their IPRs to local producers in poor countries in an attempt to protect and keep their inventions and technological secrets to themselves. The fear of the loss of inventions to imitators, particularly in knowledge-based and technology-intensive products and processes, provides the most influential explanation for vertical integration of multinational firms. This is the central insight of the Internalisation Theory of the firm based on transaction-cost thesis of IPR: “technology constitutes the primary firm-specific advantage of the multinational firm, and no such firm will transfer such technology even when property rights are well defined”. [29]

To summarise, IPRs present an economic conundrum. Higher prices obtained as a result of exclusive rights could stimulate innovation but may stifle exploitation and development of that innovation. The reward is a monopoly, and monopolies are special privileges that restrict the operations of a free economy. [30] This means that products based on the new IPRs will be overpriced and under-supplied. The same products may not be refined and fine-tuned so quickly. The economic problem thus centres around finding the right balance in the general public interests, especially since there are other less exclusive, commercial rewards to innovation, such as public subsidy for new innovation, or a competitive licensing system to the first in the market. These, and other proposals, will be further alluded to in the final section of this paper. Meanwhile, we turn to look at the size and economic significance of the sector that will be most affected by stronger IPR protection in Jordan, namely, pharmaceuticals.

Political economy of multilateral & bilateral agreements

Most developing countries are signing multilateral and bilateral agreements under difficult financial and economic situations. This undermines their bargaining position and provides industrialised countries with a window of opportunity to extract more concessions from them. [31] Jordan is no exception. In February 1999, a new regime, led by King Abdullah II, ascended to the throne following the death of King Hussein. Abdullah II inherited a kingdom not only saddled with large foreign debt obligations (around U$ 9 billion, an amount that is almost twice the size of the country’s GDP), but also suffers from deep recession, high unemployment and poverty. [32] The International Financial Institutions, particularly the International Monetary Fund (IMF) and the World Bank, which were active in promoting structural adjustment policies in Jordan since the late 1980s, seized the opportunity of poor economic performance, high level of public debt and presence of new and inexperienced regime to leverage in new changes and conditionality in return for their support. [33] The IMF and the World Bank, which do not function in isolation from the influence of Western governments, argued that rapid global integration, particularly via WTO’s membership and bilateral trade agreements with industrialised nations will bring immediate economic and financial benefits. The latter would include promotion of exports of goods and services to the United States, and attraction of foreign direct investment (FDI) along with associated transfer of technology and new management. [34] While it took countries like China, for example, almost fifteen years of debate, discussion and negotiations before joining the WTO, Jordan, in a record time, was declared a full member of the organisation in April 2000. When the Jordanian parliament began questioning the speed and proclaimed benefits from WTO’s membership, it was suspended in June 2001 for two years, under the pretext of a deteriorating regional security situation. In the same year (2001), Jordan also signed an FTA with the US in 2001, and ratified the Association Agreement with the EU in 2002. [35]

Neither the WTO membership nor the Jordan-Euro Association Agreement or the Jordan-US FTA were debated sufficiently, or even based on any rigorous analysis for the expected costs and benefits. They simply reflected pressure on Jordan from the ‘Washington Consensus’, [36] and at the same time Jordan’s desperate need for financial assistance. When asked about the expected benefits from joining the WTO or signing a FTA with the US, Jordanian officials responded by stating that “these agreements are very prestigious for us and they will bring massive financial assistance to Jordan from the USA”. [37]

Recently, several Jordanians, including high ranked state officials and even some businessmen who were assumed to be the main beneficiaries, have expressed concern over the implications of Jordan’s rushed integration into the global economy. As one local observer put it:

“In the absence of Parliament, major decisions are taken without the necessary checks and balances, for example concerning Jordan’s membership in the World Trade Organisation and Free Trade Agreement with the United States. These agreements may have been rushed through and not have the best interests of Jordan in mind; better deals might have been negotiated”. [38]

Those fears are not without good reasons. The Association Agreement with the EU commits Jordan to tougher patent protection than the TRIPS agreement requires under the WTO, [39] while the FTA with the US went further to demand what local pharmaceuticals called ‘TRIPS-Plus’, as will be demonstrated later in what follows.

