8. Conclusions - Implications for Economy
The objective of analysing the motor vehicle, book and CD markets is to provide insights into the likely impacts of the parallel importing restriction, or any changes to it, for the economy as a whole. In each of the individual markets we found that there are both benefits and detriments associated with a parallel importing restriction. The net welfare outcome for the individual markets depends on the characteristics of both the product and the market, although in general we are of the view that it would require a fairly unusual combination of factors to generate a welfare loss from the lifting of the restriction.
Motor Vehicles
In the motor vehicle market we saw how complicated it is to measure and quantify the types of changes that are likely to occur in a market as a result of lifting the parallel import restriction. The relative changes in the prices of new and used cars were consistent with the hypothesis that consumers received a welfare increase from the changes. This is backed up by the reluctance of the local manufacturing industry to stop the inflow of used imports for fear of a consumer backlash. Consumers believe they have benefited a great deal from the introduction of used imported vehicles. There have been problems and there have been distributional consequences, but overall consumers believe the net gains have been positive. Safety and quality issues were important in the motor vehicle markets, but safety does not appear to be the main motivation behind the current actions by the local manufacturers. They have focused on nearly new cars that are impacting negatively on their new car sales. This would be a concern if we expected the reduced revenues that would result from parallel importers undercutting local agents' margins would reduce the amount of investment these companies make in new motor vehicle design. As New Zealand is such a small part of the world market, we do not expect this to occur. It is also unlikely that the domestic agents would abandon the New Zealand market as a result.
Books
In the book market, we found it difficult to identify a significant welfare gain for New Zealand from the parallel importing restriction. This is, in part, because books do not represent a sizable share of consumers' spending, making any change appear marginal. The price comparison showed that we are paying more for our books than consumers in Australia and the United States. Our recommended retail prices were about the same as those paid in the United Kingdom. Some caution must be used when comparing retail prices between countries but it does tend to suggest that even at retail prices, there are potential arbitrage possibilities. However, the largest arbitrage possibilities were at the wholesale. All of the retailers and consumers that we interviewed believed they could access at least some titles from an overseas wholesaler cheaper than they could get the same title from the New Zealand distributor. This was particularly true in the area of academic books. As with other markets, because New Zealand was such a small country, we feel it is unlikely that the marginal fall in return that is likely to result from parallel imports in this market would impact on the innovators decision to invest in future copyright works.
CDs
The CD market is similar in many respects to the book market. The issues of piracy were of more prevalence in the CD market, and these were of considerable importance. If the lifting of the parallel import restriction resulted in more pirated products and/or imports from countries that have not signed up to the international conventions, the return to the innovator could fall with the potential for impacting on future investments.
General Characteristics
Below we try to identify a set of general product and market characteristics as a guide for assessing the likely net outcome for a market.
Parallel importing is more likely to be beneficial to New Zealand in markets where:
- the New Zealand price is significantly above the price paid by consumers in other countries and that price differential cannot be explained by taxes or other market specific differences;
- the incentive to innovate will not be affected e.g. where the New Zealand market is only a small part of the world market for the good;
- there is minimal pre or after sales service required or where those services can be charged separately to consumers and/or are supplied by a range of providers.
Parallel importing is more likely to be detrimental to the welfare of New Zealand in markets where:
- there is a high set up cost involved in introducing a product to the market i.e. New Zealand firms may be less willing to buy licenses to produce or market products without the guarantee of an exclusive arrangement;
- a significant level of pre or after sales service is required and only the authorised dealer can provide those services;
- there is a threat to the innovators' incentive as a result of increased access to pirated products or non-payment of royalties;
- there are significant and relevant differences between parallel imported products and goods distributed through the traditional channel, and consumers cannot be made aware of those differences.
Copyright Application and Innovation
There are two fundamental questions that this report attempts to address:
- should the Copyright Act be used to stop parallel imports?
- is there a welfare gain to the economy from doing so?
The objective of the Copyright Act is to provide an incentive to innovate. The parallel importing provisions are socially useful if they enhance that incentive. Although the parallel importing restriction also helps to prevent pirated goods from entering the economy and helps the distributor to maintain quality and reputation through exclusivity, this is not the primary purpose of the parallel importing provisions. We believe that the marginal reduction in returns to the innovator as a result of the removal of the parallel importing restriction in New Zealand would not reduce the incentive to innovate. Other means should be used to achieve other objectives like maintaining quality of products or reducing piracy.
The difficulty in estimating a net impact on the economy as a whole, is in the diversity of products and markets covered by copyright in New Zealand. For example, the Copyright Act has been used to prevent the importation of products as diverse as Kawasaki jet skis, Rosignol skis and Remington shotguns. The list of parallel import notices registered with New Zealand Customs Service (in Appendix H) shows the diversity of goods able to be protected from parallel imports under the Copyright Act. The characteristics of each of those goods and markets are significantly different, so drawing a general conclusion is difficult.
It is most difficult to see the welfare gain resulting from a restriction on parallel imports for goods where the copyright subsists only in the label or packaging of the substantive good. As the main objective of copyright is to encourage innovation and creativity, protecting the exclusive distributor from competition from genuine goods does not appear to be a legitimate use. Many other countries including Australia, Singapore, and Malaysia have come to the same conclusion. If the concern is about the potential for damage to the reputation, there are other avenues for dealing with this.
Partial Reform
While the weight of evidence appears to be generally against the parallel importing restriction, it is possible to argue that some of the innovation-related benefits may be preserved, while the competitive detriments substantially eliminated, if the present restriction was limited in duration, say, to 3 years after the production of the good. For example, it is possible that the estimated welfare benefit from parallel imports in the car market may not change substantially if the parallel importation of used vehicles was limited to cars 3 years or older. This is because the greatest volume of imports is in the 3 years or older category.
However, our analysis does not support limited parallel importing restriction as a viable policy option:
Our analysis of the benefits of restricting parallel importing indicates that for a small economy like New Zealand, the gains from a greater incentive to innovate would be limited. To the extent that a limited restriction is preserved, its benefits would likely be negligible.
A single time limit is inappropriate given the diversity of goods covered by copyright. A 3 year limitation on cars will have a very different effect to the same limitation on books. A case by case approach, which set a time limitation with respect to the durability of the good and the substitutability between "new" and "used" would be excessively costly and impractical to implement.
A time limit on the parallel import restriction will depend critically on the legal definitions of "new" and "used". We believe there is no rational way to decide whether the time limit, whatever it may be, should be calculated from the date of manufacture of each good, the date of its first retail sale overseas, the date of model (book, CD, etc) launch, either in New Zealand or overseas, or in any other way.
The degree of substitutability between "new" and "used" may not be a smooth function of age. For many goods, there may be critical ages beyond which the used goods no longer impact on the market for new goods, or where old goods are no longer of any consumption value at all. An ad hoc limitation may lead to ad hoc and unpredictable welfare results in different markets. In some markets, the limitation may eliminate the competitive benefits of removing the parallel import restriction altogether, while in other markets it may play no role at all.
Overall, we believe that there are only two practical policy options:
- no parallel import restriction at all;
- full parallel import restriction.
The weight of evidence in this report favours the first option.
Welfare Summary
Based on the analysis of the markets studied in this report, the net impact of removing the parallel importing restriction is likely to be positive.
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