A new report on the economic impact of counterfeit trade published by OECD and EUIPO

With joined efforts, the Organization for Economic Co-operation and Development (OECD) and the European Union Intellectual Property Office (EUIPO) conducted a study on counterfeiting and the impact it had on economy from 2011 to 2013. Their results were published on 18 April 2016 under the name“Trade in Counterfeit and Pirated Goods: Mapping the Economic Impact”. Although presuming the results would not be satisfactory, they have exceeded all expectations, with 2.5% of world trade including counterfeits and up to 5% of imports in the EU. This might not seem significant at first glance, but 2.5% of the world trade amounts to 461 billion USD, which is equal to the GDP of Austria. 5% of EU trade is 116 billion USD, almost the GDP of Hungary. Seeing these numbers in black and white should start the alarm in policymakers´ heads and show how much we are in need of a change in the legislation.

The study

The study was set on two pillars. The first one was the impact of crime and illicit trade on good governance and public safety.

The second one was what were the economic effects of these activities.

The study included trademark, patent, copyright and design right infringements. The main focus is given to trademarks, as they represent the main identifier of the producer. Their value is constantly on the rise, especially for the scientific research, information and communication technology, agricultural, textiles and clothing and real estate sector.

The results

The first thing to be noted is the rise and importance of e-commerce. In the US, e-sales have been on a rise since 1999, and now hold 7% of total retail sales. In the EU, they have grown 5% in the last 6 years. The advantages of e-commerce are well-known: it is less expensive for both the producer and the consumer, and less time-consuming and more available to the customer. Unfortunately, it is also the easiest way to distribute counterfeits. They are available non-stop and the e-shops are easily transferrable from one site to another, making them harder to shut down.

For every of the three observed years, the number of counterfeited goods exceeded 100000. Most seized shipments come from East Asia, primarily China and Hong Kong. The goods in question are mostly luxury goods, like footwear, clothing, perfumes, leather and watches, but, can also be common goods, such as toys. The diversity of the seized goods is best described if said that even fake bananas and strawberries have been found. Another problem is that counterfeits can sometimes be a health hazard. When thinking about fake pharmaceuticals, food and drink, car parts or toys, it is obvious that their usage can put lives in danger.

Most seized products infringe IP rights of American producers (20%), followed by Italian (14.6%), French (12.1%), Swiss (11.7%), Japanese (8.2%) and German (7.5%). Interestingly, China has also made the list of the infringed, with the percentage of 1.3. This shows the impact of counterfeit goods on research and development in a country. With so many domestic counterfeits in the market, Chinese producers rarely dare to invest in R&D.

There seems to be a higher recurrence of seizure of specific brands like Rolex, Ray Ban, Louis Vuitton, and especially Nike. Special attention should be given to the growing number of credit card counterfeits. These are especially dangerous because of their connection to different types of credit card fraud. Usually, they are conducted using real credit card holder´s data, obtained by skimming the data from the magnetic strips, stealing the original cards or by obtaining data from the card holder in return for sales of inexistent products.

The end consumers can be divided into two groups: the ones who unknowingly buy counterfeits, expecting to get the original product, and the ones who willingly buy fakes, wanting and expecting a lower price for the good. Depending on the target group, a wide range of prices is offered. For example, Nike shoes go from 5 to 200 USD, and Rolex watches from 5 to 200 000 USD. The highest prices resemble the ones of the original product, but are usually marked as a special deal, a short-term discount, etc.

The image that comes to mind when thinking of seizure of counterfeits is usually a massive raid with hundreds of confiscated products. The reality is quite different. Most appropriations consist of ten products or less, usually only one. They are the easiest to ship, in small parcels via mail. Usually, there are multiple stops in different countries from the production line to the end consumer. This is necessary in order to mask the point of origin, adding parts or repackaging and re-labeling the product.

When mentioning provenance economies, the report is talking either about the economies where production is taking place or the economies used as a port of transit, where infringing goods pass. The report proves that any country can be a providence economy. They are geographically dispersed, with Hong Kong and China in East Asia, Turkey in West Asia and Europe, Tunisia in Africa, Tokelau, a tiny island situated between Hawaii and New Zealand, and many others.

It is hard to determine the total value of the counterfeit products. First of all, the pirate market changes so much and so often that any measurement would be highly imprecise.  Secondly, the customs information is almost always confidential. The best that can be done is determining the upper boundary of the counterfeit trade. The final result of the study indicates that the pirate goods were worth up to 461 billion USD in 2014. This makes it 2.5% of the entire world trade. It is alarming information, because a 2008/2009 study conducted by the OECD resulted in approximately 200 billion dollars. Although that study showed a lot of imperfections in comparison to the 2015 one, it still shows an undeniable divergence.

The EU

With over 100 000 trademarks registered with the EUIPO, IP rights are of major importance in the EU. IP-strong companies have higher revenues, employ more people and offer higher wages.

The types of counterfeit goods are mostly clothing and footwear, watches and perfumes, but the list also includes tobacco, optical, photographic and medical instruments and metal tools.

The value of fakes in the EU comes up to 85 billion EUR (116 billion USD), which is 5% of all imports. They are imported or produced mostly in China, but also in Afghanistan, Greece, Hong Kong, Lebanon, etc.

The conclusion

The results of the study are worrying, as the numbers show that the impact on economy and research and development is undeniable. The next steps might be tracing the production of counterfeit goods, as well as conducting an additional study of the reasons behind the emergence of pirated products. With complete understanding of this phenomenon, the OECD countries should propose measures to reduce the rates of import of counterfeits.