Review of IPR rules in Jordan

In late 1999, and almost overnight, important changes occurred in Jordan’s IPR rules and regulations. The country’s pre-1999 position with regard to IPRs was largely inconsistent with the WTO’s TRIPS Agreement. One observer summarised the situation in the pre-1999 period in the following words:

"If WTO can be viewed as 100%, then current patent protection in Jordan stands at 70%, current trade mark protection in Jordan stands at 80%, current trade secret protection in Jordan stands at 60%... and current copyright protection at 20%”. [40]

There are other important differences between the pre- and post-1999 situation that are not captured by the above quotation. For example, under old patents and trade mark rules (rules that matter most to pharmaceuticals), Jordan’s 22/1953, 8/1986 and 3/1952 statutes gave a 16-year patent protection duration instead of the 20 years common in industrial countries; provided a registration duration of 7 years for copyrights from the date of application; imposed very low fines on violators of patents and copyrights (less than U$ 300); and permitted compulsory licensing for medicines and drugs. More importantly, these rules and regulations also excluded medical drugs, pharmaceutical compositions and food items from patent protection. [41] The same statutes went further to explicitly encourage local production of new and modern drugs and medicines, including those which enjoy international IPR protection, as long as they are locally produced in a "different way" to the one used to produce them in other countries. [42]

A key objective of the Jordanian government’s policy before 1999 was to enhance domestic firms’ innovative capabilities by facilitating the process of diffusing new knowledge and technology. Nascent local firms were given free reign in imitating the production of new and modern medicines. There was, and still is, a need to produce and provide affordably priced medicine to Jordanians, a large number of whom were driven into the world of poverty in the 1990s.

Post-1999 reforms of IPR rules and regulations

As a prerequisite to joining the WTO, Jordan had to design her new IPR rules and regulations in advance. These were announced just a few days before Jordan’s negotiating team headed to Seattle for negotiations in the November 1999 Ministerial Conference. These encompassed a new patents law (No. 32/1999), a new trade mark law (No. 33/1999) and a new copyright law (No.29/1999). In brief, the new regulations provided tremendous powers to the owners of IPRs. Some of these changes include the following: the duration of the patent protection was modified to 20 years from the date of filing an application instead of 16 years under the old law; the patentee has been granted the right not only to act against any infringement of IPRs, but also the right to claim damages on all types of crimes underlined by the Law which may occur to the patent; penalties against violators of patents, copyrights and trademarks have been increased, in some cases up to US$ 2,130,000; compulsory licensing has been made possible only under very strict conditions and circumstances; licensor’s rights have been strengthened to license all the class of goods or only license selected goods if he/she wishes; the duration of registration marks was increased from 7 to 10 years under the new laws, renewable for further periods of 10 years; the previously strong role of the state in supporting local firms by tariffs, credit and production and export subsidies has been curtailed; finally, and most importantly, TRIPS has also subjected all local medical drugs, pharmaceutical compositions and food items to patent protection, and this protection now covers not only process but also product as well. [43]

The extension of patent protection to products by Article 27 (1) of TRIPS, particularly in pharmaceuticals, has generated intense debate between developed and developing countries in recent years. [44] Embracing the system of process patent protection enabled the Jordanian government to achieve one of its key objectives of ensuring the availability of new drugs to poor Jordanian patients at affordable prices. It allowed local pharmaceutical firms to specialise in the production and exportation of cheap, generic versions of on-patent drugs. The shift to product patent will make a large share of their production and exportation to other countries with similar patent regimes illegal. The inevitable hike in drug prices of newly patented drugs will also add further to the social and economic hardship of the poor in Jordan. A former high ranked state official recently admitted that Jordan rushed into the WTO prematurely and without sufficient preparation. [45]

Bilateralism: Tougher conditions, broad rights & more protection

Jordan’s pharmaceutical sector, like elsewhere, has been largely shaped by its environment. Today more than 85 per cent of Jordan’s pharmaceutical output is not covered by any property right rules and regulations, and is thus based on imitation. [46] Just a few months before joining the WTO in late 1999, American and European pharmaceutical firms complained they were losing millions of dollars every year in Jordan due to the high rate of IPR misappropriations. [47]

