China Fakes Inundate UK, OECD Says

Counterfeit goods, primarily pouring in from China and Hong Kong, are “not only becoming a significant threat to the engine of economic growth, but also undermining good governance, the rule of law and citizens’ trust” in the government of the United Kingdom, according to a new 152-page report issued by the Organization for Economic Cooperation and Development.

Counterfeit goods accounted for as much as £9.2 billion in 2013, the most recent year for which comprehensive data are available. The estimated volume of sales lost by UK merchants and manufacturers amounted to as much as 4 percent of imports and almost 2 percent of total sales in 2013, costing an estimated 60,000 jobs and resulting in a potential loss of almost £3.8 billion in tax revenue.

The study, carried out by the OECD’s Task Force on Countering Illicit Trade, identifies electronic and electrical equipment, clothing and footwear as among the most frequent fake products. For some product categories like toys, clothing and footware, takes make up as much as 10 percent of the total value of trademarked or patented products. Almost half the goods, according to the study, were intended for sale on the secondary market and “were supposed to deceive consumers, who would have bought them believing them to be genuine.

The report primarily relies on an international set of customs seizure data and interviews with trade and customs experts, and thus provides very little information on supply chains, who or where the fakes are manufactured within individual countries, or how they arrive in the UK. But it does show that the overwhelming percentage of fake goods seized after arriving in the UK come from the mainland, with perhaps 15 percent coming from Hong Kong, then a pittance from India, Pakistan and other countries.

China does regularly attempt to root out counterfeiters, shutting down illegal factors and arresting thousands of operatives. In both 2011 and 2012, authorities conducted extensive enforcement drives, only to have the problem re-emerge, partly because the central government has tenuous control over regional and local governments and corruption continues to flourish despite Supreme Leader Xi Jinping’s continuing efforts to crack down.

Multinationals manufacturing in China are also prone to lose control of their supply chains, with the result that unscrupulous local partners manufacture far more products than the multinationals can control. A couple of decades ago, a major European car manufacturer discovered there were far more of its models on the road than it had been authorized to build. It is possible to buy designer handbags in Shenzhen, just across the border from Hong Kong, that are of the same quality as those produced by Italian manufacturers.

However, as the OECD report points out, far too often, “counterfeiting poses dangers for health, safety and privacy. It may also lower consumer satisfaction, notably when low-quality fake goods are purchased unknowingly. For intellectual property rights holders and their authorized vendors, rising counterfeiting brings revenue losses while trademark infringements continually erode brand value.”

Interestingly, the report notes that its methodology focuses only on losses incurred by the industry due to counterfeiting and piracy and doesn’t consider either the positive impact of production on counterfeit products, or potential gains that intermediaries derive from counterfeit trade. Some industries, including intermediaries such as express and shipping companies may actually record higher demand for their services because of counterfeit trade.

For instance, India has “reverse engineered” a long list of pharmaceuticals and sells them at a fraction of the cost that western drugmakers charge. In 2012, as Asia Sentinel reported, India’s Intellectual Property Appellate Board revoked three patents held by western drug manufacturers for products including one to Roche for pegylated interferon alfa-2a, which is used to treat Hepatitis C. The patent, granted in 2006, was the first such on a medicine under the TRIPS-mandated product patent regime for medicines as part of the country’s obligations under World Trade Organization international trade rules. Roche, with US$22 billion in sales across the world in the first half of 2012, joined the Swiss pharmaceutical giant Novartis and German drug maker Bayer as having been bruised in the Indian legal system.

India’s Patent Office in March that year issued a license to a generic drug manufacturer, effectively ending the German pharmaceutical company Bayer’s monopoly in India on the drug sorafenib tosylate, known as Nexavar, which is used to treat kidney and liver cancer. In that case, the patent office ruled that not only had Bayer failed to price the drug at a level that made it accessible and affordable, it also was unable to ensure that the medicine was available in sufficient and sustainable quantities within India. Competition from the generic version brought the price of the drug in India down dramatically, from more than US$5,500 per month to close to $175 per month – a price reduction of nearly 97 percent. A domestic company, Natco Pharma, now manufactures and sell a generic version of Nexavar and will pay a 6 percent royalty on net sales every quarter to Bayer.