Mega-regional trade Agreements: Costly distractions for developing countries?

Prior to the Brexit and USA’s withdrawal from Trans-Pacific Partnership (TPP), mega-regionals were the latest trend in trade Agreements. The best-known examples of mega-regional Agreements are the TPP, the Transatlantic Trade and Investment Partnership (TTIP) between the USA and the European Union (EU), both promoted by the USA, and the Regional Comprehensive Economic Partnership (RCEP) between Australia, China, India, Japan, Korea, New Zealand and ten countries of the Association of Southeast Asian Nations (ASEAN). In particular, TPP and TTIP are classic examples of mega-regional Agreements that seek to introduce innovative content that reflects twenty-first-century trade and economic exchanges such that commitments undertaken on “traditional and new areas of trade” are likely to have far-reaching implications on global trade regulation and public policy. This paper examines how these critical mass Agreements could be employed to bring some of the mega-regionals’ new rules and issues into the system? While studies specifically analyse the economic implications of TPP and TTIP on developing countries, no work focuses on how such mega-regional Agreements that aim to liberalize “substantially all trade and investment” can potentially impact on global health through commitments on tariff elimination and stronger intellectual property (IP) rules.

This paper identifies how trade commitments, based on the intrinsic characteristics of the provisions or chapters in TPP and TTIP, could interact with and impact on public health in developing countries. This follows from the concerns that the haste of negotiators to conclude deep Agreements could impose ill-conceived constraints on domestic regulators’ access to medicines and has wide-ranging implications for public health policies in developing countries by feeding into domestic regulation. We analyse two interlinked policy concerns: firstly, how tariff reduction/elimination under mega-regional Agreements impacts on production of sugar, and by inference higher consumption. A second related policy area examined is the impact of mega-regional commitments, which include Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS)-like and TRIPS-plus commitments, on IP protection rules and even modification of such rules by partner countries, thus impacting the access of people in developing countries to life-saving drugs and medicines.

Tariff reduction/elimination on sugar, beverages and sugar products can have direct health implications for populations of partner countries’ populations. The health implications stem from the fact that while reductions in barriers to trade increase consumer food choices and improve supply for net-food-importing countries, trade liberalization can lead to disproportionate increase in imports and domestic production of processed foods, skewing the food supply towards an oversupply of highly processed foods that are calorie-rich and nutrient-poor (Clark et al. 2012). Thus, lower/no tariffs and lower prices of these products will lead to higher consumption that is scientifically linked to adverse dental health with possible association with obesity, diabetes and cardiovascular conditions. Similar is the case with higher tobacco consumption that has proven adverse health effects increasing the risk and incidence of oral and lung cancer. It is in the context of such health concerns from increased consumption of these products that require policy-makers in developing countries to carefully analyse health effects of deep “across-the-board” commitments (see Clarke 2008; Roffe et al. 2008). In this context, addressing health concerns and devising appropriate public policies to keep a check on burgeoning health expenditure are key, given that trade policy can impact on partner countries’ domestic pharmaceutical industries through providing (a) access to medicines and (b) incentives for innovation in the development of new life-saving drugs.

While several studies model the economic effects of trade liberalization, there is limited analysis that examines the health effects of zero tariffs and stronger IP rules from a public health perspective. It is in this context that the link between zero tariffs, on sugar and sugary beverages, and tobacco and tobacco products, is examined by this paper and how these are likely to contribute, on the one hand, to adverse impact on people’s health, while stronger IP commitments can pose a policy paradox for policy-makers, on the other. This also addresses a related question whether commitments under mega-regional Agreements that address trade issues and twenty-first-century challenges can be heralded as a truly next-generation regional Agreement.

This paper employs dynamic GTAP (GDyn) model firstly to examine the effects of TPP and TTIP on production, consumption, prices and trade of “harmful” products, i.e. sugar and tobacco, over 2015–2030 and secondly to assess the costs as a result of imposing stringent IP rules across the world following commitments under these mega-regional Agreements. The analysis focuses primarily on developing countries. Results indicate that there are significant health consequences of commitments undertaken by developing countries in that firstly, there is notable expansion in the production of sugar (about 0.3% per year) due to trade liberalization; secondly, while stricter IP rules are likely to lead to net global gains in terms of gross domestic product (GDP), poorer countries suffer implying that even without accounting for the “health justice” argument about allowing access to medicines stricter IP rules are likely to work against the poorer countries.

