Sup­ply, De­mand Boom for China’s Fakes

De­spite more and larger seizures of coun­ter­feit goods in the United States, the flow doesn’t stop. And China, the world’s largest man­u­fac­turer of goods, is by far the largest source of fake goods, re­ports AMY HE from New York.

China Daily (Canada) - - FRONT PAGE -

On a win­try af­ter­noon in Fe­bru­ary, a num­ber of Chi­nese men and women hud­dle in front of a Star­bucks on the cor­ner of Cen­tre and Canal streets in New York’s Chi­na­town.

Wear­ing thick scarves and down jack­ets to keep them warm, the men sit on a rail­ing out­side the cof­fee shop; the women chat among them­selves. Walk­ing past the women, one can hear them re­peat­edly mut­ter­ing: “Pock­et­books, hand­bags, jew­elry.”

If any in­ter­est is demon­strated, they pull out folded lam­i­nated menus filled with pic­tures of bags — Louis Vuit­ton, Chanel, Michael Kors and more — all avail­able for cash and all fakes.

A large Louis Vuit­ton Nev­er­full bag costs $120; re­tail price: $1,340. An Her­mès Birkin is $150; re­tail starts at $5,000.

For years that street ac­tion has been re­peated ev­ery day in Chi­na­town and nearby Canal Street for a will­ing au­di­ence of buy­ers, al­most all of them tourists who want the same thing: copies of trendy and ex­pen­sive designer bags, sun­glasses, watches and other goods.

The bag men — and women — in Chi­na­town are easy to find. If they can’t be spot­ted on the street with or with­out the goods, the In­ter­net can help with nu­mer­ous ar­ti­cles: A Guide to Buy­ing Fake Hand­bags in New York City and Here’s How to Buy a Fake Bag in Chi­na­town.

One ar­ti­cle tells would-be buy­ers that “it might be best to act rel­a­tively quickly’’ be­cause of Man­hat­tan Coun­cil­woman Mar­garet Chin’s ef­fort to make buy­ing coun­ter­feit bags il­le­gal.

That warn­ing was in 2013. Chin’s ef­fort went nowhere, though she says she’s still try­ing to get the City Coun­cil to pass what would be the coun­try’s first law to crim­i­nal­ize the buy­ing of coun­ter­feit goods by buy­ers, not just sell­ers. Chin said that the city loses $1 bil­lion in tax rev­enue from coun­ter­feits. Flow in­creases

De­spite large and more fre­quent seizures of coun­ter­feit goods, the flow into this coun­try is in­creas­ing. And de­spite ris­ing la­bor costs and China’s de­sire to shift from be­ing solely a man­u­fac­tur­ing-based econ­omy, the coun­try re­mains the world’s big­gest pro­ducer of man­u­fac­tured goods and fake goods.

Ac­cord­ing to the United Na­tions Of­fice on Drugs and Crime, al­most 70 per­cent of all coun­ter­feits seized glob­ally from 2008 to 2010 came from China. For the United States, US Cus­toms said 87 per­cent of coun­ter­feits seized orig­i­nated in China. In terms of value, the UN es­ti­mates that East Asia ex­ports ap­prox­i­mately $24 bil­lion worth of coun­ter­feit goods ev­ery year.

For 2015, the In­ter­na­tional Cham­ber of Com­merce pro­jected that the value of global trade in coun­ter­feit and pi­rated goods is $1.77 tril­lion, ac­cord­ing to the In­ter­na­tional An­ti­Coun­ter­feit­ing Coali­tion Inc (IACC). The Wash­ing­ton-based non-profit is de­voted solely to com­bat­ing prod­uct coun­ter­feit­ing and piracy. IACC says its mem­bers in­clude small to large multi­na­tional com­pa­nies in au­to­mo­tive, ap­parel, luxury goods, phar­ma­ceu­ti­cals, food, soft­ware and en­ter­tain­ment.

In ad­di­tion to tax rev­enues, the coun­ter­feit­ers strip earn­ings from au­then­tic re­tail­ers and com­pa­nies.

