The Netherlands abolished patents from 1869 to 1912, Switzerland refused to patent chemicals until 1907, and the United States denied foreigners patents and copyrights for decades. They did so while they were learning. The essay puts the ladder test to TRIPS, which forbids today's developing countries the same choice.
by Changian Development Economics, Simulacrum · Universitas Scholarium
In 1891 Gerard Philips and his father Frederik opened a works in Eindhoven to make incandescent light bulbs. The light bulb was one of the most heavily patented objects of its age. Lawyers on two continents had fought over its filaments and its vacuum for a decade. In the Netherlands, though, there was no patent law for the Philipses to consult, because there had been none since 1869. The company made bulbs for fourteen years before it was granted a patent of its own. That first patent covered a 1905 improvement by Gerard Philips that made the bulb last longer, and it was granted in Germany, because the Netherlands still had no office to grant it.
The company's own museum tells this story, and tells it without embarrassment. There is nothing to be embarrassed about. The Dutch parliament had repealed the patent law, and the Philips works kept the law as it stood. What is odd is how rarely the story comes up when a rich country's trade negotiators sit across the table from a poor country's and explain that strong intellectual property rights are a precondition of development.
Pick any development prescription and put one question to it before arguing about it: did the country recommending this policy follow it when it was at a comparable stage? For tariffs the answer has been set out at length, and it is no. Britain protected its manufactures until they had nothing left to fear, and only then discovered the virtues of free trade. For most of the nineteenth century the United States was, in the phrase Ha-Joon Chang uses in Kicking Away the Ladder, "the most ardent practitioner and the intellectual home of protectionism." The tariff case is well known by now, even if it is not yet much believed.
I want to put the question to a policy that looks harder to test, because it arrives dressed as law and not as economics. The prescription is that a developing country must grant and enforce patents, copyrights and trademarks to the standard of the most advanced economies, and must do so now. Since 1995 this has been a treaty obligation of every member of the World Trade Organization, under the Agreement on Trade-Related Aspects of Intellectual Property Rights, known as TRIPS. The claim behind it is that without such protection nobody will invent, nobody will invest, and technology will not flow.
So I open the record.
The Netherlands had a patent law from 1817. In the half-century that followed, the Dutch patent office mostly served foreigners. Between 1851 and 1865 foreigners received 88.6 per cent of the patents granted in the Netherlands. A patent law under those conditions is not a reward to Dutch inventors. It gives foreign firms a legal monopoly in the Dutch market, and the state enforces it.
In 1869 parliament repealed the law. The reasoning of the time matters. The anti-patent movement of the 1850s and 1860s did not come from protectionists. It came from the free traders. Fritz Machlup and Edith Penrose, in their 1950 study of the nineteenth-century patent controversy, placed the rise of the anti-patent movement in the years 1850 to 1873 and linked it to the high tide of free trade. The case was simple and consistent. A patent is a monopoly granted by the state. A free trader who opposes the monopoly of a protected industry has no principled reason to love the monopoly of a protected invention. In the Dutch debates the patent was also called undemocratic, a privilege of the kind the new liberal state was supposed to be sweeping away.
The Netherlands then went without patents for forty-three years. These were the years in which the modern Dutch industrial economy took shape: the Philips lamp works, and the margarine makers of Oss, whose firms later became half of Unilever. Margarine was a French invention, and its inventor, Hippolyte Mège-Mouriès, patented it in Britain in 1869. In 1871 the Jurgens firm of Oss bought his rights. Van den Bergh, a rival butter house in the same town, then began making margarine too without buying anything from anyone. It did not have to, because no Dutch law asked it to.
One detail of the interval deserves a place in every textbook on the subject. In 1883 the Netherlands was among the original signatories of the Paris Convention for the Protection of Industrial Property, the founding treaty of the international patent system. It signed while it had no patent law at all. The Convention asked each member to treat foreigners as it treated its own nationals. The Dutch did so, and gave foreigners exactly the patent protection they gave themselves, which was none.
A new patent law came in 1912. By then the Netherlands was an industrial country with firms that had things to protect abroad. The Dutch brought patents back when that suited them, which was after the climbing was done.
Switzerland is the better case, because its industries were exactly the ones that patents are said to create: chemicals, pharmaceuticals, precision engineering.
For most of the nineteenth century Switzerland had no federal patent law. The first one, in 1888, was a curious object. It protected only inventions that could be represented by a mechanical model. A new watch escapement could be patented. A new chemical process could not, since a process cannot be modelled in brass. It is hard to read that requirement as an accident of drafting. Switzerland already had a watchmaking industry that could now protect itself against imitators. It also had a young chemical industry in Basel that lived largely by working out and making dyes that German firms had invented and patented in Germany. The model requirement protected the first industry and left the second free to keep copying.
The chemical industry of Basel grew up in that gap. The firms whose descendants are among the largest pharmaceutical companies in the world spent their infancy in a legal system that did not recognise the German inventions they were learning from.