At the multilateral level, trade in health products and services are governed by the WTO Agreements. The WTO-TRIPS Agreement (Article 8) recognizes the right of WTO members to “adopt measures necessary to protect public health and nutrition and to promote the public interest in sectors of vital importance to their socio-economic and technological development, provided that such measures are consistent with the provisions of the Agreement”. It is common knowledge that developing countries have been averse to committing to TRIPS at the multilateral level, mainly on the grounds that the interests of developing countries are comparatively less reliant upon knowledge-based, intellectual property intensive goods and services which makes these countries’ consumers and net importers of intellectual property, not producers and net exporters¹ (Gaisford et al. 2007). The reluctance of developing countries is based on the fact that they have to bear significant costs of adjusting to the TRIPS Agreement, which requires institutional and judicial infrastructure to educate, inform, implement, regulate, manage and enforce IPR protection provisions. Historically, developing countries’ joined the TRIPS Agreement with much reluctance with the carrot of greater market access to developed country markets for their agricultural goods and textiles, in combination with the stick of exclusion from the WTO and the General Agreement on Tariffs and Trade (GATT) for the exports of their goods should they not join TRIPS (Kerr 2003, 2007, 2011). Developing countries’ incentives to joining the TRIPS have been eroded by the fact that the promised increased trade via greater market access for agricultural goods and textiles has not materialized as developed countries have implemented strategically blocking tactics (Kerr 2005). Of late, TRIPS has impacted on countries’ health policy through tariff reduction, as is the case with sugar and tobacco. In addition, patent protection and innovation as well as through the diffusion of new technologies to populations are related issues impacting on developing countries’ policy space.

The TRIPS Agreement includes specific rules on compulsory licensing, parallel importation and the application of patent law. For instance, Article 30 allows governments to make limited exceptions to patent rights provided certain conditions are met. The Agreement goes on to recognize that such exceptions must not “unreasonably” conflict with the “normal” exploitation of the patent and must not unreasonably prejudice the legitimate interests of the patent owner, while taking the legitimate interest of third parties into account. Article 31 of the Agreement allows developed and developing countries to provide for compulsory licensing in their national legislation and does not limit the reasons for which governments may grant compulsory licences. Having said this, governments’ use of a patent without the authorization of the right holder can only be done only under a number of conditions that protect the legitimate interests of patent holders. There have, however, been instances when generic producers and originator companies in developed and developing countries have disagreed on issues of patent linkage and/or the extent of data protection. A prominent case law example extraterritorial application of national laws under TRIPS is European Union-Seizure of Generic Drugs in Transit (WT/DS408, May 2011). Yet another Article 30 interpretation is in case law Canada-Pharmaceuticals (WTO/DS114) that allows countries to allow manufacturers of generic drugs to use the patented invention, without the patent owner’s permission and before the patent protection expires, for the purpose of obtaining marketing approval from public health authorities.

At the mega-regional, standards committed are higher than TRIPS, i.e. TRIPS-plus, and are increasingly a norm and common feature. The same applies at the bilateral level and analysis shows that TRIPS-like commitments require partners to commit bilaterally to the protection of IPRs, often far in excess of the minimum standards beyond and what was internationally agreed upon in the TRIPS Agreement. The literature also confirms this growing trend to increasingly include TRIPS-like and even higher commitments, i.e. TRIPS-plus (Vivas-Eugui 2003; Reichenmiller 2005). Such provisions take several forms: first, TRIPS-plus commitments extend the protection on patents, particularly for pharmaceuticals and data, which take the form of wider patent applicability, restricting patent oppositions, and/or extension of the patent durability. In fact, data exclusivity and patent registration are common TRIPS-plus pharmaceutical patent provisions undertaken at a bilateral level. Examples of patent strengthening provisions include the extension of duration patents on agrochemicals and pharmaceutical products from 20 to 25 years and industrial designs from 10 to 15 years, most common in several US RTAs. There are examples of extension of patent duration beyond the TRIPS commitment of 20 years, under the US–Macedonia regional trade Agreement (RTA) where patents on agrochemicals and pharmaceutical products have been increased from 20 to 25 years, and the EU-Morocco RTA where patents on industrial designs were increased from 10 to 15 years. In addition, the USA is also implementing provisions in RTAs that automatically extend patent terms if an extension is granted in a third country (El Said 2010).