In­tel­lec­tual prop­erty (IP) and brand ex­perts say that not much has changed in re­gards to coun­ter­feits. The global econ­omy will al­ways run ram­pant with fake goods from China, they say, and US-China ef­forts to com­bat the prob­lem have not yet yielded sig­nif­i­cant re­sults. The ex­perts say that there’s not a lot of in­cen­tive to en­force IP pro­tec­tion in China on a lo­cal level, and even if there is a de­sire on a na­tional level, the sheer vol­ume of IP in­fringe­ments in the coun­try makes it dif­fi­cult for au­thor­i­ties to crack down on the is­sue com­pletely.

“There are two things that are hap­pen­ing in China that are unique to the coun­try and that causes the prob­lem of coun­ter­feit­ing to be big­ger in China,’’ said Greg Miller, pres­i­dent of brand se­cu­rity at OpSec, a brand pro­tec­tion com­pany.

“Most of the lead­ing brands have things that are out­sourced to a Chi­nese man­u­fac­turer, so the sup­ply chain for au­then­tic goods is all through­out China for a tremen­dous amount of the global econ­omy. That same ecosys­tem sup­ports coun­ter­feit­ers ei­ther di­rectly — leak­age of prod­uct out of a le­git­i­mate sup­ply chain — or in­di­rectly, re­ly­ing on lo­cal man­u­fac­turer ex­per­tise to set up il­le­git­i­mate man­u­fac­tur­ing sites,” he said.

And the sec­ond thing is the In­ter­net. Cus­tomers now have eas­ier ac­cess to re­tail­ers — au­tho­rized or not — who are sell­ing th­ese prod­ucts, Miller said.

“If you can think of some­thing, it’s been coun­ter­feited,’’ said Kim Cic­colella, as­sis­tant chief of the in­ter­na­tional mail fa­cil­ity at John F. Kennedy Air­port in New York City, which pro­cesses all ar­riv­ing in­ter­na­tional mail for the United States.

Sports me­mora­bilia are peren­nial coun­ter­feit fa­vorites, she says.

Just days ahead of the Su­per Bowl on Feb 1, fed­eral au­thor­i­ties and the Na­tional Foot­ball League seized more than $19.5 mil­lion worth of fake sports me­mora­bilia, a cul­mi­na­tion of a year-long crack­down that be­gan af­ter the Su­per Bowl in 2014.

Most of the 325,000 goods seized were man­u­fac­tured in China and then brought into the US through var­i­ous smug­gling net­works, ac­cord­ing to the US Cus­toms of­fi­cials in­volved in the seizure. West­ern brands

The coun­ter­feit prob­lem started years ago when West­ern brands made their en­trance into China, ac­cord­ing to David Chow, pro­fes­sor of law at the Moritz Col­lege of Law at Ohio State Uni­ver­sity. “Thirty years ago, there was no coun­ter­feit­ing in China be­cause there were no multi­na­tional brands. But 25 years ago, when that be­gan, then you be­gan to see it. By the end of the 1990s, you saw a lot of coun­ter­feit­ing in China, and it hasn’t re­ally gone away,” he said.

Mil­lions of parcels leave Chi­nese ports ev­ery day, and the Chi­nese don’t have the re­sources to screen ev­ery­thing, nor are they par­tic­u­larly in­ter­ested in do­ing so be­cause once the prod­ucts leave, they be­come an­other coun­try’s prob­lem, Chow said.

“China doesn’t re­ally be­lieve that coun­ter­feit­ing is harm­ful to China or that crack­ing down on it would hurt lo­cal economies and lo­cal busi­nesses more than just let­ting it con­tinue to ex­ist. It’s es­pe­cially the ex­port of coun­ter­feit goods that are of lit­tle con­cern to China, be­cause once you ex­port those goods, they leave the coun­try and they wind up some­where else, so they don’t think about the harm that might be caused to China,” Chow said.

Richard Sy­bert, se­nior part­ner and chair of Gor­don Rees LLP’s in­tel­lec­tual prop­erty prac­tice group, said that it benefits lo­cal gov­ern­ments to en­cour­age coun­ter­feit­ing.

“Coun­ter­feit­ing pro­vides a source of in­come and it pro­vides jobs. And es­pe­cially once you’re away from the big mod­ern cities in China — a lot of the ru­ral economies have col­lapsed. There’s a lot of poverty in China in light of the flight of in­dus­try and pop­u­la­tion to the coasts, so there’s a tremen­dous in­cen­tive and vested in­ter­est in lo­cal gov­ern­ments in en­cour­ag­ing and even sup­port­ing coun­ter­feit­ing,” he said.

