Six Inconvenient Truths about NAFTA Renegotiations

This article is part of a series about what the renegotiation of the North American Free Trade Agreement means for the knowledge economy in Canada and for the people who turn ideas into innovations within one of the world’s largest free trade zones.
 

The renegotiation of the North American Free Trade Agreement’s (NAFTA’s) standards on patents is not good news for Canada. Any give by Canada will be costly not only to our health care system, but also to Canadian innovators.

This grim prospect is not apparent in policy makers’ reassuring declarations. The United States Trade Representative Robert Lighthizer talks about “modernizing” rules negotiated 25 years ago, when “digital trade was in its infancy.” Canadian Minister of Foreign Affairs Chrystia Freeland officially welcomes the US initiative as an opportunity to “best align NAFTA to new realities.” Like her American counterpart, she calls for a “modernized NAFTA.” Framed this way, the renegotiation of NAFTA patent provisions might sound like a mere update. And who is against updates?

However, there are structural realities that explain why Canada will be the loser on any patent concessions made through a revision to NAFTA. These are inconvenient truths, things that Canadians find unpleasant to remember. It is, nevertheless, necessary for Canadian negotiators to acknowledge these truths in order to limit the damage of a renegotiated NAFTA driven by the interests of the United States, which has just released negotiating objectives that include a 10-point plan for intellectual property. 

The first inconvenient truth is that, despite having firms with innovative ideas, Canada has a weak innovation ecosystem, leading our firms to do less well than our competitors, even taking into account our smaller economy.  This is not for a lack of trying. Canada has roughly the same number of researchers per capita as the United States and spends more on public research and development (R&D) as a percentage of its GDP than does the United States. But these efforts have not paid off in terms of the export of knowledge-based products and services. Canadians obtain globally far fewer patents per capita and export fewer high-tech goods as a percentage of total exports than the United States, or most Organisation for Economic Co-operation and Development countries for that matter. While the United States, Japan, the United Kingdom, Germany and France receive more than they pay in licensing fees and royalties, Canada has a negative balance in charges for the use of intellectual property. Simply put, Canada is a net knowledge importer. Although Canada might like to become a knowledge economy, as suggested by the federal government’s push for an innovation strategy, statistics demonstrate that it is not yet one. In the world of patent politics, Canada belongs more appropriately to the category of emerging countries than of high-income countries.

Second, Canada cannot become more innovative simply by imitating the United States’ laws and policies; in fact, the opposite is true. Innovations emerge from a complex ecosystem. This ecosystem is constructed through the interaction of several interconnected elements, not simply intellectual property. These include university research, social norms, immigration policies, venture capital, business culture, redistribution policies and public infrastructure. Because each ecosystem is unique, laws and policies that have positive effects on innovation in one country might be counterproductive in another. For this reason, Canadian patent laws should be tailored to the specificities of the Canadian economy. Transplanting US patent laws in Canada could actually destabilize the Canadian innovation ecosystem. 

Third, several Canadian innovators care more about having a strong and fair patent protection system in the United States than in Canada. The Canadian market is too small on its own to provide much incentive to invest in R&D. Canadian firms file almost three times as many patents in the United States as they do in Canada, because they know that US patents drive their business, not Canadian patents. In fact, Canadian patents — in particular the 87 percent held by foreigners — can decrease their freedom to operate.

Fourth, despite the points made above, Canadian patent law is already very generous, perhaps even too much so, for patent holders. Canadian standards for patentability — utility, non-obviousness, disclosure and enablement — are lower than in the United States, and Canada allows patents on more things. Also, Canada does not have jury trials that favour nationals over foreigners. While there are still some specific aspects of Canadian patent law that are less generous than the US law (for example, period of data exclusivity for biologics of eight years versus 12, and period of patent term extension of two years versus five), Canadian patent law remains above world norms.

This leads to the fifth hard truth: the United States will certainly push Canada to accept patent standards that are not in Canada’s best interest. As US firms own nearly four times more Canadian patents than Canadian firms do themselves, the United States has a clear interest in having Canadian patent laws be more patent-holder friendly. Each trade negotiation is another opportunity for the United States to export its desires in Canada. At the end of the 1980s, at the time of the negotiations of the Canada–United States Free Trade Agreement, the Reagan administration successfully used access to the large American market to pressure the Canadian government to extend patent protection to pharmaceutical products and restricted the possibilities for the government to provide licences to generic manufacturers. Later, with NAFTA, the United States made sure that Canada could no longer provide a more favourable treatment for pharmaceutical inventions and generic products made in Canada. This time, one could expect that the United States will ask for a 12-year data exclusivity for biologics and a five-year patent term extension to compensate patent holders for regulatory delays. These rules would not serve Canadian interests.

Last, the Canadian innovation ecosystem has benefited tremendously from NAFTA. Although NAFTA patent provisions, in themselves, did not lead to increased innovation, the Canadian innovation ecosystem as a whole benefited from a freer access to the US market. In fact, trade liberalization and investment in Canada arguably did more to create a fertile environment for Canadian innovation than any other public policy. Acceding to previous US requests regarding patent protection was a fair price to pay for this liberalization. However, Canada never had to make concessions to keep or sustain its access to the US economy. In the past, it was not the fear of losing an advantage but the prospect of gaining new ones that motivated Canadian patent concessions. This time, it is unclear what Canada could gain.

For a revised NAFTA to create favourable conditions for innovation, it would have to address policies other than intellectual property. The renegotiation of Chapter 11 on investment and Chapter 16 on mobility could be undertaken with innovation objectives in mind. Canada could also propose new chapters on issue areas that were not properly addressed in the original 1992 agreement, such as joint public research policy, cooperation on military and defence research, incentives for university collaboration and e-commerce. Otherwise, merely “updating” NAFTA to the level of patent protection found in more recent US trade agreements would be a net loss for Canada.