Stronger IPR enforcement with penalties for non-compliance or violations is another common feature of bilateral commitments. Further, data exclusivity commitments are increasingly common within bilateral settings. For instance, Roffe et al. (2008) examine the issue of implementation of data exclusivity commitments in Jordan and Guatemala following RTAs with the USA. The study suggests that intellectual property rules reduced access to some generic drugs already on the market and delayed new entry of other generics. Further, TRIPS-plus provisions also limit or undermine developing countries’ policy options for legislating and using TRIPS flexibilities, even though safeguards and flexibilities were included in the TRIPS Agreement to enable governments to protect public interests, including access to medicines. This has led to concerns that TRIPS-plus provisions in FTAs will undermine public health safeguards and objectives—notably access to medicines, as well as delay generic market entry and competition.

These concerns are particularly pertinent within the context of the TPP Agreement, which has been positioned as a “model” for the twenty-first century implying that similar provisions are likely to appear in future trade Agreements, including those involving developing countries. The analysis of TPP commitments suggests that the Agreement reaffirms participating countries’ commitment to the WTO’s 2001 Declaration on the TRIPS Agreement and public health. It is interesting to note that the TPP does include a specific chapter with commitments that have implications for the health sector. The TPP Agreement, however, includes specific commitments by partners on pharmaceuticals-related provisions, which relate to the development of innovative medicines and availability of generic medicines, and in fact provides for stronger protection of IP. The IP chapter also includes commitments on the protection of undisclosed tests and other data submitted to obtain marketing approval of a new pharmaceutical or agricultural chemical product. However, no linkage between low tariffs on agricultural products and health linkage has been deliberated upon in the Agreement. Ongoing TTIP talks, between the EU and USA, do not explicitly highlight the link between lower tariffs and implications on health policy from information available in the public domain.

In this section, we describe the model, the assumptions underlying the baseline projection for the dynamic simulations and TPP/TTIP policy shocks. We also underline the methodological caveats of the study.

The simulations shed light on several variables and policies, and focus on two broad aspects. First, these look at the average annual impact on production of sugar across countries from 2015 to 2030. Table 5 shows that sugar consumption is often positively affected both by raising standards and reducing tariffs in developed countries, while sugar consumption in developing countries is adversely affected.

The net global effect turns out to be around 0.3% per annum, which is a notable rise in sugar consumption globally. World Health Organization (WHO) estimates (2015) show that worldwide, many populations consume sugars at levels that exceed the WHO’s sugar guideline, such as Brazil, Canada, South Africa, the UK and the USA. Sugar consumption is growing, especially in low- and middle-income countries. Between 2000–2001 and 2013–2014, global sugar consumption grew from about 130–178 million tonnes and is expected to reach about 182 million tonnes in 2014–2015. Almost three quarters of global sugar consumption each year takes place in developing countries. This overconsumption of sugar is taking place in the context of a cheap and abundant supply of sugar on the world market, which can be attributed to lowering/elimination of tariffs on sugar and sugary products that are likely to boost sugar consumption. The WHO (2014) draft guideline on sugars intake proposed that sugars should be < 10% of total energy intake per day. But tariff reduction on sugar will have the opposite effect on public health.

Second, as given in Table 6, stricter IP rules have a net positive effect globally in terms of employment and GDP and a net negative effect in terms of investment. Thus, new competing investment that could improve access to medicine may be hindered by these rules, and even apart from this, we note that poorer countries are adversely affected by stricter IP rules.

