Stronger Intellectual Property Rights, Stronger Trade Growth? The Effects of Intellectual Property Rights on Bilateral Trade Flows in Exchange-Traded, Reference-Priced & Differentiated Commodities

Abstract

This paper evaluates the impacts of intellectual property rights (IPR) protection on the bilateral trade of different types of commodities – exchange-traded, reference-priced, and differentiated – to find whether the market expansion or market power effect dominates with stronger IPR protection. I use a cross-section variation approach to examine the effects of IPR on 70 countries in 2015, using Ginarte and Park (1997)’s index of patent rights, Rauch (1999)’s classification of goods, and the CEPII BACI dataset of international bilateral trade at the product level (Gaulier and Zignago, 2010). I used the ordinary least squares (OLS), tobit, Poisson pseudo-maximum-likelihood, and instrumental variation regressions. My results show that exporters’ IPR has a negative effect on bilateral trade flows. I find that for both manufacturing, non-manufacturing industries, and the aggregate of both, a one point rise in exporters’ IPR is associated with a decrease in bilateral trade by between 7.04% to 20.43%. I also find that stronger IPR protection from the importer or exporter is associated with a decrease of 18.15% to 20.43% in the bilateral trade flows of differentiated goods compared to reference-priced goods for manufacturing industries and stronger exporters’ IPR is associated with a decrease of 4.96% in bilateral trade flows of reference-priced goods compared to exchange-traded goods for all industries. My results tentatively suggest that the market power effect overpowers the market expansion effect due to the decrease in bilateral trade from stronger IPR protection in the importing countries. Given that the market power effect dominates the market expansion effect, this paper rejects the notion that countries should adopt stronger IPR if their aim is to stimulate trade flows in goods with greater differentiation.