Innovation Arrested By The Law Of Unintended Consequences

Innovation Arrested By The Law Of Unintended Consequences

March 30, 2011
Originally published in Forbes Blog

Wrong-headed regulation often has unintended consequences.  A good example is governments’ approach to “genetically engineered” crops.

In only 15 years, modern genetic engineering technology — specifically, recombinant DNA technology, sometimes called “genetic modification” — has achieved monumental humanitarian and economic successes. Higher productivity, lower costs for inputs, economic gains to farmers and environment-friendly agronomic practices have made it the most rapidly adopted agricultural innovation in history.  Since 1996 there has been an astonishing 87-fold growth in farmers’ adoption of genetically engineered crops; in 2010 more than 15 million farmers in 29 countries cultivated 366 million acres.  In Argentina, Australia, Brazil, Canada, China, India, Paraguay, South Africa, the United States and Uruguay, more than half the cultivation of at least one major crop — corn, cotton, soybean or canola — is genetically engineered.

Many of these varieties have been around long enough that the intellectual property rights (patents and plant variety rights) in these seeds will soon expire.  And with the expiration of these IPRs, some of the unintended consequences of bad regulatory policy come into play.

In spite of their benefits and unblemished safety record, genetically engineered crops are subject to excessive, discriminatory, expensive regulation in every country of the world that grows them. Seeds cannot be sold to farmers until the seed producers gain regulatory approval, variety by variety, trait by trait. This process is time-consuming (years), effort-intensive (yards-high stacks of paper) and very costly (tens of millions of dollars per application).  The seed companies that obtain these approvals become the holders of the regulatory permits and also the owners of the data submitted to regulators.  In most countries, the regulatory approval for a genetically engineered variety is permanent, but in others, such as the nations of the European Union, the regulatory approval expires after ten years; after that, the plant variety again becomes “unapproved” unless someone reapplies for and renews the regulatory permit.  This disparity has important implications.

When farmers purchase genetically engineered seeds protected by IPRs, most often they must agree contractually not to save and replant seeds from the harvest — much as the purchaser of Microsoft’s Windows software commits not to share it with others.  After the IPRs in a biotech crop expire, however, farmers are free to save seeds to grow the crop without infringing any IPR; and seed companies may then produce and sell “generic” genetically engineered seeds without violating IPRs and probably, for anti-trust reasons, without violating any contractual licenses from the original developer.

If farmers save seeds and seed companies develop generic versions of genetically engineered seeds, it is possible that these varieties will be planted long after regulatory approvals have expired in export markets such as the EU.  That presents a conundrum: Who will have the incentive to spend the time and resources to apply for renewal?  The original holder of the regulatory approval whose IPRs have expired and who is now selling newer, more advanced competing genetically engineered seeds (which are protected by current IPRs and with regulatory approvals intact)?  Farmers or their trade associations?  The seed companies who have produced the “generic” seeds?

In spite of the fact that it will legitimatize and lengthen the life of products that compete with their later-generation seeds, the Monsanto Company has pledged to renew regulatory approvals for its off-IPR genetically engineered crops through at least 2021.  No other agribusiness company or public research institution of which we are aware has made a similar commitment.

Compounding the conundrum surrounding who will renew the regulatory approval for a genetically engineered variety are questions related to the data needed to apply for renewals.  If a renewal application requires the same voluminous data as the original application, the applicant would either need to generate that data de novo or get access to the data that belongs to the original permit-holder.  Pharmaceutical and pesticide industry models allow for compensation for proprietary data, either by law or voluntary agreement, but no such compensation mechanisms currently exists in the seed industry.

The resolution of these issues is critical because of the economic implications of the expiration of regulatory approvals. The expiration of the regulatory permit for a genetically engineered variety, which causes it to become unapproved, is important because many countries impose a legal limit of “zero tolerance” for the presence of unapproved varieties. These countries reject imports of agricultural products (corn, soybeans, and so on) that contain even trace amounts of an unapproved crop. Incredibly, billions of dollars of agricultural trade in export markets can be disrupted even though the seeds or other agricultural commodity areidentical to what had been imported and sold routinely and uneventfully during the previous decade (and are, virtually by definition, an improvement over conventional seeds). The expiration of approvals thus becomes a trade-barrier — one that makes no sense except as blatant protectionism.

But the chaos doesn’t end with the disruption of trade. The expiration outside the United States of the regulatory approval of a product that remains approved within the U.S — which, as discussed above, makes a variety unapproved and illegal wherever the approval has expired — creates a problem for domestic farmers whose ability to export is disrupted.  This situation would likely result in the filing of domestic class-action lawsuits as farmers sought compensation from someone — perhaps seed-saving farmers, generic seed developers or the original permit-holder — for pecuniary damage from loss of exports.  Whether American courts would allow a cause of action for losses due to trade disruption, especially when the genetically engineered variety retains perpetual approval in the United States, is uncertain.  This is yet another unintended consequence of regulatory systems that are not only incompatible with one another but are also unscientific and illogical.

There are several ways to drain this bureaucrat-generated swamp:

– Countries could harmonize the longevity of their regulatory permits, making them all permanent, which would enable farmers to save seed and seed companies to develop generic versions of genetically engineered seeds without concerns about interference with exports, trade disruption or liability lawsuits. After all, the products do not become unsafe merely because some of the paperwork (which was arguably gratuitous in the first place) has expired.

– Countries could establish sensible “tolerance levels” for unapproved varieties.  This would potentially allow farmers to save seed because the number of farmers doing so may be sufficiently small in number such that their saved-seed harvest, when pooled with the harvest of other fields of approved crops, might remain below the tolerance level.  However, seed companies developing and selling generic seeds that meet certified seed standards could be exposed to class action lawsuits if farmers purchased these generic certified seeds (which are of higher quality than saved seeds and cheaper than approved IPR seeds) in such quantity that the permitted tolerance was exceeded in pooled harvests.

– The best and most definitive solution of all would be for the harmonization of regulatory approaches in order to eliminate the existing discrimination against and excessive regulation of innocuous genetically engineered plants.  This would constitute recognition at long last of the decades-old consensus that the newer techniques are essentially an extension and refinement of older breeding techniques and take into account that genetically engineered crops offer economic and environmental benefits without any unique or substantial risks compared to other crops.  This course would promote advances in agriculture and unleash the ingenuity and entrepreneurism of both private and public agricultural research sectors.  And on a practical level, it would remove the discontinuities that exist in current public policy and that create various unintended consequences.  But because of bureaucratic inertia and self-interest, it is highly unlikely to come to pass, yet another reason that agricultural biotechnology is a tough row to hoe.