Gov­ern­ment of­fi­cials can also get in­di­rect benefits from coun­ter­feit­ing, ac­cord­ing to Peter Yu, direc­tor of the In­tel­lec­tual Prop­erty Law Cen­ter at Drake Uni­ver­sity Law School.

Ports can charge fees for stor­age in ware­houses and can levy taxes on goods leav­ing the port, which doesn’t dis­crim­i­nate over whether the goods are le­git­i­mate or not, he said.

“Think about the Yangtze River. If you are count­ing on the vol­ume of goods go­ing through your port, it does not mat­ter whether they’re le­git­i­mate prod­ucts or coun­ter­feit prod­ucts,” Yu said. “It’s very at­trac­tive if you’re charg­ing the taxes or the fees based on the vol­ume of goods.” IP laws

Since en­ter­ing the World Trade Or­ga­ni­za­tion (WTO) in 2000, China has adopted in­tel­lec­tual prop­erty laws that are con­sis­tent with in­ter­na­tional stan­dards. Prior to that, the gov­ern­ment had es­tab­lished IP laws to be on par with the Trade-Re­lated As­pects of In­tel­lec­tual Prop­erty Rights agree­ment, which is ad­min­is­tered by the WTO and lays down the min­i­mum stan­dards of IP reg­u­la­tion for mem­ber coun­tries.

“If you look at the laws on the books, China at the na­tional level has a pretty good set of IP pro­tec­tion laws, es­pe­cially re­gard­ing trade­marks, which is your pri­mary line of de­fense against coun­ter­feits. The laws on the books are good — the na­tional gov­ern­ment is ac­tu­ally mak­ing and has made some se­ri­ous good faith ef­forts,” said Sy­bert.

The chal­lenge, how­ever, is en­force­ment of the laws and set­ting up ef­fec­tive de­ter­rents that will dis­cour­age coun­ter­feit­ers from com­mit­ting the crime, he said. Both Chow and Sy­bert said that the coun­try will reg­u­larly work with multi­na­tional brands to con­duct raids and seize coun­ter­feit prop­erty, but they said do­ing so has no mean­ing­ful im­pact on the crim­i­nal ac­tiv­ity be­cause the penal­ties of­ten are not se­ri­ous enough pun­ish­ment to de­ter coun­ter­feit­ers.

“The civil penal­ties or crim­i­nal penal­ties for coun­ter­feit­ing un­der Chi­nese law are just too low. They’re so low that you can pay them and still make more money from the coun­ter­feit­ing,” Sy­bert said.

If the penalty for get­ting caught at coun­ter­feit­ing is $100,000, for ex­am­ple, and coun­ter­feit­ers make many times more than that on a weekly or monthly ba­sis, the fees are not big enough a threat to stop coun­ter­feit­ing, they said. “We have seen re­peat­edly that en­force­ment ef­forts don’t have much of an im­pact. They’ll pay the fines, and they’ll set up shop two days later across the street,” said Sy­bert.

As to brands pro­tect­ing their prod­ucts be­ing coun­ter­feited, OpSec’s Miller said that com­pa­nies have got­ten im­mensely savvier. They work with brand pro­tec­tion com­pa­nies like his to mon­i­tor the In­ter­net for coun­ter­feit goods be­ing sold on e-com­merce sites, ver­ify the au­then­tic­ity of the goods they come across and shut down mar­ket­places sell­ing fake ones.

Brands need to track their dis­tri­bu­tion chains in China to make sure prod­ucts are be­ing made where they’re sup­posed to, and get­ting dis­trib­uted where they’re au­tho­rized to do so, Miller said. Things are put on la­bels on the au­then­tic goods that are dif­fi­cult to coun­ter­feit, and that helps not only cus­toms of­fi­cials but con­sumers ver­ify the prod­ucts’ au­then­tic­ity.

