Counterfeit Goods Impact

by Steven Rayson


counterfeit goods impactThe counterfeiting industry has expanded greatly in recent years in terms of the range of counterfeited products that are now available. These include, among other things, airline parts; automobile parts; batteries; cigarettes and accessories; cosmetics; films (DVDs); clothing and accessories; jewellery; leather goods; money orders; music (MP3/CDs); passports; pharmaceuticals/drugs; software; sports equipment and memorabilia; toys; video games and other technology products; watches and more.

Tough economic times have most likely fueled our appetite for cheap counterfeit goods, and that demand will likely remain even as the economy improves. In fact, an Environics Research survey from December 2008 found that a quarter of Canadians had admitted to knowingly buying a counterfeit or pirated product.

To that end, it is important to have a better understanding of the nature of counterfeit goods and the impact on our economy. To start, it is useful to split counterfeited goods into three basic categories: (1) counterfeiting of safety-critical goods, such as automobile and aircraft parts, pharmaceuticals and other essential goods. Such goods are sometimes accompanied with fake validation documentation which greatly increases their value. These are either passed off as originals at full price or, in some cases, supplied at a much cheaper cost than the authenticated original). (2) counterfeiting of copyright piracy and bootlegging, such as in the music industry; and (3) counterfeiting of luxury goods.

While the counterfeiting of safety-critical goods is of immense public concern, a study published in the October 2010 issue of the British Journal of Criminology declares that buying fake designer goods can benefit consumers and the companies whose brands are being illegally copied.

The report was funded by the European Union (“EU”) and concludes that consumers benefit from the market for counterfeited designer clothes and accessories at cheaper prices. The study also rejected the complaints of designer companies, claiming that losses to the industry as a result of counterfeiting are vastly exaggerated; those who buy counterfeited products would never pay for the real thing while the “knock-offs” actually promote the luxury brands by quickening the fashion cycle and raising brand awareness.

The author of the report, who advises the British government on crime, said the real cost to the luxury goods industry from counterfeiting could be one-fifth of previously calculated figures.

However, the purpose of the study was to emphasize the need to allocate scarce resources effectively and separate the policing of counterfeit luxury items from the more important issue of safety-critical counterfeits such as aircraft parts, pharmaceuticals and construction and building materials.

Whether one agrees or not that brand-owners suffer significant losses from the sale of counterfeit luxury goods, it is important to recognize who is profiting from counterfeiting. The logic of the economics of counterfeiting certainly does present circumstances that could foster such links to organized crime, especially the combination of relatively low levels of perceived risk with a massive return on investment.

We know that counterfeiting affects all kinds of industries, with quite different consequences. As mentioned earlier, some types, such as counterfeit pharmaceuticals or airline parts, can injure, kill or have damaging financial consequences for consumers and therefore present a clearly cut case for action in the public interest.

However, with respect to counterfeit luxury goods, whether or not one agrees that the direct impact of such goods may be limited to specific scenarios, there are still important indirect social and economic harms caused by the consumer desire driving the counterfeiting industries. These include:

  • Societal consequences in the form of loss of tax revenue.
  • The industry can also arguably suffer job losses – if profits are down, research and development funding may diminish, lessening the development of new product lines.
  • Unregulated manufacturing may encourage worker exploitation, child labour and dangerous working environments. In addition, consumers of the authentic goods are also paying for unfair competition.
  • Individual consumers may still risk health and safety from purchasing counterfeit luxury fashion goods that have not been produced in accordance with governmental regulations. For example, the chemicals used in the production of the counterfeit product may be toxic or abrasive and illegally used. There is also an increased potential risk to the environment because the manufacturers of counterfeits are arguably less likely to be concerned about, or even aware of, any potential environmental damage that they may cause by not following government standards.
  • The brand may suffer reputational damage through complaints from dissatisfied customers, even though the goods were counterfeit.

While a portion of consumers are deceived into buying counterfeits that they had thought were real at the point of sale, a larger portion of consumers of counterfeits appear to deliberately seek out fakes and pirated goods. And because of the “black market” nature of this activity, it is fair to say that the economic impact can never be measured with great accuracy.

The RCMP has acknowledged that there is no comprehensive study regarding the amount of pirated and counterfeit goods in Canada. Any dollar figure, therefore, must be based on a best estimate.

One reasonable method would be to compare Canadian piracy and counterfeiting losses in relation to the losses in the United States (relative to the size of their respective markets). In this regard, the U.S. Chamber of Commerce estimated in 2007 that counterfeiting and piracy costs the U.S. economy approximately $250 billion per year. Given that the GDP of the Canadian economy is approximately 9% of the U.S economy, the cost of counterfeiting and piracy in Canada would approximate $22.5 billion.

In conclusion, counterfeit goods impose long-term costs since consumers will lose out when companies scale back their investment in research and development, whether developing new drugs or new music acts.

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