The gap closed in 1907, when a new law dropped the mechanical-model requirement and extended patent protection to chemical inventions. The pressure came largely from Germany. The German government had pressed the point in the tariff negotiations of 1894, on behalf of a chemical industry whose inventions Basel had been free to make. Switzerland conceded when the concession had become cheap. By 1907 Basel was an innovator in its own right and had patents of its own to defend.
It is worth noticing the shape of that episode. An advanced country uses the threat of trade consequences to force a follower to adopt the advanced country's intellectual property standard. That is not a modern invention. TRIPS did not devise the method. It made the method permanent and universal.
The United States is the case that ought to settle the matter, because since the 1980s the United States has been the leading evangelist of strong intellectual property rights. Its trade representative publishes an annual Special 301 Report ranking other countries by how badly they protect American patents and copyrights. What did the United States do when it was the follower?
On patents, it discriminated. The patent statutes of 1793, 1800 and 1832 restricted patents to American citizens, or to residents who declared that they intended to become citizens. A foreign inventor had no American patent to apply for. When the 1836 Patent Act opened the system to foreigners, it charged them for it. A foreigner paid three hundred dollars for a patent, and a British subject paid five hundred. The citizen's fee was a fraction of that. The British surcharge was not arbitrary. Britain was the technological leader, and the country whose inventions Americans most wanted to use was the one whose inventors were charged most to protect them.
On copyright, the record is plainer still. The first federal copyright act, of 1790, said outright that nothing in it prohibited the importing or reprinting of books by foreign authors. For a century American publishers reprinted British books without paying their authors, and sold them cheaply to a very large reading public. Charles Dickens toured the United States in 1842 and complained about it in public, which won him few friends in the American press. British authors petitioned Congress from 1837 onward. Congress was unmoved for fifty-four years.
When the United States finally extended copyright to foreigners, in the International Copyright Act of 1891, it attached a condition. The Manufacturing Clause required that a foreign book, to be protected in America, be printed from type set in the United States. A British novelist could at last have an American copyright, provided an American printer was paid to earn it. The clause was the price of the printers' support for the bill. It was an infant-industry measure written into copyright law.
The United States did not join the Berne Convention, the main international copyright treaty, until 1989. By then it was the world's leading exporter of films, music, books and software, and Berne membership had become a way to collect.
Put the three cases together and the pattern is the one the tariff history shows.
At the stage when each of these countries was learning technology from those ahead of it, it granted weak intellectual property rights, or none, or rights that discriminated against foreigners. The Netherlands abolished patents altogether. Switzerland exempted exactly the industry it most needed to grow. The United States refused foreigners patents, then charged them several times the domestic price, and for a century let its publishers reprint foreign authors for nothing.
Each of them strengthened its regime when, and roughly because, it had become a producer of technology and not only a user of it. The strengthening followed development. It did not cause it. This is the general rule about institutions that are called preconditions of growth. Look at when the now-rich countries actually adopted them, and they turn out to be consequences of growth, adopted by countries that had already become rich enough to want them.
And each of them, once over the top, pressed the same standard on those still climbing. Germany pressed Switzerland in the 1890s and 1900s. The United States and Europe pressed the whole world in the Uruguay Round, and the result was signed at Marrakesh in 1994.
This is where the prescription needs its beneficiary named. The purpose is not to accuse anyone. Nobody is surprised that a firm which owns a patent prefers the patent enforced. The point is that the argument for TRIPS was presented as an argument about the development of poor countries, and it should be judged as one. Judged that way, the question is who receives the rent. Royalties and licence fees for intellectual property flow overwhelmingly to a short list of rich countries, led by the United States. For most developing countries the balance runs the other way, and they are net payers. A developing country that raises its patent protection to the TRIPS standard does not mainly create an incentive for its own inventors, who are few and hold few patents. It mainly raises the price it pays for other people's inventions, and it closes the one route by which every earlier follower learned: imitation, reverse engineering and adaptation, carried out legally at home.
There is one modern case that ran the nineteenth-century experiment almost in the laboratory, and it is the case TRIPS was built to end.
In 1970 India passed a Patents Act that, for chemicals, food and drugs, allowed patents only on processes and not on products. A foreign company could patent its method of making a drug. It could not patent the molecule. An Indian firm that found another way to make the same molecule was free to sell it. This is very close to the Swiss position before 1907, arrived at by a different route.
Indian chemists did what the chemists of Basel had done. They reverse-engineered, found new routes, and sold the result cheaply. Over the next three decades India built one of the largest generic pharmaceutical industries in the world. Its low-cost medicines were exported to much of the developing world, including the antiretroviral drugs that, from around 2000, brought the price of treating HIV down to a fraction of the price charged by the patent holders.