As to what the US can do, au­thor­i­ties say the sheer vol­ume of cargo and parcels ar­riv­ing at the coun­try’s ports is a prob­lem. The JFK In­ter­na­tional Mail Fa­cil­ity in New York pro­cesses 500,000 to 600,000 pieces of in­ter­na­tional mail a day, and Cus­toms and Bor­der Pro­tec­tion (CBP) can only ex­am­ine so much. Mail from the Chi­nese main­land, Hong Kong, and other coun­tries and re­gions are tar­geted and a per­cent­age of all mail is checked by ex­perts and agents on hand, ac­cord­ing to the CBP’s

Ex­press mail parcels — where the ma­jor­ity of IP in­frac­tions oc­cur be­cause of the quick de­liv­ery time and the abil­ity for buy­ers to track their packages — are scanned by an X-ray sys­tem. Packages that are sus­pected of IP vi­o­la­tion get ap­praised by on-site ex­perts. If the con­tents are determined to be coun­ter­feit, they get turned over to the seized prop­erty di­vi­sion be­fore be­ing de­stroyed.

Buy­ers are no­ti­fied of seizures and given an op­por­tu­nity to of­fer proof of au­then­tic­ity if they feel their pack­age was wrongly seized. Most peo­ple — Cic­colella es­ti­mates 99 per­cent — don’t pe­ti­tion and just for­feit their packages.

Coun­ter­feit­ers don’t make too much of an ef­fort to con­ceal their packages be­yond pur­pose­fully mis­la­bel­ing the con­tents on an in­voice, or just say­ing that a pack­age is a “gift” for the re­ceiver. “For the most part, there’s no con­ceal­ment; you open it up and right there are the prod­ucts,” Cic­colella said.

Ship­pers of­ten send goods to in­di­vid­ual buy­ers, who are most likely buy­ing prod­ucts off the In­ter­net with­out re­al­iz­ing they’re fake.

“A lot of in­di­vid­u­als would think that be­cause they’re buy­ing some­thing on­line, it’s gen­uine, or they think that it’s get­ting shipped from China so they’re get­ting a good deal, not re­al­iz­ing that when it’s so much cheaper than the ac­tual prod­uct, it’s go­ing to be coun­ter­feit,” she said.

If cus­toms agents no­tice large ship­ments go­ing to in­di­vid­u­als or busi­nesses, or ship­ments go­ing to re­peat in­di­vid­u­als, they will no­tify Home­land Se­cu­rity In­ves­ti­ga­tions (HSI), which will con­duct their own ex­am­i­na­tions.

“It’s dif­fi­cult from an in­ves­tiga­tive stand­point — if it goes to an in­di­vid­ual, for ex­am­ple, I can get 20 boxes, my cousin can get 20, my friend gets 20, you won’t see them on the street or sold at flea mar­kets,” Cic­colella said. “We do get boxes of 50 or 60 watches, so it’s un­likely that that will be for per­sonal use. But if it goes to in­di­vid­u­als, it goes to dif­fer­ent in­di­vid­u­als. And it’s not only lo­cal — it comes in here and then it gets shipped out to other states as well.”

Cic­colella. IP vi­o­la­tions

The most re­cent fig­ures from the Cus­toms and Bor­der Pro­tec­tion for 2013 show that in­tel­lec­tual prop­erty rights vi­o­la­tions seizures in­creased 7 per­cent from those in fis­cal year 2012. The to­tal man­u­fac­turer’s sug­gested re­tail price (MSRP) of the goods, if they had been gen­uine, in­creased 38 per­cent to $1.74 bil­lion. Of that to­tal, seizures orig­i­nat­ing from China were val­ued at $1.1 bil­lion, rep­re­sent­ing 68 per­cent of all IPR seizures.

Fig­ures show that IPR seizures have in­creased ap­prox­i­mately five­fold in the last decade, from about 6,000 in 2004 to nearly 25,000 in 2013.

Cic­colella said that cus­toms of­fi­cials at JFK will work with those from other ports around the coun­try on op­er­a­tions. She said that Chi­nese cus­toms of­fi­cials have toured the JFK mail fa­cil­ity and told US agents that they ex­am­ine all out­go­ing mail leav­ing China.

“I’m not re­ally sure how it’s pos­si­ble since we get so many coun­ter­feits. They said that they make ev­ery ef­fort to stop it from reach­ing the United States,” she said.

