Friday, July 03, 2009

Parallel importation vs Free trade

Parallel importation is a trade policy where a country imports a particular commodity under some intellectual property rights (IPR, like patent and copyright) at home, from other countries where they are sold cheaper. While it has a laudable goal of helping bring down the average price of the commodity, it violates one tenet of private property ownership: the author, composer and inventor of the IPR-protected good or service is dishonored.

Thus, many countries, rich and poor alike, have parallel import restrictions (PIRs) on some patented or copyrighted products. In Australia, the major ones having PIRs are books.
A government agency there, the Productivity Commission, has completed a review on PIRs on books and is considering whether they should be scrapped or not.

A friend in Australia says that in some products, PIRs should be retained but in the case of books, such PIRs should be scrapped because while it limits the import of books without the authors consent, PIRs also protect the printing and publishing industries that produce the physical book.

I agree that parallel importation will somehow bring down the price of a commodity, a good policy outcome. But since it dishonors and violates the IPR of the author, composer or inventor of that commodity at home, this creates some unnecessary problems.

Parallel importation (PI), in my opinion, is another variety of trade protectionism. A better policy option is to have free trade, a unilateral free trade, preferably.

Import taxes, sales tax or value added tax, other taxes and fees on imported commodities make them expensive. Plus non-tariff barriers like a long list of signatures and permits that need to be secured from the customs, internal revenue, local government, other bureaucracies.

So why should a trade policy pick on IPR, when a better restriction to be removed are import taxes and other non-tariff barriers? Consider the following illustration, a hypothetical one.

Suppose there are 50 books on monetary economics in country A, all are copyrighted, protected by IPR. Some of those books are sold abroad at a cheaper price, maybe because the taxes on books there are lower than in country A. Parallel importation (PI) says that country A should import those books from countries B, C, etc. where they are sold cheaper, and sell them at home at a price between Price (A) and Price (B, C,...), WITHOUT permission by the book authors in country A.

Now there are a total of 500 books on monetary economics from around the world, all copy-righted. Free trade now says,

"Bring them all to country A, respect their authors' IPR, we abolish all taxes on books and other non-tariff barriers, and let the publishers and authors of those books slash each other's throat in fierce competition for lower price and at more sensible academic and policy discussions of the subject."

In this case, PI is a completely unnecessary tool when free trade can achieve all the good results that the authors and book readers want. PIRs therefore are good policy tools if free trade can be pursued instead.

Since many countries do not want to pursue free trade, PI is a good smokescreen for protectionism. It gives the public the impression that the government is liberalizing trade and importation of the commodity in question when in fact PI (a) is silent on, and indirectly retains all the protectionist taxes, and (b) it makes a mockery of IPR and private property ownership.

To summarize, instead of adopting PI, instead of scrapping PIRs, scrap or drastically cut instead those taxes, fees and bureaucracies through free trade. With free trade, a country achieves 3 or more good results:
1. cheaper price of the imported commodity due to lower or zero taxes
2. cheaper price, more choices, due to competition among numerous suppliers
3. more innovation as there is clear protection of the IPR of the composer, author and inventor of a good or service.

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