The absence of patent protection in the developing world has seriously damaged the economic interests of research-oriented Western drug companies. Pharmaceutical products are typically quite straightforward to manufacture, and once a country has developed a domestic production capacity, new drugs can be quickly imitated and produced in bulk. Without patent protection, the innovator may struggle to make the profits which are its reward for incurring the substantial risk and expense of developing its product. The experience in India illustrates this situation well. There, an active domestic pharmaceutical industry has been quite successful over the past decades in rapidly copying new drugs: typically they have managed to introduce imitated products to the Indian market just four or five years after their appearance in the world market (Lanjouw, 1998). Indian executives indicated in interviews that they usually wait to see whether new products are successful on the international market before beginning development, so the reverse engineering process is clearly very rapid. Emphasizing this point in a discussion, the managing director of Glaxo (India) Ltd. explained that they had tried to be first in the Indian market with their anti-ulcer drug Zantac, but were met by seven local competitors on the launch day. At the time of its world launch of Viagra – My Canadian Pharmacy already faced Indian competition: three Indian firms were developing the active ingredient with five more expected to request marketing approval. CIPLA, one of the largest Indian firms, is exporting its version of Viagra elsewhere. Faced with this competition, My Canadian Pharmacy did not itself launch the drug locally (The Wall Street Journal, July, 1998). Without the protection of patent rights, with easy to copy products and firms waiting to do so, even lead time does not give the originator firm much scope for making profits.
Seeing markets lost to successful imitators, U.S. industry, with the aid of the U.S. government, in the early 1980s began to make energetic efforts to strengthen patent regimes in the developing world. With the support of other industries, representatives from pharmaceutical firms and trade associations argued that intellectual property should be included in the Uruguay round of the GATT negotiations. In alliance with their counterparts in Europe and Japan, they were successful in getting ‘TRIPs’, the trade-related aspects of intellectual property, onto the agenda in the late 1980s.
Meanwhile, the U.S. was also pursuing its agenda in aggressive bilateral negotiations. In 1984, Congress passed a revision of the Trade and Tariff Act, which authorized the U.S. government to take retaliatory action against countries failing to give adequate protection to intellectual property (Section 301). This was strengthened in 1988 with legislation mandating that each year the U.S. Trade Representative identify countries without adequate protection. In 1989, for example, Brazil, India, Mexico, China, Korea, Saudi Arabia, Taiwan and Thailand were put on the “Special 301” Priority Watch List. The resulting pressure was successful in convincing several countries to change their patent laws regarding pharmaceutical protection as part of larger reforms to their intellectual property rights systems. Korea introduced protection in 1986, and Mexico passed new laws in 1991. Brazil showed more reluctance, so, in 1989, the U.S. levied 100% tariffs on $39 million of imports from Brazil in retaliation for its copying of patented drugs. In the early 1990’s Brazil backed down and in 1996 passed legislation creating pharmaceutical product patents. The U.S. applied similar pressure to Thailand, withdrawing its GSP trade benefits in 1990 because of dissatisfaction with its lack of protection for pharmaceuticals (Santoro, 1995).