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The Economic Impacts of The Economic Impacts of Counterfeiting and Piracy Counterfeiting and Piracy

The main findings of the OECD Study The main findings of the OECD Study

DubaiDubai

Marcos Bonturi

Head of theStructural Policy DivisionOECD

The views expressed are those of the author in his private capacity and do not necessarily represent those of the OECD or its Member governments.

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Project background – Global Value Chains

Fragmentation of the production process across countries contributed to considerable changes, e.g.:

Growth of importance of outsourcing and off-shoring of certain functions.

Relocation of firms’ activities overseas.

Growing volume of internationally traded intermediates. In 2003, 54% of world manufactured imports were intermediate goods (including

primary goods, parts and components and semi-finished goods).

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Project background – Global Value Chains

The ratio of imported to domestic intermediates, 1995 and 2000.

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Benefits of Globalization of Value Chains: Growth of productivity and hence average incomes

and wagesAt the economy-wide level, the OECD Growth Study estimated that an increase in openness by 10 percentage points translates over time into an increase of 4% in per capita income in the OECD area.

Project background – Global Value Chains

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Major challenges for policy makers

How to continue moving economic activity further up the value chain to ensure competitivenes and prosperity in the global environment?

Globalization of value chains -- continuous process of change, innovation and productivity growth

- Today’s most innovative products and services ultimately end up as commodities that can be produced anywhere.

- Economies can only grow by inventing new technology, innovating products and processes and by designing new management methods.

At the same time, the innovation process becomes more open. - Global sources for innovation.

- Growing importance of linkages and co-operation are of for successful innovation.

- Key sources of knowledge are in public domain.

Project background – Global Value Chains

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The problem of counterfeiting & piracy has been growing – both scope and magnitude; – affects firms, consumers, governments and workers

There is a broad range of effects – economic, social, health, safety

Concern is increasing– About the impacts on innovation– about economic implications for economies where there is

significant production of counterfeit goods– over role of organised crime

But politically sensitive and even some ambivalence among certain stakeholders.

Rationale for the project

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Phase 1: Counterfeit and pirated products – Scope: Tangible products that infringe trademarks, copyrights,

patents or design rights

Phase 2: Digital piracy – This has been scoped, and now only needs final agreement by

member governments before moving forward

Phase 3: Other IPR infringements – Yet to be scoped and funded and must take account of

progress in Doha Development negotiations– If it goes ahead will cover inter alia Geographic Indications

Structure of the project>>> Three phases

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Co-operation between governments, business (e.g. BASCAP), civil society and international

institutions, notably WCO, WIPO, Interpol, at global and regional level

Surveys undertakenof governments, industry, and customs authorities with the assistance of the World

Customs Organisation (WCO)

Methodology developedto assess the magnitude of the problem in international trade, principally using

statistics on customs seizures

Analysis conducted• of trends, developments and effects;• drivers of consumption and production of C&P, and• distribution channels

Country and sectoral case studies carried outto overview country activities and to address the specific circumstances that exist in

a number of industries affected by counterfeiting and piracy

General outline of the study

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► Magnitude of the problem

Measurement needs rigorous methodology, but data is hard to find

• activities are illicit and clandestine

• enforcement and customs data are sparse, incomplete and inconsistent

• Enterprises may be reluctant to divulge data Analysis suggests that international trade in counterfeit or pirated

products could have been up to US$ 200 billion (customs basis) in 2005

The figure does not include – domestically produced and consumed products– non-tangible pirated digital products

If added, the figure could be several hundred billion dollars higher

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► Extent of the problem

Virtually everything can (and probably has) been counterfeited, and is taking place in virtually every economy

Analysis confirms counterfeiting of

• increasingly complex products

• sophisticated packaging

• security items (i.e. holograms) Growing trend towards everyday products intended to deceive

consumers, many of which may affect public health and safety, eg • car parts

• Pharmaceuticals

• food/drink Evidence of growing infiltration of legitimate supply chains – an

area of interest to organised crime

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Seizures of imported counterfeit and pirated products from the top 20 source economies

Region of top 20 source economies

Number of source economies in region

Seizures (% of total)

Asia (excl. Middle East) 12 69.7Middle East 2 4.1Africa 2 1.8Europe 2 1.7North America 1 1.1South America 1 0.8

Top sources 20 79.2

Customs seizures

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China’s share in major markets (% of total imports)

Project background – Global Value Chains

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► Distribution channels

While many counterfeited goods are smuggled, most are transported using normal commercial transport services

- often with appropriate documentation (such as Bills of Lading)

- products are accurately described as it is not always clear when these may be counterfeited

- this places considerable onus on customs officials to determine provenance, as many counterfeits can only be identified by rigorous testing (eg car parts, pharmaceuticals).

