How counterfeit goods hurt manufacturers, consumers and the economy
Counterfeiters do more than make knock-off versions of popular electronics, toys or cosmetics. They also harm the economy and threaten buyers’ safety.
The global e-commerce marketplace has created almost limitless opportunities for companies to grow and prosper. As with any economic transformation, the upside of today’s always-on economy brings new challenges. The same opportunities that are stimulating business growth have also created a fertile environment for counterfeiting and the theft of intellectual property (IP). Counterfeiting in the digital age is sophisticated and can be challenging to identify and prevent, resulting in severe implications for businesses, consumers, and the economy.
A drain on the global economy
A 2017 report by the Commission on the Theft of Intellectual Property found that stolen ideas, brands, and inventions drain up to $600 billion from the global economy, harming U.S. businesses, jobs, and workers. Of that number, counterfeit and pirated goods are estimated to cost the U.S. economy between $29 billion and $41 billion per year.
The International Trademark Association paints an even bleaker picture, predicting that the global economic value of counterfeit and pirated products could reach $2.3 trillion by 2022, draining more than $4 trillion from the global economy and putting more than 5 million legitimate jobs at risk. Such massive losses may also discourage firms from investing in innovation or striving to become the first to market with new products, making American companies less competitive globally.
Risky for consumers
While the economic consequences of counterfeiting are alarming, manufacturers, retailers, and consumers also need to recognize the health and safety risks fake products present. For instance, a commissioned report of 400 illegitimate Apple iPhone chargers bought from all over the world found that 99 percent were unsafe, lacking sufficient safeguards to protect users and devices.
In the pharmaceutical industry, substandard drugs made from poor quality raw materials or mislabeled ingredients create serious risks for consumers, including adverse drug reactions, permanent injury or even death. Other unsafe products include toys containing lead paint, smartphones with counterfeit batteries that overheat, computers with fake components, and counterfeit automotive airbags that fail to deploy.
In 2017 alone, U.S. Customs and Border Protection seized over 34,000 shipments of counterfeit products. Sixteen percent of the confiscated goods contained threats to consumer health and safety.
Costly for businesses
Brand owners can suffer devastating effects from counterfeiting and IP-infringing actions, whether they sell to other companies or directly to consumers. The overall financial impact can add up to millions in lost revenue, not to mention the intangible cost of reputational damage. For example:
- Legitimate companies must bear the additional costs of improved packaging and enforcement efforts, which can force them to pass along higher prices to consumers.
- Counterfeiters undercut brand owners on price and do not pay taxes or comply with government regulations and quality standards.
- Employees of companies targeted by counterfeiters may lose their jobs due to fewer sales of legitimate goods and unfair competition from pirated products.
- Buyers who believe they purchased a genuine article may hold brand owners accountable for warranty and liability claims when the fake product doesn’t meet expectations for quality or performance, resulting in lost brand trust.
While these issues impact manufacturers large and small, counterfeiting is particularly harmful to small and medium-sized firms (SMMs). These companies often do not have in-house IP experts or investigators to monitor for theft of brands or the resources to track down and prosecute counterfeiters.
Manufacturers and government act
The United States has spent decades building a robust domestic legal framework to tackle counterfeiting and pushing for stronger global enforcement of trademarks and other IP rights abroad. Despite those efforts, U.S. IP remains a constant target for global counterfeiters and other criminal elements who seek to appropriate intellectual property and brands for their own goals.
Acknowledging that there is still much work to be done when it comes to combating counterfeiting and IP theft, the U.S. Senate Finance Committee reached out to the National Association of Manufacturers (NAM) for its insights on the proliferation of counterfeit goods sold through e-commerce websites. NAM, the voice of the U.S. manufacturing community and a leading advocate for policies to help firms compete in the global economy, revealed some interesting findings shared by its members.
Companies noted they encounter a range of challenges when it comes to educating consumers on the risks of counterfeiting:
- Some firms are challenged to inform consumers of the risks associated with buying counterfeit goods. For example, some companies do not sell directly to consumers, making it difficult to reach potential buyers with educational messages.
- Respondents noted that they are unable to tell customers that a given e-commerce platform is “safe” or “unsafe” without limiting their companies’ ability to get legitimate products into the hands of customers through those same channels.
- Companies are working with industry associations and coalitions to issue consumer advisories and leveraging social media to publicize the dangers of counterfeit goods.
- Manufacturers say they must use caution when educating consumers. If they are overly specific about how to distinguish real products from fakes, this can actually serve as a “blueprint” for counterfeiters on how to fool customers.
To remove counterfeits from the marketplace, survey respondents take a range of actions, including working directly with e-commerce sites, engaging law enforcement officials and involving Customs and Border Protection. Broader strategies include making legitimate products more difficult to counterfeit, making counterfeit products easier to detect, and making it harder for counterfeiters to find distributors and online sales channels.
NAM members also noted other issues that have an impact on their ability to combat counterfeiting, both via physical and online channels. These include:
- Loopholes in U.S. Postal Service procedures that make it easier for counterfeiters to ship to the U.S
- Limitations in federal trademark law that can allow counterfeit products into the country that are not direct copies of existing trademarks
- Limited sharing of best practices across platforms, which can often result in the migration of counterfeit products from one platform to another
There is no one-size-fits-all approach to anti-counterfeiting, but manufacturers seeking to protect their brands can begin by determining if and how they are at risk, then develop a multifaceted strategy that includes education, partnerships, and enforcement.