How Poorly Drafted Trade Agreements Produce Bad Law and Undermine Internet Investment

by Matt Schruers on September 27, 2012

DisCo frequently criticizes government intervention, but this is not to say government intervention is inherently problematic.  When intervention is the product of incumbents manipulating the political process to shackle disruptive new entrants with regulatory constraints, then intervention disserves the public interest.  Government action can greatly serve the public interest, however, such as by lowering barriers to cross-border trade with free trade agreements.  Free trade agreements have great potential to unleash new competition in markets, producing better products and services at lower prices.  This assumes, however, that these agreements actually lower barriers to trade.

Unfortunately, due to misaligned priorities and poor drafting, the U.S. Government’s framework for free trade agreements has neglected aspects of U.S. law that are instrumental to a flourishing Internet sector, and in doing so has erected new barriers to tech exports.

The clearest example of this, highlighted today by Infojustice and Techdirt, is a copyright bill that passed the Panamanian legislature yesterday.  The bill is the result of efforts to implement Panama’s Trade Promotion Agreement reached with the United States last year.   In enacting this bill, the Panamanian legislature apparently swept away a more flexible standard, more consistent with 17 U.S.C. 107 in the U.S. Copyright Act, and replaced it with a narrow list of exceptions designed to be interpreted “strictly”, and leaving no room for new technological innovation.

In the U.S., the fair use standard has ensured balance in copyright law, encouraging in particular the development of innovative online products and services that involve transformative uses of copyrighted information.  Broadly across the economy, industries depending upon the various balancing provisions in U.S. copyright law add $2.2 trillion in value (PDF) to the U.S. economy.  (It is worth noting that the Supreme Court recently held that our fair use statute is constitutionally necessary to prevent government enforcement of copyright from unduly restricting the First Amendment right of free speech.)

In addition, the Panamanian act narrowly confines some of its exceptions to “uso personal” – personal use – which is defined as “utilización… exclusivamente para el uso individual de una persona natural, en casos como la investigación y el esparcimiento personal.” (Artículo 1(54)).  Roughly translated, this means ‘utilization… exclusively for the individual use of a natural person, in cases like research and personal enjoyment.’  By adopting a definition of “personal use” that is limited to natural persons and then limiting some exceptions strictly to personal use (artículos 26, 28, 68), the law denies some of its liability protections to businesses, as they are not ‘natural persons.’  This is important for Internet users, who maybe themselves be natural persons, but often depend upon businesses when they are exercising their rights.  Consider: if you have the right to record a television program, but no business can manufacture a digital video recorder, (or a cassette recorder, for that matter) then your right isn’t worth much.

The trend of expanding liability and constraining the balancing provisions of copyright law also manifested recently in Colombia. Also responding to a recently enacted Free Trade Agreement with the United States, Colombia hurriedly passed a controversial copyright revision this spring which similarly left little flexibility for technology innovation.  The upshot of the copyright law revisions in these countries is to erode certainty and discourage investment by online services, e-commerce platforms, device manufacturers, and ISPs.  This is not lowering barriers to market access.

It would be a mistake to understand this as solely an issue affecting U.S. exports, however.  In fact, it is a more serious issue for our trading partners, because while U.S. firms may look to more fertile export markets, Colombian and Panamanian firms must survive at home before they can reasonably expand abroad.  In 2010, I presented a paper at the National Diet Library in Tokyo which noted research on a curious natural experiment that had happened in the Pacific Rim.  Why were U.S. companies dominating Japanese search, but not Korean search?  U.S. search engines dominated the Japanese markets in part because Japanese search engines could not flourish under the inflexible Japanese copyright law at the time.   The result was that U.S. search providers focused abroad on other, more hospitable markets, and claimed Japanese market share as hobbled domestic competitors withered away.  In Korea, by contrast, domestic search companies were dominating their American competitors, as they were never throttled with poorly conceived copyright regulations the way their Japanese counterparts had been.  Both countries have recently amended copyright laws to accommodate technological advancement, with Korea in particular adopting a robust, fair-use-like provision.  Only Korea, however, presently has a strong domestic search industry to take advantage of recent copyright reforms.

As the Panamanian and Colombian copyright overhauls follow a path similar to the Japanese experiment, we can expect their domestic Internet sectors to similarly underperform.  In the short and medium term, foreign firms will underinvest in these markets, and yet local firms will also wither due to the lack of flexibility in the law.  In this sense, poorly-drafted free trade agreements (and poor implementation of them) are a “lose-lose” for both parties to the pact, as it cripples domestic industry and simultaneously discourages market entry by U.S. firms.  It is a bad deal that makes the pie smaller.

 

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