Under the WTO Agreement, developing countries were given a ten-year transition period (until 2005) to fully implement TRIPS. [48] This period was considered agonisingly long for the profit-oriented European pharmaceutical multinationals. To accelerate the full implementation of TRIPS in Jordan before 2005, European firms successfully lobbied their governments to oblige:

"Jordan [to] undertake to provide for adequate and effective protection of patents for chemicals and pharmaceuticals in line with...the WTO Agreement on TRIPS by the end of the third year from the entry into force of this agreement or from its accession to the WTO, whichever is earliest." [49]

As the Euro-Jordan Agreement was delayed for almost five years, [50] it was the WTO’s Agreement which naturally entered into force first in 2000. Even in the WTO itself, Jordan was pressed hard by industrialised governments to accept conditions and regulations that further empowered owners of intellectual property, overwhelmingly Northern-based enterprises. In fact, Jordan was treated as a developed, rather than a developing country in the WTO, at least with regard to the implementation of TRIPS. Jordan not only had to establish new rules for all key IPR prior to membership, but was also obliged to commit herself to the implementation of a TRIPS Agreement "immediately and without any grace period". [51]

Yet, it was the FTA with the US that went much further in building protection for intellectual property than under both the WTO and the Euro-Jordan Association Agreement: [52]

"Under the FTA with the US, we [Jordanian pharmaceuticals] were asked to do much more and accept much stricter terms than under the WTO or even the Euro-Jordan Agreement... more rules were put on us due to PHARMA pressure, the main lobbying and representative groups for US pharmaceuticals". [53]

In addition to adopting the WTO’s TRIPS as the main framework, the FTA with the US tightened the marketing approval process by linking it to the complex US regulations and standards. It also called for the need to notify the identity of any third party requesting marketing approval effective during the term of the patent. The Jordan-US FTA went further to claim broad rights to US firms in an attempt to limit competition and prevent Jordanian firms from using new innovations for different uses. It thus added another clause stating that "protection for new chemical entities shall also include protection for new uses of old chemical entities for a period of three years", to be added to the five-year protection period already given for registering a new brand. [54] All of these changes are to be fully implemented within two years of the ratification of this agreement by the governments of both countries, which occurred in early 2002. Jordanian pharmaceuticals refer to FTA’s IPR status as “TRIPS-Plus”. [55] Although Jordan is currently a strong US ally in the region, “it is conceivable that the United States [will] threaten trade sanctions against a country that will not institute ‘TRIPS-Plus’ standards”, even if it was a close ally of the war on terror. [56]

Jordanian pharmaceuticals are puzzled by the act of their government, which not so long ago encouraged them to produce generic drugs, but now wants them to destroy most of their production without giving them a sufficient period of time to adjust to the new situation. They wonder why the country is moving so quickly to join the WTO and FTAs “while our land is infertile and not ready?" [57]

Implications for the domestic market

Pharmaceuticals have come to play an important role in the economy and labour market that some refer to them as “a sunrise industry” in Jordan. [58] The total value of domestic production rose to more than US$ 250 million in 2000, up from US$ 77 million and US$ 185 million in 1990 and 1995, respectively. In terms of exports, pharmaceuticals are the third largest earner of foreign exchange, after textiles and minerals. In 2003, total pharmaceutical exports exceeded US$ 203 million, or 2.2 percent of GDP in market prices (Table 1).

Pharmaceuticals also contribute significantly to domestic employment. The sector directly employed more than 4000 workers in 2002, up from only 1700 workers in 1991 (Table 1). Although official data is lacking, local sources suggest that the drug industry also provides another 3000 jobs indirectly in supply and related industries. [59] In other words, the seventeen pharmaceutical firms that currently operate in Jordan provide jobs to approximately 3.5% of the total work force employed in the country’s industrial sector, including minerals and crude materials.

Finally, the Jordanian pharmaceutical sector is the highest paid sector in terms of average monthly wages and salaries. [60] It is currently completely owned by domestic investors. Empirical evidence suggests that local firms are far more sensitive than foreign firms to the local needs of the economy and workers, and are more reluctant to sack workers under periods of contraction. [61] The destruction of local pharmaceutical firms as a result of stronger IPR protection can have serious social implications on a country that is already suffering from high levels of unemployment and poverty.

