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Are Governments Economically Stupid in Failing to Suspend Patent Protection for Vaccines?

By Arthur MacEwan | July/August 2021

Dear Dr. Dollar:

A recent study from the International Chamber of Commerce (ICC) showed that the rich countries’ failure to support worldwide vaccinations against Covid-19 is likely to do severe harm to their own economies. Based on the study, Oxfam commented: “The U.S., U.K., Germany, France, Japan, and Italy together could lose as much as $2.3 trillion in GDP this year unless they stop fighting on behalf of a handful of big drug companies to retain the intellectual property of the vaccine.” And, Oxfam continues, “The United States could lose up to $2,700 per person in household spending in 2021” due to the global economic impacts of highly unequal vaccine distribution. Moral issues aside, how can the governments of rich countries act in such a seemingly stupid manner, doing such harm to their own economies? —Katharine Rylaarsdam, Baltimore, Md.

The immediate answer to this question is that a set of very powerful firms owe their monopolistic positions and thus high profits to the protection of their patents and copyrights. These include the pharmaceutical firms, information technology firms, and many others.

Not only have they been able to exercise their power to preserve patent and copyright laws—i.e., preserve their monopolies and profits—but they have been able to extend these laws internationally and increase the number of years that their patents and copyrights remain in force. Indeed, on the international level, the protection of trade-related aspects of international property rights (TRIPS) has been a major part of so-called “free trade” agreements —with representatives of the firms writing relevant parts of these agreements. (Don’t miss the irony of “free trade” agreements being designed to protect monopolies.)

The close relationship between pharmaceuticals and government policy derives in part from their industry being one of the largest in terms of lobbying expenditures. Also, there is the revolving door between the industry and the government, illustrated by the activities of Sally Susman, a top officer at Pfizer. In the 1990s, Susman worked for the Senate Finance Committee and then the Department of Commerce, where she focused on international trade issues. In the more recent decades, she has been a major fundraiser for Barack Obama and Joe Biden, and for other Democratic candidates—and has become a leader of lobbying for her firm and the pharmaceutical industry.

Just as important as the power that the firms wield through money and connections, the protection of the firms’ profits has long been enhanced by the widespread belief that patents and copyrights are an inducement to technological progress, which benefits society at large over the long run. (More on this below.) Raw power, buttressed by this widespread belief, has made government reluctant to act against these high-riding firms—even when the economy in general might suffer immediate damage. It may be wrong and venal, but it’s not stupid.

Covid-19 and the Current Context

There is, however, good news—since the study from the ICC and the Oxfam press release were issued earlier this year, the U.S. government has agreed to a temporary suspension of patent restrictions that could make Covid-19 vaccinations more widely available in low-income countries. The bad news is that this step by the U.S. government, however welcome, is not nearly enough. The European Union and some other high-income countries are not going along with the suspension of patent restrictions, and, according to the rules of the World Trade Organization (WTO)—the enforcer of those “free trade” agreements—the suspension would require unanimous consent. Further, lifting patent restrictions would be effective only if the companies currently producing the vaccines share their technological know-how with producers in low-income countries.

Although the WTO director-general has expressed the hope of getting a favorable consensus by December, as the saying goes, justice delayed is justice denied—even if a December consensus is obtained, millions will die due to the delay in getting the vaccines to people in low-income countries.

Yet, the delay involves more than deaths. While the humanitarian impact is severe, there is also the economic impact mentioned in the ICC study, and not just in the counties where Covid-19 continues to be rampant. Globalization has greatly increased the economic ties among countries—traditional exports, imports, and investments, often involving complex supply chains. Businesses in high-income countries have become increasingly dependent on the well-being of the entire global economy. The production of the vaccines provides an example. According to The Economist, “Pfizer’s vaccine requires 280 inputs from suppliers in 19 countries.”

The study from the ICC examines the network of economic ties among countries and estimates how the lack of vaccinations in many parts of the world will impact the entire system. The study is dependent on many assumptions, and the authors present several alternative scenarios, each based on different assumptions. It is clear, however, that major economic costs to the rich countries could be substantial, even when the virus is effectively limited within their own borders.

And, of course, the spread of the pandemic in countries with low levels of vaccination could lead to the generation of virus variants that are not readily controlled by existing vaccines. These variants would surely spread to the rich countries, causing a new surge with much more humanitarian and economic impacts. The ICC study does not consider this type of event.

Profits and Rationalizations

The protection of intellectual property rights through patents, whatever its impact on GDP in the United States, appears to work well for the pharmaceutical companies. On average, firms in the pharmaceutical industry have profit rates (return on invested capital) at least 50% higher than the average of (nonfinancial) publicly traded firms across the economy.

The suspension of patent protections, even a temporary suspension of a particular patent, is a threat to the pharmaceuticals’ profits. The firms have operated under “rules of the game” that have been very favorable. A change of those rules opens the door to an undermining of their position. Suspension of a patent protection is, from their perspective, a “slippery slope,” which can have major—for them negative—consequences.

But, of course, the pharmaceutical companies and their supporters don’t argue their position by making a direct appeal to maintain their monopolistic profits. Instead, they claim that the protection of intellectual property rights (their patents) is necessary to create an incentive for technological progress, a payment for the risks they take in developing new medicines. The firms, the argument goes, will not undertake the risks of developing new drugs (vaccines and others) unless they can count on substantial profits when they succeed. A spokesperson for the German government, which has been opposing the suspension of the vaccine patents, stated, “The protection of intellectual property is a source of innovation and must remain so in the future.”

Reality

Reality, however, tends not to support this argument. First of all, the development of medicines has long depended on heavy expenditures by the government, providing billions of dollars over the years supporting basic research through the National Institute of Health, the National Science Foundation, and other government agencies. Years of government-funded research (mRNA research) led to the basis of the Covid-19 vaccine technology. The pharmaceuticals built on this research to create the vaccines and then claimed the patents.

Further, there was the several billion dollars that the U.S. government provided directly to pharmaceuticals for the development of Covid-19 vaccines, under Operation Warp Speed. A listing of what the companies received is provided in the sidebar. This support, along with the long-term government funding of basic research, greatly reduced (if it did not eliminate) the companies’ risks. Also, there is a basis to argue that the extension and protection of intellectual property rights actually inhibits innovation. New ideas are built on old ideas, but, if old ideas are patented and not shared, they cannot be built on.

Microsoft’s development, for example, depended on building on old ideas, but then it controlled its new ideas, limiting further innovation. There are many historical cases of innovation without patents. The economic historian David Landes relates how medieval Europe was “one of the most inventive societies that history has known,” without patents—providing, as examples, the water wheel, eyeglasses, and the mechanical clock.

Perhaps the best argument against the sorts of protection we now have for intellectual property and for patent suspension in the current pandemic is provided by the following two quotations.

When asked who held the patent for the polio vaccine that he had developed, Jonas Salk replied: “Well, the people, I would say. There is no patent. Could you patent the sun?”

The most famous inventor in U.S. history, Benjamin Franklin, declined to obtain patents for his various devices, offering this explanation in his autobiography: “That as we enjoy great Advantages from the Inventions of Others, we should be glad of an Opportunity to serve others by any Invention of ours, and this we should do freely and generously.”

ARTHUR MACEWAN is professor emeritus at UMass Boston and a Dollars & Sense Associate.

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