21 for 2021: Copyright and Creative Trade

This post is part of a series of evidence summaries for the 21 for 2021 project, a CREATe project within the AHRC Creative Industries Policy and Evidence Centre (PEC). The 21 for 2021 project offers a synthesis of empirical evidence catalogued on the Copyright Evidence Portal, answering 21 topical copyright questions for the 21^st century. In this post, Giorgio Fazio (Newcastle University, PEC) explores the empirical evidence relating to copyright and creative trade.

After a long period of sustained growth, the creative industries (CIs) are by now significant contributors to the national economy in many developed, developing and less developed countries (UNCTAD, 2008, 2010, 2018). These trends – together with the global reduction in trade costs and tariff barriers, and the increase in technology and digitalisation – have also allowed international creative trade to expand significantly, with trade flowing in the (usual) North-North, South-South but also in the (less usual) South-North direction.

Maybe more than non-creative trade, creative trade can be affected by non-tariff barriers (NTBs). For the CIs, these include differences in legislation, and Intellectual Property Rights (IPRs) in particular. These differences significantly affect the future expansion of international creative trade. At the same time, however, their removal, via trade liberalisation and trade agreements, also carries potential redistributive effects among users, creators, producers and distributors. According to anecdotal evidence, for example, in some sectors market power seems to have concentrated in the hands of a few global players, mainly in the Global North, with international royalties eventually accruing towards countries with better financial resources, technology, platforms and legal institutions, including IPR legislation and protection.

Given its continuous expansion, international creative trade is going to be of increasing interest for academics and policymakers in the years to come. Nevertheless, empirical evidence in this area is limited, and so also the scope for evidence-informed policies. Against this backdrop, this blog provides a brief overview of some of the issues involved in the relationship between creative trade and IPRs like copyright from an economics perspective.

The production and consumption of cultural and creative goods, such as music and art, has attracted the interest of economists from the early historical contributions of Adam Smith and Alfred Marshall to those of John Kenneth Galbraith and Lionel Robbins (see Throsby, 1994, for a review). The later contributions by Caves (2000) and the several published handbooks on the CIs (Towse, 2003, 2013, 2020; Jones, Lorenzen and Sapsed, 2015) are testimony to the interest for the CIs by the economics profession. Specific sub-sectors, like music or movies, have attracted even further interest in recent times, resulting in a well-developed literature, already the subject of extensive reviews (see McKenzie, 2014). The attention for these sub-sectors is due to multiple factors, such as the availability of data (see Connolly and Krueger, 2006, for the music sector) and their quick transformation due to technology (see Waldfogel, 2012, 2017; Aguiar and Waldfogel, 2018a, b; Krueger, 2019). Also their global orientation has made them the subject of much trade policy controversy. The audiovisual sector, for example, remains one of the most restricted internationally, due to the political desire to ‘protect’ national culture and the national media against the influence of foreign culture and communication.

Given the centrality of IPRs in the CIs, their role in international creative trade deserves special attention. Like other international trade issues, however, this role is not uncontroversial. While trademarks and design are clearly also important for the CIs, this blog will mostly focus on copyright. Given the scarcity of the literature, this blog will sometimes draw (admittedly far-stretched) parallels from other IPRs like patents, where the international trade literature is far more conspicuous.

Copyrights are critical for the physiological operation and growth of creative trade: they enable the alienability and commercialisation of the creator’s rights and, therefore, the distribution and economic exploitation of creations. These functions carry implications for trade modelling and the welfare effects of trade liberalisations.

In new trade theories, for example, entry barriers and sunk costs imply that each firm operates as monopolists of their product variety. At the same time, IPRs in general allow the exploitation of economies of scale in production and distribution, which further strengthen the firm’s position. In these trade models, since each country is able to produce a fixed number of varieties, trade liberalisation raises welfare by increasing the number of varieties available to consumers. In models incorporating firm heterogeneity a-la-Melitz (2003), the existence of trade costs means that firms need to overcome a certain productivity threshold in order to access international markets. This Darwinian selection process results in higher average productivity that represents the gain from trade. (The lack of) Copyright protection can affect this threshold and, therefore, the internationalisation of creative firms. Finally, Eaton and Kortum (2019) discuss the fundamental distinction between blueprints and copies when it comes to modelling the international trade of services and, in particular, intangible services (e.g. streaming) which can be delivered to the consumer long after their creation, relying on the existence of IPRs.

While IPR protection is essential, it also comes at the risk of reinforcing (international) asymmetries in market power and, hence, distribution of revenues. Moreover, fundamental freedoms, such as the freedom of expression and creativity, can be affected. Macmillan (2014) discusses how, in the presence of market imperfections and asymmetry of power between “creators” and “industry”, strong IPRs may end up limiting cultural expression. Keeping the balance between the copyright and human rights is difficult within the same jurisdiction and even more so at the international level.