Extensive fieldwork and monitoring of Jordan’s reform efforts over the past decade by the authors [62] revealed continued lack of understanding about the nature of IPRs and their implications on the local economy. This lack of understanding is widespread and apparent even at the highest levels of government. When asked about the rationale behind implementing TRIPS in Jordan, the head of the team that negotiated Jordan’s entry into the WTO responded by saying that "I am not an expert in this field... I am...only the head of the Jordanian negotiating team for the WTO". [63] He also recently admitted that his team had rushed into joining the WTO before the third Ministerial Conference in Seattle in 1999 without any public debate or discussion:

"because it was known that the round will start discussing new issues and it was clear to us from different indications that membership conditions will become harsher and more difficult and that some voluntary commitments will become obligatory, new conditions will be imposed... and that there will not be transitory periods anymore. Therefore, our aim was to join the WTO before the round starts and before new conditions are imposed on us." [64]

Underestimating the Costs and Overestimating the Benefits

The expected benefits from the WTO, the Euro-Jordan Agreement and FTA with the US have been largely overestimated. Jordanian officials argue that "our accession to the WTO is a great achievement... an exceptional case of a country joining with her rules and regulations not ready yet... The WTO’s membership will open 135 markets for our products". [65] US officials publicly stated that the US has privileged Jordan: "Jordan will become the fourth country to establish such agreement with the United States after Canada, Mexico and Israel", and that this agreement will not only increase Jordan’s exports of goods and services to North America, but that the implementation of TRIPS will also "attract foreign direct investment" into the country. [66] "The FTA", the American Ambassador to Jordan, Edward Gnehm, recently stated, "is another success story in the making", making "Jordan the place to be". [67]

Empirical evidence is not supportive of the above arguments. The available literature suggests that Jordan’s bilateral and multilateral agreements have so far failed to either attract European or American investment into Jordan or increase the country’s exports into Europe or North America. [68] Although still far below its potential, foreign investment in Jordan began rising in 1997, long before stronger protection for IPRs was introduced in 1999 (Table 2). This was mainly due to the acceleration of the privatisation programme that was first introduced in the mid-1980s. Between early 1998 and October 2002, Jordan received more than U$ 800 million in privatisation proceeds. [69] In early 2004, officials from Jordan and the EU met in an attempt to salvage the Jordan-Euro Association Agreement which left:

“European and Jordanian officials and industrialists alike with nothing but disappointment... the agreement’s economic objectives of fostering north-south trade and increasing the Kingdom’s exports to the EU market have not been met, with Jordanian exports to the EU further declining and the trade balance between the two parties further inclining north.” [70]

A more in-depth analysis of Jordan’s bilateral and multilateral agreements suggests that these agreements have been struck at too high a price to be paid by a small, debt-saddled and aid-dependent developing country like Jordan. Each one of these Agreements contained some extra and tougher conditions than the one before, with serious implications for local pharmaceutical producers.

Impact felt too soon

Immediately following the establishment of the WTO in 1995, the Jordanian Industrial Development Bank (IDB) published a study in which it warned against the possible impact of TRIPS on pharmaceuticals in Jordan. The study concluded that stronger protection for IPRs will cause local production to suffer in terms of both investment and output; employment level shall decrease due to destruction of local production; not only will imports of drugs increase but also exports will decline with negative effects on the balance of payments; prices of medicines in general shall increase remarkably due to the monopolistic nature of patentee’s supply and the opportunities for R&D in finding new processes to manufacture patented final products shall be eliminated. It was not whether, but rather, when these implications will materialise. [71]

While working on the impact of TRIPS on LDCs, some specialists estimated "the direct impact of" TRIPS to "begin to be felt in developing countries only by 2005", while the "full impact - that is, the complete displacement of ’pirates’ [to] materialise only by 2015". [72] Contrary to these expectations, the direct impact in Jordan has been felt prematurely and almost immediately. Due to their limited capital resources and weak R&D capacity, Jordanian firms have not been able to compete, and will be unlikely to compete with giant firms from industrialised countries in the short- and medium-term, through innovation and production of new medicines. They have thus abandoned the production of modern drugs. The new strategy is now called "branded-generic", meaning "we search for the formula on the internet and other sources and then we produce it. Some copy the formula literally but most modify it a little bit then produce it under a different name", as long as it is no longer protected. [73]