TRIPS allowed developing countries a transition period. For countries that had not given product patents in a field of technology, such as India in pharmaceuticals, the deadline was the start of 2005. India met it. The Patents (Amendment) Act of 2005 brought product patents to pharmaceuticals, food and chemicals. The route by which the Indian industry had grown was closed to the next country that might have tried it.
It is fair to note what India kept. Indian law and Indian courts have since used every flexibility the agreement allows. There is a strict test of what counts as a genuine new invention, and there are provisions for compulsory licences. Those flexibilities are real, and they were fought for. But they are exceptions carved out of a standard. The Dutch in 1869 and the Swiss before 1907 did not need exceptions. They were free to set the standard themselves.
How the standard is held in place shows what it is for.
In 1997 South Africa amended its medicines law to allow parallel importation, generic substitution and some control over prices. The country was entering an HIV epidemic of very great size, and patented antiretrovirals were priced beyond the reach of almost everyone who needed them. Thirty-nine pharmaceutical companies went to court to block the law. They argued, among other things, that it violated South Africa's obligations under TRIPS. The case dragged on for three years. It ended on 19 April 2001, when the companies withdrew it unconditionally in the face of a public reaction that had turned against them around the world.
Seven months later the WTO ministers meeting at Doha adopted a declaration affirming that TRIPS "can and should be interpreted and implemented in a manner supportive of WTO members' right to protect public health." It is a remarkable sentence to have to write down. It was needed because the agreement had been read, by the parties with most at stake, as saying otherwise.
Now apply the test. When the Netherlands wanted margarine it did not need a declaration from France confirming its right to feed its people. When Basel wanted to make aniline dyes it did not need permission from Berlin. When American publishers wanted to print Dickens they did not seek a waiver from London. What the followers of the nineteenth century took as a matter of course, the followers of the twenty-first must request, justify and defend in litigation.
The strongest reply to all of this is the reply always made to the tariff history: times have changed. Today's technologies are costlier to develop, the argument goes. Research spending on a new drug runs into the billions. Without worldwide patent protection nobody will pay for the next generation of medicines. A nineteenth-century dye was cheap to invent, and a modern biologic is not.
There is something in this, and it deserves a proper answer, not a slogan. Consider, though, what the argument actually requires. It requires that the protection granted in poor countries make a material difference to the incentive to invent. The markets of the poorest countries are a small share of any global drug company's revenue. The research incentive is set by the markets of North America, Europe and Japan, which were protected long before TRIPS existed. Extending patents to a country whose people could never have paid the patented price does not add to the incentive to invent. It adds only a legal barrier to the generic that those people could have afforded. The incentive argument is strongest exactly where TRIPS matters least, and weakest where it bites hardest.
The second half of the objection is about technology transfer. Strong patents, it is said, give foreign firms the confidence to license and invest, and so bring technology in. Sometimes they do. But the historical record points the other way: at the learning stage, technology moved into the Netherlands, Switzerland and the United States mostly through imitation that the patent holder had no power to stop. It has to be shown, not assumed, that a patent monopoly held by a foreign firm transfers more technology to a follower than that follower's own engineers could have absorbed by taking the product apart. The historical followers did not wait to be shown. They took it apart.
There is a wider record too, and it does not favour the orthodoxy. In the decades when developing countries were free to use tariffs, subsidies, state direction and weak intellectual property as they chose, from 1960 to 1980, their income per head grew at about three per cent a year. In the two decades from 1980, when the orthodoxy was pressed on them through structural adjustment and then written into the WTO, growth fell to about one per cent. Leave out India and China, which followed the prescriptions least faithfully, and it is lower still. Intellectual property is only one strand of that package, and nobody should claim it explains the whole of the slowdown. But the package as a whole was sold as the road to faster growth, and on its own terms it failed.
None of this is an argument against patents as such. A country that has become a producer of technology may well find that a strong patent system serves it. Almost every rich country eventually decided that, and many of them were right. It is not an argument that imitation is a virtue, or that inventors should not be paid. The argument is narrower, and it is historical. The now-rich countries decided the timing and strength of their own intellectual property regimes to suit their own stage of development. They kept patents weak or absent while they were learning, and strengthened them once they were teaching. A development policy that forbids today's followers the same choice is a ladder being kicked away.
Friedrich List, who had lived for some years in the United States and watched American protection at work, described the device in 1841: "It is a very common clever device that when anyone has attained the summit of greatness, he kicks away the ladder by which he has climbed up, in order to deprive others of the means of climbing up after him." List was writing about tariffs. He could have been writing about the Patents (Amendment) Act of 2005.
The Philips museum in Eindhoven tells the story of the company's first patent, and the patent is a German one. The museum might set beside it the Dutch statute of 1869 that abolished patents, since the German patent exists because of that statute. A Dutch firm took its first patent from the German patent office because at home there was no patent office to go to. Nobody then called that piracy. It was simply the law of a country that was still learning.
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Changian Development Economics, Simulacrum · Universitas Scholarium · universitas-scholarium.org
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