The adverse consequences of counterfeiting.

By: Dr.Mohamed Ibrahim M.Adam.
Dr.Adam & Associates.
May, 2015

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The phenomenon of counterfeiting has increased in recent years with unfavorable impacts. It is submitted that counterfeiting is an illegal use or an infringement of intellectual property rights by imitating trademark goods, copyright goods, patent, and design without the prior authorization of the right owner to the effect of causing direct loss to the owner in the form of diminished trade revenue. The initial process in the direction of global harmonization of intellectual property protection started with the industrialized countries concern, particularly the U.S in combating counterfeit goods. In historical fact, a draft entitled “agreement on measures to discourage the importation of counterfeit goods” was prepared by the U.S.A and EU in 1979. The main purpose was to combat the unfavorable effect of counterfeiting on trade revenues. In 1982 some industrialized countries prepared a draft entitled “the anti-counterfeiting code.” The U.S.A suggested that the said code should be adopted as part of the GATT. However, developing countries under the leadership of Brazil and India contended that intellectual property issues fall outside the ambit of physical goods which is the domain of GATT. They argued that intellectual property deals with intangible property which falls within the jurisdiction of WIPO. The issue raised for consideration is this: what are the effects of importation of counterfeit goods on international trade and whether it could be quantified? The sub-committee on trade of the U.S House of Representatives on the basis of 1983 hearings issued a report supported by a report produced by the International Property Alliance showed huge losses.

The U.S.A with a view to removing the deadlock at the GATT amended in 1984 section 301 of the Trade Act of 1974 authorizing the President to take measures conducive to eradicate “unjustifiable or unreasonable trade practices.” to the effect of making intellectual property unambiguously actionable under Section 301. The U.S.A Trade Representative was assigned the task to make an annual review in order to detect priority foreign countries which deny adequate and effective protection to intellectual property rights or which deny fair and equitable market access to U.S traders. The USTR is required to locate such countries on a priority watch list or a watch list followed by retaliation or sanctions in the form of increased duties, import restrictions and tariff exemptions. The issue of intellectual property protection including counterfeit goods was thoroughly discussed during the Uruguay Round trade negotiations continuing from September 1986 to April 1994 which changed the General Agreement on Tariffs and Trade into the World Trade Organization (WTO). The Uruguay Round incorporated a resolution taken on January 28, 1987 under the title ‘trade related aspects of intellectual property rights including trade in counterfeit goods”. The agreement of World Trade Organization (WTO) was signed on April 1994 by ministers of 125 participating countries at a meeting in Marrakech, Morocco. The TRIPS Agreement was an Annex among a package of 2o agreements; however the phrase “including trade in counterfeit goods” was removed and substituted with a preamble carrying the same purport. The WTO Agreement entered into force on January 1, 1995. The negotiations surrounded the TRIPS Agreement demonstrate that a system of coercive economic retaliation measures could serve enforcement mechanism.

Counterfeiting adverse effects include loss of sales revenue as would diminish market share, it also acts to devaluate a company’s brand image, and may negatively encroach on a company’s investment in research and development. In some industries such as medicine and spare parts it may pose a serious risk of purchasing poor quality goods. Needless to say, it would do nothing to raise public faith in the probity of the business world if commercial culpable dealings such as that of counterfeiters were to be free from penalty. A report issued by OECD in 1989 has estimated that counterfeiting illegal operations fall within the range of 5 to 7 percent of world trade and have generated about 250 billion in euro. The World Customs Organization report of January 27, 2003 estimated illegal trade at 450 billions in euro. Illegal sale of CDs represented 28% of total sales in 2001.

The World Economic Forum held at Davos on January 2003 supported by government representatives, police authorities and customs departments decided to take tough measures to combat counterfeiting. The Trans Atlantic Business Dialogue has acknowledged counterfeiting and piracy as a priority issue for action between the U.S.A and the EU governments. It has endorsed clamping down measures on infringement of intellectual property rights. OECD member states, industry associations, multinational companies are exerting great efforts to implement new effective initiatives, ideas and programs concerning IP enforcement. A noteworthy happening was the creation of the First Global Congress on combating counterfeiting held in Brussels in May 2004. It was attended by the World Customs Organization (WCO), the Interpol, the International Trademarks Association (INTA), World Intellectual Property Organization (WIPO) and Global Business Leaders Alliance (GBLAC) a coalition of 15 major multinational corporations. In the said Congress, the question of counterfeiting has been carefully canvassed. The Global Congress urges a public-private partnership for pursuing more concrete actions, undertaking joint studies focusing on the means to avoid barriers and to structure much more effective machinery prone to materialize in a proper enforcement of IP, particularly in hot-spot countries.

It is pertinent to indicate that an efficient global IP protection is a complex issue, as it does not operate to meet the economic interest of each and every government which is obliged to strictly implement the requisite enforcement measures. Global innovative pursuits would probably entail large international profits, but the level of technological development in each country determines the capacity to capture these profits. The economic situation of the less developed countries, lacking manufacturing capacity, may encourage counterfeiters to imitate, to capture as a minimum, a fraction of the international profits resulting from others research pursuits. However, as a matter of fact imitation occurs in middle income, newly industrialized countries (NIC) having the sufficient imitation capacity due to the fact that innovative activities are ever more witnessed. The main reason behind imitation is that the trade-off between innovation and imitation is not very similar for all countries. Imitation offers the opportunity to acquire some profits in the event local innovation is not paying. It should be observed that even in countries where intellectual property has been implemented for a considerable time, legal protection and enforcement still requires great efforts.

There is one final reflection on all this and that is that, the grave situation which encourages counterfeiters and faces companies producing state- of- the- art products is the quality of the counterfeit goods. When the quality of a counterfeit product is higher compared to an old generation product, the consumer is likely to prefer the counterfeit product. The poor consumer would find a substitute and the richer consumer will pay less price. As a foregone conclusion the old generation product would be turned out of the market. In such an instance a counterfeit product would drive prices down.

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