Jordanian pharmaceuticals have thus been relegated to the production of old drugs that graduate from the 20-year patent protection period. As the head of the Arab Union of the Manufacturers of Pharmaceuticals and Medical Appliances (AUPAM) commented: "The discontinuation of manufacturing up-to-date medicines... pushed the Jordanian drug industries back by at least 20 years... a period equivalent to the period of patent protection", causing it to "lag behind similar industries in the world". [74]

So far, not even a single multinational pharmaceutical firm has opted to serve the Jordanian market by establishing fully owned production facilities there. Trade, particularly exportation, and to a lesser extent licensing agreements (Table 3) has been their favourite approach. Drug imports into Jordan have increased steadily since the mid-1990s, rising from US$ 58 million in 1990 to more than US$ 203 million in 2003. [75] During the first eight months of 2003 alone, pharmaceutical imports already surpassed the 2002 total pharmaceutical imports by more than US$ 25 million, thus registering the highest growth rate for pharmaceutical imports since the mid-1990s. [76]

Anecdotal evidence also suggests that the price of medicine in Jordan, which is largely demand inelastic, has risen sharply in recent years, particularly the prices of imported drugs and that which is produced locally but under international licensing agreements. The same source also suggested that the share of local firms in the domestic market has declined to 30 per cent in recent years, down from 45 per cent before 2000. [77]

In order to compensate for the loss of shares in the domestic market, local firms sought and have successfully managed to increase their exports to foreign markets. But Jordan is "not selling to European or North American countries. We are only selling to poor Arab and African countries that cannot afford to buy European and North American products. Most of the countries we export to are not members in the WTO, and therefore still provide protection for our products. That’s how we will survive during the coming five years, we are working very hard and we will keep on working very hard searching for countries and markets that are not registered with the WTO". [78] Exportation to Europe and US has been hampered by high health and safety standards set by the European Union and North America. As a local exporter stated:

"We cannot export to Europe or America because of their complex and high health and safety standards. This is despite the fact that we are the only Jordanian pharmaceutical firm with more than one patent registered under our name in Europe". [79]

Earlier work has warned that signing agreements with industrialised countries alone will not automatically lead to an increase in the volume of exports from developing countries. Unless LDCs are capable of meeting and satisfying the high quality requirements of international markets, particularly of industrialised countries, their exports might actually suffer. Meeting such requirements is currently hampered in most LDCs, including Jordan, by lack of resources, marketing skills, technical know-how to enhance productivity and up-to-date knowledge of changing quality standards, and small- and medium-scale producers.

Implications for bilateral and multilateral agreements

Recent bilateral agreements that were recently signed between developed and developing countries, including Jordan, have taken place in an environment characterised by a stalemate in the WTO’s multilateral system over the so called ‘new issues’- investment, competition policy, government procurement, trade facilitation and softening of IPRs. [80] As argued earlier, LDCs agreed to TRIPS under the WTO not because they believed that the TRIPS agreement was necessarily in their best interests, but rather because it was part of the “bargain”,[Abbott 1996, p. 472.[]] the “best deal” they could get in return for market access to developed countries’ markets [81] For industrialised countries, however, the inclusion of TRIPS in the WTO was just the beginning of a more heavily regulated global market for intellectual property rights. [82] Even long before the WTO was established in 1994, it was understood by most US officials and industry that TRIPS under the WTO Agreement was only the beginning of stronger and more comprehensive protection for IPRs, even if this comes via “an increase in bilateralism. For those of you who think that bilateralism is a bad thing, a bad thing will come about”. [83] It is not surprising, therefore, that the TRIPS Agreement itself, under the WTO, incorporated a number of vague, ambiguous and unpredictable provisions which may allow countries to deviate and interpret the agreement differently. [84] Vagueness and different interpretations have reflected some of the major factors behind the impasse in the WTO’s multilateral system since 1999. The explosion in the number of bilateral agreements between developed and developing countries represents part of a new trade strategy by industrialised countries to eventually weaken LDCs’ opposition to ‘new issues’ in WTO,