TRIPS-plus-style commitments under mega-regionals allow transition periods for developing countries. But these also allow rights and privileges to foreign investors, with the obligation on governments to provide protection of such rights. Such obligations can significantly restrict a government’s ability to regulate how companies operate within its national borders, which may then have an impact on the promotion of access to medicines and the protection of public health in general. In this manner, the potential impact on public health of the deep provisions on investment highlights three areas of concern. First, the expansive rights and privileges accorded foreign investors, with the corresponding obligation on governments to provide protection of such rights is likely to have the effect of significantly restricting governments’ ability to regulate how companies operate within their national borders. Current disputes in tobacco regulation demonstrate the potential public health implications that may arise from broad definitions of “investment” and the obligation to protect investors and their investments. Second, the investment provisions combine strong investors’ rights and high protection standards with a dispute settlement mechanism (the ISDS), which would provide the “teeth” for enforcement of those obligations. It is also noted that IP rights are included in the definition of “investment”, which would mean that a government measure affecting the intellectual property holdings of investors may be considered an “expropriation” or the withholding of “fair and equitable treatment”. This raises concern about the ability of governments to implement and use the range of TRIPS flexibilities, many of which could be seen as limitations or restrictions of the exclusive rights granted under a patent. Although the proposals provide that compulsory licensing does not constitute an expropriation where such a licence is granted “in accordance with the TRIPS Agreement”, this still leaves room for investor corporations to challenge the compulsory licence using the ISDS on the grounds that it does not comply with TRIPS. A related concern is that the extensive investor rights and the ISDS framework might provide a legal framework by which corporations may challenge any government measure, thus engendering a “chilling effect” on government regulation and action.

The TPP Agreement and proposed TTIP go well beyond traditional trade concerns and includes, among other elements, extensive obligations related to IP and investor protection. In fact, the health concerns with the TPP arise from the intensification of existing trade provisions and unprecedented protections for investors and intellectual property right holders. The analysis of commitments and modelling exercise support the view that the mega-regional Agreements are likely to have major implications for public health and access to medicines. The IP obligations under TPP exceeded the minimum standards of the multilateral WTO Agreement on TRIPS. The potential health effects of TPP and TTIP cannot be ignored and need the attention of negotiators, not merely because of the adversity in terms of health, but also due to the magnitude of overall economic effect. While the promotion of free trade via tariff elimination and economic growth is important, it must be balanced against the need to ensure both a population’s access to needed medicines and its long-term health and well-being. While the annulment of TPP or putting the TTIP on hold has not been done with the potential impacts in mind, it is important that policy-makers are wary of the effect of the mega-regionals and how these can translate into gains for countries in the public health domain. This is due to the fact that the simulation results suggest an increase in sugar production that is a silent killer in terms of being a contributor of obesity and diabetes. Further, if countries adopt TRIPS-plus provisions this is likely to threaten access to pharmaceuticals for people in developing countries, which points in the direction that the negotiating countries may wish to consider the types of measures that would strengthen and further expand the gains made in the effort to increase treatment access.

Another important implication is that the importance of relationship between IP rights and competition law cannot be understated. While IP protection effectively vests exclusive control of production and supply of protected invention in the rights holder, competition law seeks to encourage a multiplicity of suppliers in order to ensure effective competition in the market place. In most developed countries, higher standards of IP protection have evolved alongside the development of norms providing effective defence against anti-competitive practices related to the acquisition and exercise of IP rights. The policy objective from the perspective of developed countries is, therefore, to achieve a balance between intellectual property rights and competition that is appropriate to the domestic context. But this represents a complex challenge in developing countries given most lack competition law framework and/or effective mechanism for implementation of anti-competitive practices. Despite such practical concerns, most developing countries have undertaken deep intellectual property rights commitments as well as expanded existing ones without the capacity to implement, which is a matter for thought.

The empirical information made available by this paper can serve a variety of purposes. First and foremost, it provides a basis of evidence to inform policy-makers and strengthen their position in trade negotiations. The information can help to identify those areas in which greater flexibility in the negotiation of new IP standards may be warranted, or can make the case that new standards may not be desirable at all. Further, in countries that have adopted TRIPS-plus standards as under TPP, the evidence can provide an important basis from which to identify complementary policies that can remedy or alleviate the negative impacts of implementation.

In this light, governments may wish to adopt coherent approaches, in which trade and IP policies are formulated in a manner that preserves developing countries’ ability to provide long-term, affordable and sustainable access to medicines. While the current state of annulling the TTP talks and uncertainty around TTIP are not attributed to these concerns, ongoing mega-regional (and bilateral) negotiations must bear these policy aspects in mind. It is, thus, imperative that governments adopt a “positive agenda”, wherein they actively identify and implement policies that can help achieve the goals of trade and economic growth, alongside the objectives of ensuring access to needed medicines and the protection of public health. This leaves the question unanswered whether commitments under mega-regional Agreements addressing trade issues and twenty-first-century challenges are next-generation regional Agreements, and if such commitments are likely to impact on policy space of developing countries.