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FTZs are having significant impact

Impact of Free Trade Zones on trade

Zone Exports of manufactured goods ($US billion)

Percentage of total exports of manufactured goods (%)

Global 177.7 8.3 Asia/Pacific 84.5 11.0 Americas 44.0 5.3 Central/E. Europe & Central Asia

14.5 6.8

Middle East/North Africa 28.7 16.7 Sub-Saharan Africa 2.4 19.5

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Counterfeiters use FTZs

Growing use of free trade zones

- these are used as gateways and way-points where goods can be

• broken down into smaller consignments

• Documents sanitised to disguise point of manufacture

• elaborated and repackaged (often goods only become counterfeits at this point)

• transhipped to disguise actual origin

The lower intensity of customs surveillance in free trade zones can be to counterfeiters’ advantage

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Counterfeiters are skilled at what they do

Transportation patterns suggest that highly developed networks are in place to distribute counterfeited and pirated goods

Only limited number of places can produce these goods in quantity, while markets span the world

- therefore such networks are critical

There is evidence of growing sophistication on part of counterfeiters, from fabrication, to labelling, packaging and distribution

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► Main Effects

Counterfeiting and piracy…

can impact negatively on innovation and growth may reduce employment can reduce foreign direct investment (FDI) damages sales volume, profits, brand value and capitalisation of rights’

owners, and can lead to potential legal liability can seriously affect health and safety of users can negatively affect consumer confidence reduce tax revenues to governments induce high costs on governments and industry to combat C&P encourages participation by organised crime and can be the cause of

corruption

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Importance vs. Priority

Most governments have labelled counterfeiting and piracy as important problems.– However, not always matched by priority. Other illicit activities

are being given first call on resources (for example, drugs, people smuggling, gun running)

Governments may better respond to these problems if they appreciate the corrosive effects of C&P.– especially if they took full account of the role of organised crime,

the effects on health and safety, foregone tax revenue and weakened incentive to innovate

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Laws & regulations often ineffective

Not properly enforced

Insufficient public enforcement resources

Low priority in courts

Protection of locals

Courts often lenient because counterfeiting and piracy are not considered to be serious crimes

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Penalties do not always deter

Civil remedies (including damages) generally insufficient to deter

Criminal penalties and fines, even if available, rarely applied to full extent

Therefore high rates of repeat offenders

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Improving data collection This study has highlighted just how poor data really is Governments and industry can help by maximising the

value of data by ensuring that it is– systematically collected– comparable– Comprehensive

The reporting framework developed by the World Customs Organization (WCO) offers a useful template by other law enforcement agencies and industry

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For the attention of policymakers

Improve co-ordination amongst domestic agencies

Consider having a clear C&P policy

Have a clear and enforceable legal and regulatory framework

Ensure effective enforcement

International co-operation, bilateral, plurilateral and multilateral

Increase awareness amongst government officials and consumers

Enhance co-operation with industry

Monitor progress through programme evaluation and measurement

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Counterfeiting and piracy is a significant and growing problem that can affect health and safety

Counterfeiters are well organised and adept at establishing distribution channels, and this encourages the participation of organised crime

The infiltration of legitimate supply lines, and the potentially harmful effects of many products is of growing concern

The very damaging effects on consumers, rights holders and governments are now beyond dispute

More priority, co-operation and information collection is necessary to better understand and deal with these problems

Full report is available on OECD web sitewww.oecd.org/sti/counterfeiting

Summary of Conclusions

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That counterfeiting and piracy is a significant and growing problem that has economic, social, health and safety consequences has been recognised at highest levels:

G8 meeting at Heiligendamm in June 2007 included Intellectual Property generally, and Counterfeiting and Piracy specifically, in its Summit Declaration

A Unit has been established within the OECD to steer the implementation of the Heilingendamm Dialogue Process, including “the Promotion and Protection of IP”

Dialogue will include the “O5” emerging economies: Brazil, China, India, Mexico and South Africa

Where to from here?

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Marcos Bonturi

Head

Structural Policy Division

OECD2, rue André-Pascal75775 Paris CEDEX 16France

Email: marcos.bonturi@oecd.orgPhone: (+33) 1 4524 9349Fax: (+33) 1 4430 6257Website: www.oecd.org/sti/counterfeiting