“a laboratory for the multilateral trading system in much the same way as many of the North American Free Trade (NAFTA) provisions, such as standards of review of anti-dumping, migrated into the multilateral system during the Uruguay Round”.Grynberg, Roman (2001). "The United States Jordan Free Trade Agreement: A new Standard in North-South FTAs?" Journal of World Investment, Vol. 2, No. 1, (5-19), p. 6. [85]

Although Jordan’s FTA with the US was not the first of its kind, it went further in setting new standards of conditionality in many areas, including labour, environment, and IPRs, that were “higher than any currently faced by developing countries in NAFTA or in any other FTA”. [86] Many of these standards, including TRIPS-Plus, that is, stronger and more extensive IPR protection, have already migrated to other bilateral agreements that have recently been completed between the US and several developing countries. For example, the US-Singapore FTA. [87] US-Australia FTA (May 18th, 2004), US-Bahrain FTA, [88] US-Chile FTA (June 6th, 2004), US-Morocco FTA (June 15th, 2004) and US-Dominican republic FTA (August 5th, 2004) have all been modelled on the Jordan-US FTA.

Moreover, the term TRIPS-Plus itself is evolving, and not fixed. Although the US government uses TRIPS-Plus as a general framework in its bilateral agreements, it also readjusts each agreement according to each country’s comparative advantage which might affect the US’s industry in different ways. Therefore, the US’s bilateral agreements have acquired an accumulative nature, intensifying along the way with each new agreement. This is also consistent with the nature of new technology, whose innovation rate has accelerated in recent years. This allows the US to readjust its bilateral agreements in a way that best serves its interests and to protect new technology. New countries completing FTAs with the US should, therefore, expect to see more conditions imposed on them. This is particularly the case if these countries command or occupy less geo-political importance in the US’s foreign policy than countries like Jordan do.

It is interesting to note here that those developing countries that have so far signed bilateral FTAs with the USA are considered by Washington as close allies in the so-called ‘war on terror’. In return for small concessions in terms of access to the US market, Washington is seeking “coalitions of the willing”, those who are willing to align their foreign policy firmly in line with the US’s. [89] This has important political and economic implications for developing regions, particularly the Arab World. The latter is not only plagued by deep political divisions, but also has limited intra-regional trade and investment. Despite repeated efforts and unlimited number of treaties over the past five decades, intra-regional trade and investment in MENA remain the weakest among all developing countries. FTAs with the US represent a new obstacle beyond regional integration by dividing the Arab World into US’s “friends or allies, or good or bad” states. [90] Singapore’s willingness to sign on a US-Jordan FTA template is effectively dividing South-East Asian Nations. [91] Bilateral FTAs in MENA will also create a two-speed Arab World, with some countries liberalising and opening up their economies at a much quicker pace than others, thus leading to trade diversion that hurts both regional and global welfare.

Bilateralism will also have significant implications for the future of the WTO’s multilateral system. As more developing countries sign bilateral agreements with the industrialised countries and accept their TRIPS-Plus and other extra conditionalities, the weaker the bargaining power of all developing countries will become over time in opposing ‘new issues’. Eventually, those ‘new issues’, including TRIPS-Plus, will migrate to the WTO’s multilateral system itself. Current developing countries’ opposition to what they perceive as issues not serving their best interest will be diluted.

Conclusion

This article looked at the evolution of IPR rules and regulations in Jordan before and after 1999, within the context of bilateral and multilateral agreements that Jordan has recently signed with the EU, WTO and US. It also empirically analysed the economic implications of TRIPS embodied in these agreements on the domestic market and consumers. The evidence cited in this article suggests that the expected benefits from such agreements have been largely over-estimated while the costs under-estimated.

