Mythes and Realities of Counterfeit Products

Much of global economic growth in recent years has derived from outsourcing. Counterfeiters have taken advantage of this practice. In Chinese wholesale markets, counterfeit goods are graded based on the degree to which they resemble the original. A merchandise may be manufactured in the factories licensed to produce the authentic goods, and are virtually indistinguishable. Many of these goods do not go far. An increasing share appears to be consumed in China. An other share of these products reach the Western countries.

Product counterfeiting is a form of consumer fraud: a product is sold, purporting to be something that it is not. This is different from the crime of copyright violation, which involves the unauthorized transfer of licensed material, such as the sharing of music or video files electronically. Product counterfeiting is typically an organized group activity, because the manufacturing of goods takes people and time, and the goal is invariably profit. The value of this market can be estimated at US$8.2 billion per year for consumer goods and US$8.2 billion per year for medicines. Some more pessimistic estimations claim that the value is around 5% of the global trading (or about 300 billions US$ per year). At moment there are not sufficient data to have a clear view of the facts. A fact is that the efforts to prevent this phenomenon have increased but they can achieve only an insignificant result of seizure success rate between 0.1% to 1% of the value of the counterfeited product, depending on the estimations above. The number of counterfeits detected at the European border has increased dramatically in recent years (a factor 1000%), and most of these products originate in China (including Hong Kong, China and Taiwan, Province of China). It remains unclear how much of this flow is due to push factors and how much to pull.



The production and trafficking of counterfeit goods is often portrayed as a matter of intellectual property theft, and through this prism it garners little sympathy. Many otherwise law-abiding citizens think nothing of buying a knock-off version of a designer article. Though many are aware that the loss of income reduces the incentives for creativity, the impact seems too remote and the victims too affluent for many people to give the matter a second thought. In aggregate, however, product counterfeiting poses a serious global challenge. The branding of a product provides implicit quality assurance and a legal line of accountability that consumers have come to take for granted. Without a brand to protect, counterfeiters have no incentive to produce anything but superficial quality. Where it becomes impossible to distinguish the real from the counterfeit, poor quality products destroy the reputation of the copied brand, and the cheaper goods will inevitably dominate. The ultimate threat of counterfeiting has been realized in some parts of the developing world: the original, high-quality products have been essentially priced out of the market.

Unaccountable products are often dangerous products. Knockoff toy producers need not worry about choking hazards or paint toxicity. Counterfeit auto parts are not subjected to the rigorous safety testing borne by their licit counterparts: statistically considered, every car could contain 1% to 5 % counterfeit spare parts. Due to cheaper materials and workmanship, counterfeit spare parts are much more subjected to failure. Counterfeit medicines need not contain any active ingredient at all: worse, they could contain a substandard dose, allowing the target microbes to develop resistance. In this way, the proliferation of counterfeits anywhere in the world can have ramifications for global health. Electronic and spear parts goods are one of the most commonly encountered counterfeit products, and detection of pharmaceuticals has also been rising. The single most commonly counterfeited class of goods, however, is apparel: clothing, accessories and shoes. The safety hazards of knock-off designer handbags are less obvious than dilute penicillin or misfunctioning car breaks, but all counterfeits undermine national and global attempts to regulate commerce in the common interest. For example, counterfeit products are often smuggled, both to circumvent problematic inspections and to evade import taxes. Since they are generally retailed irregularly, sales taxes are avoided. Tax evasion also allows counterfeit goods to be priced extremely competitively, while at the same time affording attractive profits for the dealers. By displacing the sales of legitimate products, they undermine the tax base, and thus affect public services available for all.

The damage is not just felt in the receiving countries: the producing countries also suffer. Even as the major brands work to improve labour standards and workplace safety at their outsourced manufacturing sites, counterfeit goods producers take advantage of global sweatshops. As licensed manufacturers try to improve their environmental impact standards, counterfeiters enjoy the cost savings of dirty production up to illigal use of slavery-like work forces, violeting international human right standards. In short, anywhere that the international community attempts to establish good practice standards for industry, counterfeiters undercut them. Thus, much of the impact of product counterfeiting is long-term, subtle and diffuse. Deaths, many of which occur in developing countries, are often not tied back to the counterfeit product, or if they are, there is little organized response. As a result, the impact of counterfeiting can be frustratingly difficult to quantify. The most accessible metric is loss of revenues, and so counterfeiting is often reduced to a revenue issue, despite being much more than that.

Much of global economic growth in recent years has derived from outsourcing. Counterfeiters have taken advantage of this practice – in which the designers and manufacturers of a product often live on different continents. China, in particular, has grown rapidly as the world’s workshop, and according to World Customs Organization statistics, some two thirds of counterfeits detected globally in recent years were shipped from China. This production is typically decentralized. A large number of firms can produce virtually any product desired, and since many products are not branded until they are closer to their destination markets, the lines between licit and illicit production can become blurred.

In Chinese wholesale markets, counterfeit goods are graded based on the degree to which they resemble the original. A merchandise may be manufactured in the factories licensed to produce the authentic goods, and are virtually indistinguishable. For any product, several different grades of imitations are often available.

Geographic specialization has also evolved, and certain areas of the country are associated with counterfeiting particular products. For example, according to the China United Intellectual Property Protection Centre, groups in Chaosan (Guangdong) specialize in electronics, cigarettes, pharmaceuticals and CDs. The goods are moved from their production sites to destinations along all the regular commercial streams, assisted along the way by corruption and bribery, if necessary. Because the Chinese law bases the penalties for counterfeit trafficking on the value of the material seized, traffickers have learned to break up their shipments into small consignments. This has allowed even repeat offenders to operate profitably for extended periods without fear of incarceration.

Many of these goods do not go far. An increasing share appears to be consumed in China. In addition, cheap Chinese-made consumer goods of all kinds are available throughout South-East Asia, including counterfeits, and some of the production has been moved there.

The European Union does not attach a financial value to the seizures of counterfeit goods it makes. The United States does, and puts the figure at around US$261 million from 14,841 seizures in financial year 2009.23 The types of products seized in both the US and the EU are similar. For example, 57% of the goods seized at the European border in 2008 fell under the heading of clothing, shoes and accessories; in the US, it was 58%. If average value of each item seized in the EU was about the same as in the US, the European seizures from all sources would be worth roughly US$867 million in 2008.

The question is: what share of the total flow does this seizure total represent? If about half the flow were intercepted, this would suggest a market worth at least half a billion dollars; this could be considered a minimum figure. If the share seized were 10%, the figure would be US$8.7 billion. If only 1%, it could be as high as US$87 billion; higher than this would suggest extraordinarily weak enforcement. Of this, some two thirds would come from China. Which order of magnitude is correct?

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