Impact of Counterfeits

The first meaningful steps to measure counterfeiting were undertaken by the Organisation for Economic Cooperation and Development (OECD). Its 2008/2009 report found that as much as $250 billion in counterfeits move through international trade. In releasing its findings, the OECD stated: “This total does not include the value of domestically produced and consumed counterfeit and pirated products and the significant volume of pirated digital products being distributed via the Internet”. In addition, the OECD explained that counterfeiting and piracy “can have broader economy-wide effects on trade, foreign investment, employment, innovation, criminality, environment… and with respect to governments, counterfeiting and piracy have direct effects on tax revenues and government expenditures”.

In order to study the broader impacts of counterfeiting and piracy that were not addressed by the OECD, in 2011 Business Action to Stop Counterfeiting and Piracy (BASCAP) commissioned Frontier Economics to assess the impacts of counterfeits produced and consumed domestically, digitally pirated products and the broader economic impacts such as loss of employment and foreign investment. The Frontier report estimated the total impact of counterfeiting and piracy at between $580 billion and $775 billion, and projected that it could reach $1.7 trillion by 2015.

The OECD – in cooperation with the EU Intellectual Property Office (EUIPO) – updated its report in 2016. The OECD/EUIPO report found that trade in counterfeit and pirated goods had grown from $250 billion annually in 2008 to more than $461 billion in 2013. According to these findings, counterfeit products now represented more than 2.5% of all world trade – including 5% of all imports into the European Union.  Again, the OECD/EUIPO study looked only at counterfeits traded across borders.

In 2019 another joint report by the OECD and the EU’s Intellectual Property Office confirmed that, despite “sluggishness in legal commerce”, the trade in counterfeit and pirated goods had risen in the last few years and now counted for over 3% of international trade. The report put the global value of imported fakes at USD $509 billion, up from $461 billion previously estimated.

This joint OCED – EUIPO report on the global trade of counterfeit products upheld the fact that the severe risks to consumers from counterfeiting and piracy keep growing. The boom in online ordering and the dramatic increase in international trade and digital technologies have meant that counterfeiters are able to get products directly to consumers and businesses alike and at much lower costs. This and the increase in volume of parcels crossing borders mean that it easier for very dangerous products to evade detection by enforcers.  Consequently, the problem and inherent risks are growing, not just at holiday times but throughout the year.  And unfortunately, this sinister trade has even wider implications, as huge profits are being handed over to transnational crime gangs and terrorist organisations who increasingly control this industry.

National and international enforcement agencies such as Interpol, Europol and the World Customs Organisation, regularly warn about the emergence of massive shipments of dangerous counterfeits, which threaten consumers across the world.  Despite these warnings shoppers and businesses are still being drawn into buying these products.

Counterfeiting has a damaging effect on business, the economy, job creation and the general population. Here are five ways that counterfeiting hurts our society.

Risk to Health - A major concern of the AACS members is the risk to health posed by counterfeit spirits. Fake alcohol can contain high levels of toxins that can cause blindness, coma, and even death. No brand or type of alcoholic drink is immune from counterfeiting; gin, whisky, vodka, wine and beer are all produced. For example, fake alcohol containing methanol can lead to a wide range of health issues and in some cases death. Drinkaware’s Chief Medical Advisor has explained that fake alcohol has: “Commonly used substitutes for ethanol including chemicals used in cleaning fluids, nail polish remover and automobile screen wash, as well as methanol and isopropanol, which are used in antifreeze”. These are all extremely dangerous.

But it is not only consumers who are potentially put in harm’s way by buying and using counterfeits.  Fakes are often produced in extremely dangerous conditions, putting the people who make these products at serious risk as well.

For more information on methanol poisoning click here.

Greater Crime - counterfeiting and piracy are criminal activities in and of themselves but they also support wider criminality by providing funds that can be used for other illegal ends. More money inevitably strengthens criminal organisations and makes it more difficult to stem the damaging societal impact of their activities - an impact that could include lost lives, greater security costs as well as physical and emotional consequences.

A 2009 BASCAP study developed an estimate of the social costs of crime by assuming a 1% increase in the crime rate due to counterfeiting. Using this approach, the global cost of greater criminality is thought to be around US$60 billion per year.

Investment & Innovation - counterfeiting can also hurt the foreign direct investment (FDI) prospects of a country, and its potential to attract and develop valuable innovation hubs. Just as enforcing intellectual property rights has been shown to stimulate FDI, the erosion of IP rights is associated with poorer standards of governance and transparency, reduces incentives to invest or innovate and affects long-term economic growth..

The erosion of IP rights is associated with poorer standards of governance and transparency, reducing incentives to invest or innovate and affecting long-term economic growth.

The total reduction in FDI due to counterfeiting and piracy is estimated at US$111 billion, as companies will have less incentive to invest in a country where their IP could be stolen and used to displace their legitimate products. Moreover, other benefits of FDI like knowledge and innovation spillovers would consequently be lost as well in an environment with rampant counterfeiting.

Genuine Economic Impact - consumers who knowingly purchase counterfeit products are unlikely to have purchased genuine equivalents and often do so because the counterfeit versions are much cheaper. This means that legitimate companies face competitors that steal their intellectual property (IP) without paying taxes or complying with the regulations and quality standards that the former do.  The displacement of genuine activity by illicit activity is also likely to reduce efficiency, as the underground economy is likely to have more irregular supply chains which do not optimally allocate resources.

Such unfair and illegal competition displaces legitimate business activity, with clear negative knock-on effects for consumers, governments and economic growth.  Such unfair and illegal competition displaces legitimate business activity, with clear negative knock-on effects for consumers, governments and economic growth. A recent study estimates that in 2013 between US$470 billion and US$597 billion of genuine economic activity was displaced by counterfeiting. Counterfeiting is also estimated to cost up to 2.6 million jobs with projected job losses estimated to be between 4.2 and 5.4 million by 2022.

Less Public Money for Roads, Schools - business provides essential tax revenue for governments not only through direct transfers like corporation tax and income tax of employees but also through the sales tax and duties that is levied on their products. Indeed, sales tax is estimated to represent between 70% – 90% of the financial losses that the displacement of genuine economic activity brings about.