Fighting the Global Trade in Fakes

Although it has been assumed by analysts that as China grew richer and its own manufactures became more sophisticated, it would crack down on counterfeiters in an effort to protect the country’s own intellectual trademarks, nothing could be further from the truth.

In fact, the global trade in counterfeit goods, far from deceasing, is actually on the increase, according to a new 88-page study released March 18, accounting for a full 3.3 percent of global trade in goods and up to 6.8 percent of imports into the European Union. And an astonishing amount of it – perhaps 80 percent of the fakes – originates in China and Hong Kong.

In fact, China is the top producer of fakes in nine of the 10 categories of goods investigated, from fast-moving consumer goods such as foodstuffs or cosmetics, to business-to-business products such as spare parts and computer chips. India, Malaysia, Pakistan, Thailand, Turkey and Viet Nam are producers in many sectors, although they hardly make the map next to China and Hong Kong.

Hong Kong and Singapore double as important transit hubs, with fake goods arriving in large quantities in containers, to be sent on in small parcels by post or courier services. Panama is an important hub for transit into the United States.

The report is a result of a combined investigation by the 36-nation Organization for Economic Cooperation and Development and the European Union Intellectual Property Office and covers 2016, the latest year for which reliable figures could be obtained. Basically, the report says, almost anything that can be copyrighted is being faked – footwear, clothing, leather goods including watches, perfume and high-end leather products and information communications technology items.

“The results are alarming,” the report says. “These figures underscore once again the need for coordinated action against IP crime in general and trade in counterfeits in particular.”

In 2016, according to the report, as much as US$509 billion in goods were shopped across the world, up from US$461 billion in 2013. The amount of growth, described as “significant,” occurred during a period of relative slowdown otherwise in global trade. In 2016, imports of counterfeit and pirated products into the EU alone amounted to as much as €121 billion (US$134 billion).

These results don’t include domestically produced and consumed counterfeit and pirated products, nor do they include pirated digital content on the Internet, which has grown enormously. The counterfeit and pirated products “continue to follow complex trading routes, misusing a set of intermediary transit points,” often passing through large free trade zones that are important hubs of international trade. In addition, much of the trafficking is in small shipments, sent mostly by post or express services.

Small packages are also a way for criminals to reduce the chance of detection and minimize the risk of sanctions. The proliferation of small shipments raises the cost of checks and detention for customs and introduces additional significant challenges for enforcement authorities. There is thus a need for coordinated examination of policies in this area.

Fake products can be found in a large and growing number of industries, such as common consumer goods, (footwear, cosmetics, toys), business-to-business products (spare parts or chemicals), IT goods (phones, batteries) and luxury items (fashion apparel, deluxe watches). Importantly, many fake goods, particularly pharmaceuticals, food and drink, and medical equipment, can pose serious negative health and safety risks.

Just how important China and Hong Kong are in the trade can be seen in the chart below. Between the two of them, they supply approximately 80 percent of the world’s fake goods.

The companies that are ripped off by the counterfeiters are primarily OECD members including the United States, France, Switzerland, Italy, Germany, Japan, Korea and the United Kingdom although a growing number of companies registered in high-income non-member economies, such as Singapore and Hong-Kong are becoming targets. Copyright holders in Brazil, China and other emerging economies are also increasingly being damaged.

“Counterfeiting and piracy thus present a critical risk for all innovative companies that rely on IP to support their business strategies, no matter where they are located,” the report says.

In a globalized world, the rising importance of intellectual property “has created new opportunities for criminal networks to free-ride on others’ intellectual assets and pollute trade routes with counterfeits,” according to the report. “The recently observed broadening scope and magnitude of counterfeiting and piracy, in particular in the trade context, is seen as a significant economic threat that undermines innovation and hampers economic growth.”

Regarding the economies of origin of fakes in world trade, existing studies show that trade routes of fakes are very complex. Counterfeiters tend to use complex routes, with many intermediary points which are used to aid in the creation of false documents in ways that camouflage the original point of departure, establish distribution centers for counterfeit and pirated goods, and repackage or re-label goods.

In addition, while imports of counterfeit goods are, in most cases, targeted by local enforcement authorities, goods in transit are often not within their scope, which means they are less likely to be intercepted.

Five main drivers determine an economy’s propensity to become an active actor in the trade. They are:

  • Governance: high levels of corruption and poor intellectual property protection are factors that greatly influence the degree of exports of fake goods from an economy.

  • Free trade zones (FTZs) that offer a relatively safe environment for counterfeiters, with good infrastructure and limited oversight. The share of fake goods from economies hosting the 20 biggest FTZs is twice as big as from economies that do not host any FTZs.

  • Production facilities: low labor costs and poor labor market regulations are important drivers of trade in counterfeit and pirated goods.

  • Logistics capacities and facilities: the ability to trace and track consignments is the key factor for reducing the share of counterfeit and pirated products in exports. However, other factors increase this trade, including low shipping charges; fast, simple and predictable customs formalities; and good quality trade and transport-related infrastructure.