IP Theft Reduces Economic Activity

by Michael J. Horney

Free State Foundation scholars have said that strong protections of intellectual property (IP) rights encourage creativity, innovation, and economic activity. Moreover, the absence of strong protections of IP rights discourages creativity and innovation and leads to IP theft, like piracy or counterfeiting.

So, as we begin 2018, it seems appropriate to emphasize the extent of the economic losses due to theft of intellectual property. In this regard, it’s worth taking a close look at a 2017 report by Frontier Economics focusing on piracy. The report estimated that a one percentage point reduction in piracy in 2017 would lead to an additional $34 to $54 billion in economic activity for OECD countries.

In other words, strengthening IP rights protections and enforcements efforts reduces IP theft and this, in turn, promotes economic activity.

In a 2016 study, the OECD and the EU Intellectual Property Office found that, in 2013, trade in counterfeit and pirated goods accounted for as much as 2.5% of the value of international trade involving OECD countries, or $461 billion. The 2017 report by Frontier Economics, “The Economic Impacts of Counterfeiting and Piracy,” used the $461 billion figure to estimate additional findings regarding the impact of IP theft on OECD countries. Frontier Economics found that the value of domestically traded pirated and counterfeit goods was between $249 billion and $456 billion in 2013. This means the total value of pirated and counterfeit goods traded domestically and internationally among OECD countries was between $710 billion and $917 billion in 2013. These figures only include physical IP theft and, therefore, do not include online piracy, which obviously is a massive problem by itself.

IP theft negatively impacts job creation and economic growth because it discourages artists and innovators from creating new products and services. In 2013, the negative impact of counterfeiting and piracy on economic activity translated to a net loss of between 2 and 2.6 million jobs in the OECD. Frontier Economics also found that a one percentage point increase in the size of piracy reduces economic growth rates by 0.21 to 0.33 percentage points. Applying that to the nominal GDP of the OECD in 2017 means a reduction in economic activity by $34 to $54 billion.

Frontier’s 2017 report only estimates the value of physical pirated and counterfeit goods that were traded domestically or internationally among OECD countries. So when considering the additional harms created by online piracy, it is clear that IP theft is even a larger problem throughout the world than the Frontier estimates might imply.

The United States should continue to strengthen protections of IP rights and enforcement efforts to decrease the negative impact of IP theft. This would encourage additional innovation and economic activity. And reducing the size and scope of IP theft in the United States should encourage trading partners and other OECD countries to strengthen their own IP rights protections.