The “territoriality” of IPRs means that countries differ widely in terms of minimum standards and enforcement. On one side, imitation and piracy reduce the market power of the right holder (with positive welfare effects on consumers). On the other, copyright owners are not necessarily only large corporations. Especially for nano and single-operator businesses like many of those in the CIs, the additional financial and legal costs of pursuing copyright protection and imitation and piracy can reduce the firm’s profitability acting as disincentive to internationalisation. Weak international rights can also act as a further barrier to internationalisation in both the Global North and the Global South, where businesses may struggle to internationally exploit the comparative advantage of a highly differentiated creative good or service, hence, remaining underdeveloped (on this, see the agenda carried out by WIPO).

So, both too strong or too weak IPRs are a problem, either as a limit to fundamental freedoms or as a barrier to trade and firm growth. Finding the right balance is critical.

International agreements have the potential, and one could argue the scope, to facilitate trade whilst, at the same time, achieve such a balance. The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) marked the introduction of IPR regulation in international trade, setting “minimum standards of protection and enforcement that each government has to give to the intellectual property held by nationals of fellow WTO members”.

WTO members, however, try to reach agreements above minimum standards via bilateral agreements. These increasingly incorporate IPR chapters (for the EU see here, and for the US see here). This trend is partly fuelled by the shortfalls of multilateral agreements, especially in terms of monitoring and enforcement. Indeed, Biadgleng and Maur (2011) discuss how developing countries often implement IPR reforms following the signing of preferential trade agreements. The recent trends and challenges due to digitalisation have further pushed towards the inclusion of digital chapters, e.g., avoiding custom duties on digital products and regulating cross-border data flows and privacy. These chapters, however, often exclude sectors like audio-visual and broadcasting (see, for example, the recent UK-EU Trade and Cooperation Agreement, and for the US the Digital Trade & E-Commerce FTA Chapters). The interested reader can refer to Matoo et al. (2020) for a thorough discussion of how IPRs are covered in trade agreements, including issues like copyright and platform liability (the latter especially important in US negotiations).

However, the introduction of IPRs in trade agreements is not uncontroversial. Curtis (2012) highlights how international changes in IPR law and policy, such as the TRIPS, the (controversial) Anti-Counterfeiting Trade Agreement (ACTA) or the Codes of Conduct or Guidelines issued by the OECD, follow the process of globalisation of knowledge-related goods and services. According to the author, the introduction of IPRs in free trade agreements can exacerbate existing imbalances, as the parties involved are often at different levels of development, which leads to an exploitation of the South. However, it should also be considered that many transactions are also regulated outside international agreements via private contracts or non-written norms. So, it could be argued that exploitation could stem, irrespective of the agreements, from unruly globalisation under market imperfections. There should be scope for fairness in international rules.

As mentioned above, much of the international trade literature on IPRs is on patents rather copyright. Ferrantino (1993), for example, finds that the role of membership in intellectual property treaties for US exports, foreign affiliate sales, and flows of royalties and license fees depends on the extent of the domestic protection of IPRs. In multinationals, parent companies export more to subsidiaries based in countries not part of international agreements. As a result, there is little impact on arms’ length exports and foreign investment. In a gravity model of trade, however, Maskus and Penubarti (1995) find a positive effect of the strength of local patents protection. Lin and Lincoln (2017) look at US manufacturing firms’ exports and IPR reforms in developing countries. The authors show how patents are strongly related to exporting behaviour and find that IPR reforms in Argentina, Brazil, Colombia, the Philippines and Turkey have expanded the number of varieties that enter these markets from the US. This expansion increases consumer welfare in the destination countries by increasing the varieties available to consumers and improves domestic firms’ productivity by allowing them access to intermediate technology-rich inputs. Band and Gerafi (2013) analyse foreign ownership of firms in IP intensive industries in the US. The data challenges the assumption that US firms dominate both domestic and foreign markets for IP products. The authors argue that policymakers should no longer assume that the beneficiaries of protectionist IP policies are US firms and, by extension, US workers and shareholders.

IPRs are clearly essential for trade patterns. However, to the extent that they represent a trade barrier, they can also influence the choice of businesses to export directly or export indirectly by setting up a foreign presence. For the movie industry, MacCalman (2004) empirically investigates how the network distribution of movies and videos by Hollywood Studios is affected by IPR standards in forty countries. The author finds that both low and high standards increase the likelihood of FDI or service and moderate standards increase the likelihood of using licensing agreements.

IPRs are critical for the existence of parallel trade or grey markets. Parallel imports are “goods produced genuinely under protection of a trademark, patent, or copyright, placed into circulation in one market, and then imported into a second market without the authorisation of the local owner of the intellectual property right.” (Maskus, 2000, p. 1269).

Parallel importers exploit international price differentials and free-ride on the investment made by the IPR owner (Richardson, 2002). The existence of parallel or grey markets, however, critically depends on the exhaustion regime adopted by a country. When exhaustion is national, the IPR owners lose their rights after the first sale only where this has taken place and, hence, they can exclude parallel imports from other countries. International exhaustion means that IPR owners lose their rights upon first sale irrespective of where this has taken place and cannot prohibit parallel imports. In the latter case, clearly, the market power of the rights owner is significantly eroded for the benefit of consumers.

