Patent protection through discriminatory exclusion of imports

Abstract

Section 337 of the U.S. Tariff Act empowers the ITC to order the exclusion of imported products found to infringe a U.S. intellectual property right. The EC and other countries have charged that section 337 and its procedures create discrimination, by offering stronger protection in the U.S. market against infringement by foreign products than by domestic. The EC's policy towards gray market imports has a similar discriminatory flavor. This paper analyzes the economic costs to the home country implicit in such discriminatory protection of intellectual property. Excluding infringing imports when their true costs are lower results in the domestic market being served by higher cost production. Moreover, tolerating infringement by domestic products dilutes the gains accruing to a patent holder when imports are excluded. The upshot is that for plausible assumptions about cost differences internationally and about the scope for domestic infringement, discriminatory exclusion of imports can be an expensive way to protect intellectual property. Other mechanisms can reward innovators in a more efficient manner.