On the Rise: Counterfeit Goods

April 8, 2019
Editor(s): Anna Ruddel
Writer(s): Kate Chow, Ivan Hasjim, Thomas Galanti, Gordon Liu

The counterfeit goods market: a place to trade fake luxury items, at not so luxurious prices.

In an era where your identity is determined through the brands you display on Instagram, it’s not surprising that the counterfeit goods market is growing profoundly fast. But what are the economic implications of trading or buying counterfeit goods? Who are the victims of this illegal trade? And what is the future outlook for the market?

Studies conducted by the OECD indicate that the market has grown to 3.3% of world trade or $509 billion USD as of 2016, and expect further growth due to the fast pace of globalisation and swelling demand (OECD, 2019). By 2022, the OECD forecasts that the total international trade in counterfeit products to reach $991 billion. From a macro perspective, more damaging problems reveal themselves. The trade of counterfeit goods and the disregard for intellectual property hurts innovators, consumers and the global economy. The total economic impact of this particular black market was estimated to be as high as $898 billion in 2013 and forecasted to more than double to $1.87 trillion by 2022.

This global phenomenon has been facilitated through e-commerce websites, which are often able to protect vendors through anonymity. 18% of Aliexpress transactions, 15% of Facebook marketplace transactions and 13% of Amazon transactions include counterfeit goods, indicating how globalisation has paved the way for distribution. Of these illegal transactions, 18% are imitation footwear, 15% electronics and 13% eyewear. Perhaps more concerningly, medical equipment makes up 5% of illicit trade. The existence of unregulated medical equipment in the market is just one example of how counterfeit goods may yield wider negative externalities, that may otherwise have gone unnoticed.

The ethics surrounding counterfeit goods is intensely debated, as economic benefits may only be presented to those who give the good a higher perceived value. However, for those that unknowingly consume counterfeit products, the effects can be disastrous. Incentives exist for firms to take advantage of industrial substitutes for many substances used to produce food, medicine, and chemical products, and use lax protocols to bump up production. Criminal networks are often found to trade lethal drugs that are poorly manufactured, substandard medicine and sanitation packages which can lead to health issues and contamination for the users.

These issues are most evident in the primary market, where consumers remain unaware of the nature of the product, as opposed to the secondary market, where consumers knowingly purchase counterfeit goods. Primary stakeholders considered here are rights holders (original producers), consumers, and the government. These are identified as ‘counterfeit trademark goods’, which are goods “without authorisation a trademark which is identical to the trademark validly registered in respect of such goods”. Common traits of counterfeit pharmaceuticals may include correct ingredients in incorrect quantities or composed according to a wrong formula, non-active substances altogether, toxic substances, or correct content but in fake packaging. Counterfeit pharmaceuticals mainly affect developing countries without proper drug regulatory control, lack of effective intellectual property rights protection and cultures that support this, and uncontrolled distribution chains. As a result, the industry has responded by establishing the Pharmaceutical Security Initiative (PSI), which was created in 1996 and operates from Rome.

Concerns to the safety of consuming counterfeit products still remain a critical issue, however, advancing technology such as blue dot tracking systems and nanotechnology may help companies identify dilution of products and protect them from product liability. These issues have relatively improved with the increasing difficulty in production, and the industry has overall remained focused on apparel, computer accessories, media, and other normal goods in all top 5 counterfeit producing countries.

The primary producer of counterfeit goods is China, responsible for 52% of all seized counterfeit products according to US customs. The lack of governance and the use of Free Trade Zones (FTZs) in countries like China and India has facilitated the illegal trade, essentially adding protections for producers of illicit goods. The OECD found that the share of fake goods from economies using FTZs is 20 times that of countries that host no FTZs. This indicates potentially negligent policy, and that lawmakers should be held accountable.

Effective strategies for the government to mitigate the negative effects of counterfeit goods may be to establish independent bodies that enforce data-collection and supervision of product quality, raise awareness of consequences, and develop rigorous peer review and examination processes. OECD outlines lack of information as one of the main reasons why regulatory bodies and companies fail to maintain oversight on counterfeit products, which has been partly fuelled by the difficulty in implementing cost-effective strategies for data collection.

Moreover, the counterfeit industry maintains strong growth, where the biggest losers are often media and software companies, and governments who lose out on tax benefits. In the long run, changing demographics remain the primary predictor of the future of counterfeit goods, where consumer demand for counterfeit goods is only more effectively contained through increased awareness of the magnitude of the issue. However, it is essential for policy-makers and businesses to work together in developing strategies to combat these issues.

The CAINZ Digest is published by CAINZ, a student society affiliated with the Faculty of Business at the University of Melbourne. Opinions published are not necessarily those of the publishers, printers or editors. CAINZ and the University of Melbourne do not accept any responsibility for the accuracy of information contained in the publication.

Meet our authors:

Anna Ruddel
Kate Chow
Ivan Hasjim
Thomas Galanti
Gordon Liu

Gordon is a 3rd year Bachelor of Commerce student majoring in Finance and Marketing. He is an amateur writer interested in technology, sustainability, and the future of work.