Unfortunately, lack of data on parallel imports prevents investigations into a phenomenon that can be of significant scale, especially for the CIs as it affects in particular copyright (hence, e.g., recordings and publishing) and trademarks and design (hence, e.g., fashion). The choice of exhaustion regime has been revamped in the UK after Brexit since under the EU, regional exhaustion implied a significant market for parallel imports. A report for the UK Intellectual Property Office, Ernst & Young (2018) highlights how this issue emerged in stakeholders’ interviews as a threat, especially for publishers. Recent jurisprudence highlights how digitalisation is affecting this issue in this specific sector.

The choice of exhaustion regime requires a compromise between the different tensions between the needs of right owners and consumers. Saggi (2012) develops a model of interaction between the Global North and South in terms of IPR protection and exhaustion regime. National exhaustion allows firms in the North to be a monopolist at home and price discriminate internationally. However, price discrimination requires IPR protection in the South. So, international exhaustion and imitation in the South reduce the market power of the IPR owner and increase consumer welfare in the North and the South. The optimal regime for the North and the South may differ depending on quality differentials between the Northern and Southern products. If quality differences are large, the South may want to protect IPRs to induce exports from the North. If quality differences are small, the North may want to adopt national exhaustion to limit competition. Both countries can end up in a worse equilibrium if the firm’s export decision is policy-dependent. International agreements like the TRIPS can help eliminate such stand-off by introducing the international harmonisation of regulation. However, global welfare would increase if harmonisation induces exports to the South. If exports happen regardless (even under imitation), international agreements would lower global welfare.

McCalman (2005) finds a non-linear relationship between IPR strengths and the speed of release of Hollywood movies internationally, as moderate protection increases speed but too weak or too strong IPRs seem to slow it down. Further, Dalton and Leung (2017) investigate strategic decision-making in release gaps by Hollywood studios. In a theoretical discrete choice model of release, they look at the release gap effect (related to issues like the prevalence of digital theatres in a market), the word-of-mouth effect (due to movie reviews) and the competition effect (due to the release of competing blockbusters). Using data from Boxofficemojo.com, the authors find empirical evidence of all three of these effects. These three effects are also affected by the strength of IPR protection, as suggested by McCalman (2005) and associated levels of piracy.

Banerjee, Khalid and Sturm (2005) track per capita income, Gini coefficient, total revenue from the retail software sector, openness of the economy, degrees of corruption, civil rights and economic freedom and the rate of software piracy using data from 53 countries covering the period 1994 to 1999. They suggest that socio-economic conditions and the lack of proper institutions may be responsible for high software piracy rates in developing and emerging economies.

Some studies have looked specifically at the music sector, where Krueger (2019) argues that piracy and file-sharing have entirely changed how the industry operates. Since Napster, in particular, artists have focused on retaining royalties from live performance rather than from records’ sales. Also, streaming has become a major source of revenues for the industry. In a recent study, Leung, Kretschmer and Meletti (2020) show by a demographic breakdown of digital consumers of feature films, TV programmes, video games, e-books, music tracks/ albums, and music videos shows that the propensity to consume digitally (as well as how much is spent on digital content) varies strongly with age for film, TV and music. In the UK, age and social class predict whether people participate in streaming at all.

Streaming has also greatly affected the music industry and its relationship with piracy. For example, Aguiar and Waldfogel (2018c) perform an international comparison of the effects of the growth in streaming services on revenues, accounting for sales displacement and piracy, and find that streaming reduces the latter.

This blog has provided an overview of the controversial relationship between IPRs, copyright in particular, and creative trade: from their role in trade modelling and welfare analysis, to the controversial effects of international trade agreements, parallel trade and piracy. We have also reviewed the scant empirical evidence on these issues.

Technological advances and digitalisation mean that these industries are going to become even more international in the future, with challenges and opportunities for national and international regulation (albeit not all creative sectors are affected to the same extent). International trade policy remains a controversial topic for the CIs, especially in terms of the balance between efficiency and fairness in a two-bloc system made of a global north and a global south.

While the WTO TRIPS Agreement established multilateral rules on “trade related aspects of intellectual property”, purporting to reduce distortions and impediments to trade, the claim that “this posits a positive-sum relation between producers and users” (Taubman 2019) remains contested. The series of evidence reviews under the 21 for 21 project does indeed reveal what is missing.

Policymakers are trying to catch up both in multilateral settings, such as the WTO system, and bilaterally, in the renegotiation of trade agreements. While ridden by challenges, these represent the opportunity to aim for a more efficient – and yet more balanced – global system for the CIs, one where the rights of users, creators, producers, distributors, and platforms, are adequately balanced, granting opportunities for both the North and the South of the world.

Understanding how this can be achieved requires further research in a fast-moving environment. In particular, renegotiating trade agreements would benefit from further empirical evidence on which specific elements of trade agreements affect creative trade, including the role of copyright, culture-specific provisions, digitalisation, data exchange, e-commerce. Also, creating a fair international system requires more knowledge, beyond the anecdotal evidence, about the current distribution and determinants of international royalty flows and the role of digitalisation and platforms in this context.

This blog is partly adapted from Fazio, G. (2021) A Review of Creative Trade in the Economics Literature, available here.

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