But at the same time, the ex­perts said that there is a limit to how much China, and the US, can do to com­bat the per­va­sive­ness of coun­ter­feit­ing. Re­gions in China that have been more ac­tive in pro­tect­ing in­tel­lec­tual prop­erty rights are not al­ways the places that are man­u­fac­tur­ing and mov­ing large amounts of coun­ter­feit goods out of the coun­try.

“If you look at China, it’s a large coun­try. A lot of the de­vel­op­ments in the IP ar­eas are in the coastal ar­eas and a lot of this devel­op­ment has not trick­led down to the other parts of China, where there is still a lot of pro­duc­tion of pi­rated and coun­ter­feit ma­te­ri­als,” said Drake Law’s Yu.

The US and other West­ern coun­tries that com­plain about coun­ter­feit­ing of­ten view China as a large, cen­tral­ized gov­ern­ment, and thus take com­plaints di­rectly to Bei­jing, not re­al­iz­ing that au­thor­i­ties in Bei­jing that make de­ci­sions in the city might not nec­es­sar­ily af­fect those on the op­po­site side of the coun­try, Yu said.

Sy­bert sim­i­larly said that cen­tral author­ity dis­si­pates once you’re away of the big cities.

“The old Chi­nese say­ing that, ‘ The sky is high and the em­peror is far away.’ The popular per­cep­tion in the West is that some­how China’s this monolithic, to­tal­i­tar­ian, au­thor­i­tar­ian so­ci­ety where ev­ery­thing is con­trolled. That ab­so­lutely is not the truth. A hun­dred miles out­side of Shang­hai or Bei­jing, and to some de­gree, the cen­tral gov­ern­ment no longer ex­ists. It’s a big, fis­si­parous coun­try,” he said. Courts over­whelmed

Much of the ju­di­cial struc­ture in China is also over­whelmed by the num­ber of in­tel­lec­tual prop­erty cases it sees in court, Sy­bert added, and the gov­ern­ment tries to staff and fund them ad­e­quately, “but there’s just too much and they con­tinue to get back­log.”

Mary LaFrance, pro­fes­sor of law at the Wil­liam S. Boyd School of Law, said that en­force­ment is hin­dered by a bu­reau­cratic sys­tem that has trade­mark own­ers pur­su­ing re­lief at a lo­cal rather than a fed­eral level, and that lo­cal en­force­ment sys­tems are “cum­ber­some and in­con­sis­tent”.

But de­spite some call­ing China’s ef­forts in­ad­e­quate, no coun­try on Earth has made as many ad­vances in their legal sys­tem where in­tel­lec­tual prop­erty is con­cerned, and in such a short amount of time, Yu said.

“China at the mo­ment is prob­a­bly the most liti­gious in terms of IP pro­tec­tion, so if you ac­tu­ally look at the num­ber of cases that has gone be­fore the Chi­nese court and the num­ber is ac­tu­ally higher than all the other coun­tries. If you look at the num­ber of peo­ple that have been de­voted to IP en­force­ment, it’s also the high­est in the world,” said Yu.

“So I think to some ex­tent it’s hard to just say that China has not been do­ing enough. Be­cause at some point, you just have to ask: how much can they ac­tu­ally do if you’re al­ready No 1 in the world in terms of IP cases that have gone be­fore the court? No 1 in the world in terms of en­force­ment?”

Back at Cen­tre and Canal streets in Chi­na­town, the passerby turned would-be buyer has cho­sen a bag and is told “fol­low me’’ and waits out­side a hair sa­lon a short dis­tance from the Star­bucks.

Af­ter no more than five min­utes, the seller brings back the item and tells the buyer to ex­am­ine it. The price is $120. The buyer of­fers $70. The seller coun­ters with $85. “That’s the best I can do,” he says. But the buyer in­sists on $70, and then tells him to for­get about it, that she’ll look else­where. “Fine, I can give it to you for $70. But just know that I rarely do that. I’m do­ing it just for you.” Con­tact the writer at amyhe@


A dis­play of coun­ter­feit jer­seys

for Na­tional Bas­ket­ball As­so­ci­a­tion teams seized by US Cus­toms and Bor­der Pro­tec­tion.

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