IPRs present an economic conundrum for developing countries. It entails a trade- off between owners and users of IP, or between prices and new innovations. Exclusive rights may stimulate creativity and innovation, including new drugs, in return for higher prices. As Correa put it:

"It is in the logic of monopoly to charge as high a price as the market can bear, with the purpose of maximizing profits. Price increases shall be a regular feature, not an accident, with the introduction and or strengthening of patent protection in developing countries...the question at stake is the quantum rather than the possible existence or not of that increase" [92] (emphasis in the original).

There are powerful theoretical grounds, however, for doubting whether stronger protection for IPRs in developing countries will stimulate further research and innovation, given the fact that their economic size is too small and their income level is too low to support a combination of price-volume necessarily to make such research and innovations commercially viable. In this case, the introduction of IPR protection based on exclusive rights in LDCs, particularly in previously unprotected sectors, will have serious negative implications for the local economy. This may lead to the destruction of local imitation-based production, and, along with it, domestic employment opportunities. Such an outcome will have a significant social and economic cost in developing countries with a large domestic imitation-based drug sector.

Concern over the serious implications of TRIPS has recently triggered a world wide debate over alternative ways of rewarding and protecting IPRs. Participants in this debate have floated several important proposals, including a competitive licensing system to the first on the market, compulsory licensing, tiered pricing and parallel imports, national drug pricing regulations and bulk purchase pre-commitments. [93] Some of these approaches have the added advantages of preventing over-allocation of resources to innovation, precluding misdirecting resources towards socially undesirable and unsuitable projects and at the same time facilitating the diffusion of knowledge. These proposals deserve serious consideration.

Bilateral FTAs signed in the post-2000 period between developed and developing countries do not consider such proposals. On the contrary, they deliberately bypass them, demand far more concessions from developing countries, and aim at eventually weakening LDCs’ opposition to ‘new issues’, including softer IPR rules that will provide the poor with badly needed medicine at appropriate prices. Important lessons can be derived from Jordan’s experiences with regard to bilateralism. Developing countries which are tempted to draw up individual agreements with developed countries ought to think twice. In a world dominated by uneven powers and development, bilateralism between developed and developing countries is inherently unequalising. Bilateralism will lock developing countries in an existing industry pattern to their long-term disadvantage, by tying them in a web of agreements over which they have little control. Developing countries are better off first forging regional agreements and alliances among themselves. For the time being, they should also avoid signing imbalanced bilateral agreements with the far more powerful industrialised countries.

Table 1. Some indicators on the significance of the pharmaceutical sector in the Jordanian economy, 1985-2002 (U$ Million).

* Preliminary.
** Employment figures are taken from Jordanian Pharmaceutical Association Data Base, June 2003.
*** Calculated by the author using data from the Ministry of Planning, Economic and Social Development Plan 1993-1997, Amman, Ministry of Planning, p. 38.

Source: Central Bank of Jordan, Monthly Statistical Bulletin, Vol. 39, No. 6, June 2003.

Table 2. Total FDI inflows in Jordan (US$ Millions)

a.Estimated

Source: UNCTAD, World Investment Report 1995: Transnational Corporations and Competitiveness, UN, NY, pp 283-7; and 2001, pp 291-5; and Jordan Investment Corporation, New Projects Benefiting from Investment Promotion Law, Amman, July 2004.

Table 3. The structure of Jordan’s pharmaceutical industry

Source: Jordan Pharmaceutical Association Data Base, Amman, June 2003.

* Acknowledgements: This paper has been supported by funds from The British Academy, but the views and opinions expressed are those of the authors alone. The authors acknowledge valuable comments made on an earlier draft by Mr. Andrew Griffiths (The University of Manchester) and Professor Heinz Tuzelman (Manchester Metropolitan University). Thanks also to anonymous referees for helpful comments on the final draft.

** Senior Lecturer in International Business, Manchester Metropolitan University Business School.
Contact: Dr. Hamed El-Said, Business School, Manchester Metropolitan University, Aytoun Building, Aytoun Street, Manchester, M1 3GH, UK. Tel: 44 (161) 247 3742; Fax: 44 (161) 445 0209;
Email: h.elsaid@mmu.ac.uk

*** Research Fellow, Department of Law, University of Manchester. E-Mail: melsaid@hotmail.com

info document (Word – 176 KiB)