Pirates of the Caribbean

Hollywood is abuzz with reports that the tiny islands of Antigua and Barbuda may begin operating their own national versions of the Pirate Bay, where individuals can cheaply, or even freely, download the latest films and TV shows. The clincher: this will all be legal.

How is that possible? Because the World Trade Organization says so. Let us explain.

When the U.S. helped create the WTO back in the early 1990s, it had a few main goals. One was to create a serious world trade court. The WTO has a lot of complex rules on trade, and the idea was to build a legal system that could neutrally adjudicate allegations of rule breaking. And it would work by allowing the winning country to retaliate against the loser by “suspending obligations.”

In other words, if the U.S. takes Japan to trade court and wins, Japan has to stop doing whatever bad thing it was doing. And if it doesn’t, the U.S. gets to retaliate–by, for example, increasing tariffs on Japanese goods up to the amount of harm Japan was causing.

The other big thing the U.S. wanted was better protection of intellectual property. If a member state (and basically every significant economy is a member) wasn’t protecting IP adequately, the U.S. could use the same dispute system to attack that problem. The resulting agreement, known as TRIPs (for “Trade-Related Aspects of Intellectual Property”) was big news that forced a lot of states to upgrade their IP laws.

So how is that Antigua and Barbuda get to play Napster? While TRIPs has generally worked as intended (at least for the U.S.), one of the problems with the dispute settlement system is that it works great when big states win. But how can a small state effectively retaliate against a big state? “Suspending obligations” by raising tariffs is, as any economist will tell you, like shooting yourself in the foot – higher tariffs just raise the prices of goods and take money out of consumers’ wallets. But the problem is much worse when you are a tiny economy and you are trying to inflict pain on a giant one. The tariffs imposed by a country with a small economy don’t cover enough trade to sting, so it just doesn’t work.

Back in 2007, the tiny islands prevailed in trade court against the U.S., successfully arguing that U.S. laws restricting Internet gambling violated the trade in services provisions of the WTO. But then they faced a conundrum. What could they do to punish the U.S.? Antigua’s proposed solution was to “suspend obligations” in the area of TRIPs. In other words, it would start ignoring certain copyright and patent rules.

Years of negotiations to avoid this outcome ensued. But on Monday, in Geneva, the WTO gave Antigua and Barbuda the right to start retaliating via TRIPs, to the tune of $21 million annually. Cue chaos in Hollywood.

For its part, the U.S. government called the planned withdrawal of obligations under TRIPs “theft” and “government-authorized piracy.” But the headline in Monday’s Deadline Hollywood gets at the mounting fear among media firms: “Copyright Nightmare on Horizon as WTO-Approved Legal Piracy Advances.”

Stay tuned. Because “Pirates of the Caribbean” may soon have a very different meaning.