Illicit Trade and the Korean Economy

4.  What are the impacts of global infringements of Korean IPRs on the Korean economy?

4.1. Are consumers knowingly buying fakes that infringe on Korean IP?

The next step consists of comparing the share of Korean IPR-infringing fakes that are sold on primary markets worldwide with those that are sold on secondary markets. This is done using the methodology described in Annex B.

Table 4.1 indicates that more than 59% of the goods traded worldwide that infringed Korean IPRs were offered on secondary markets, i.e. they were bought by consumers who knew they were fakes.

This share varies among product categories, ranging from 8.2% for recreation goods (e.g. toys and games) to almost 74% for clothes.

It can be noted that the share of the secondary market is lower for counterfeit products that have direct health and safety impacts such as toys and games, and cosmetics. However, it is important to recall that substandard products with negative impacts on consumers’ health and security are included in all product categories. Despite proven risks, this report does not provide precise estimates of these risks as they cannot be precisely quantified.

Table 4.1. Share of secondary markets for top counterfeit products that infringe on Korean IPRs, 2020-21

Sector	Share of secondary market (bought knowingly)
Household cultural and recreation goods	8.2%
Perfumery and cosmetics	33.3%
Motor vehicles and motorcycles	43.2%
Watches and jewellery	46.0%
Electrical household appliances, electronic and telecommunications equipment	59.7%
Furniture, lighting equipment, carpets and other manufacturing n.e.c	61.3%
Clothing, footwear, leather and related products	73.8%
Total	59.5%

Source: OECD calculations.

The existence of an unintended demand for counterfeit goods leads to a drop in consumer surplus, as consumers who are concerned about their health and well-being receive a counterfeit product, often of inferior quality, instead of a genuine product. Counterfeiters invest substantial effort in making the fake products appear as authentic as possible to mislead consumers effectively. The case of recycled old phones is a great illustration. Indeed, ICT representatives indicated that a common practice is to refurbish and reintroduce old phones to the market as new ones. Such counterfeit practices involve using low-quality fake chips, whilst updating the case and screen to deceive consumers.

E-commerce is a preferred distribution channel for counterfeiters as it facilitates consumer deception. For example, fake fashion products are primarily distributed online utilizing stolen seller identities, often mingling genuine and counterfeit goods.

Unintentional purchases of counterfeit goods are often linked to a lack of consumer awareness which is a key element in limiting the trade in counterfeit goods. Interviews with Korean brand representatives have shown that consumer knowledge varies across regions. While quality improvements in counterfeits have misled consumers in regions like the European Union, the United States and Korea, in Southeast Asia and Latin America, the primary incentive remains the price, underlining a significant lack of consumer awareness.

4.2. What is the impact on Korean firms’ sales in the manufacturing sector?

As can be seen in Table 4.2, the volume of forgone sales due to IP infringement varies across years and reached over USD 8 billion in 2013 and 2017. In relative terms, the impact of Korean IPR violations on total Korean manufacturing sales ranges from 0.14% to 1.05%.

Table 4.2. Volume of Korean companies’ forgone sales due to infringement of their IPRs, by year

Year	Sales losses in USD million	Share of sales
2011	2 879	0.24%
2012	4 004	0.34%
2013	8 628	0.72%
2014	5 647	0.45%
2015	4 707	0.35%
2016	4 375	0.39%
2017	9 042	1.05%
2018	6 026	0.67%
2019	1 231	0.14%
2020	3 425	0.40%
2021	6 097	0.60%

Source: OECD calculations.

In 2018, the total volume of Korean companies’ forgone sales due to infringement of their IPRs in global trade amounted to USD 6 billion, or 0.7% of total sales of Korean companies in that year (domestic plus exports).

Out of these sales, the manufacturing industry for electrical household appliances, electronics and telecommunications equipment was by far the most hit by counterfeiting (Table 4.3). It incurred sales losses of USD 4.7 billion, i.e. almost 80% of the global value of sales losses due to infringement of Korean IPRs. It was followed by machinery and industrial equipment (USD 546 million) and automotive spare parts (USD 296 million). These results highlight the importance of analysis data at the sector level as significant disparities between industries exist.

In terms of the share of sales, the electrical household appliances, electronics, and telecommunications equipment industry lost over 19.4% of its sales in 2018. It was followed by the watches and jewellery and machinery industries with losses representing respectively 0.59% and 0.36% of their sales.

Table 4.3. Volume of Korean companies’ forgone sales due to infringement of their IPRs in 2018, by sector

Sector	Sales losses in USD million	Share of sales
Watches and jewellery	5.9	0.59%
Clothing, footwear, leather and related products	47.4	0.25%
Food, beverages and tobacco	56.3	0.08%
Textiles and other intermediate products (e.g. plastics; rubbers; paper; wood)	67.2	0.07%
Chemical and allied products; except pharmaceuticals, perfumery and cosmetics	142.0	0.10%
Basic metals and fabricated metal products (except machinery and equipment)	144.0	0.07%
Motor vehicles and motorcycles	296.0	0.18%
Machinery, industrial equipment; computers and peripheral equipment; ships and aircrafts	546.0	0.36%
Electrical household appliances, electronic and telecommunications equipment	4720.0	19.42%

Source: OECD calculations and OECD SDBS database.

In 2021, the sales losses for the Korean manufacturing industry due to IPR infringement amounted to USD 6.1 billion. This represents 0.6% of total Korean manufacturing sales of that year. When considering only the sales of the sectors affected by counterfeiting, this share amounted to 2.4%.

As can be seen in Figure 4.1, the ICT sector was the hardest hit by counterfeiting with sales losses amounting to USD 3.6 billion in 2021. This is equivalent to 13.4% of the sector’s sales and almost 60% of total sales losses of the global trade in Korean IPR-infringing goods. In absolute terms, the automotive sector also experienced high losses at almost USD 1.8 billion. In relative terms, the impact is less pronounced with a share of sales losses representing 1% of total automotive sales in 2021.

Figure 4.1. Top Korean manufacturing industries impacted by IPR infringement in terms of loss of sales, 2021

In USD billion

Source: OECD calculations.

4.3. What is the impact on jobs in the Korean manufacturing sector?

In addition to its impact on the sales of brands holding intellectual property rights, counterfeiting also has an impact on employment. Table 4.4 shows the job losses in Korean manufacturing due to infringement of Korean IPR holders from 2011 to 2021. The Korean manufacturing sector losses amounted to over 13 500 jobs in 2021 due to IP infringement.

As can be seen in Figure 4.2, the manufacturing sector of electrical household appliances, electronic and telecommunications equipment experienced the highest losses with more than 7 000 lost jobs in 2018.

In 2021, the impact of counterfeiting on the Korean manufacturing employment resulted in over 13 500 lost jobs. In relative terms, this represents 0.7% of total manufacturing employment. However, this share is higher, at 3%, when only sectors affected by IPR infringement are considered.

Figure 4.3, which presents the breakdown of jobs losses by sector, shows that the ICT sector experienced the highest job losses (more than 9 500), followed by the automotive industry which lost more than 2,000 jobs. In relative terms, the watches and jewellery, and the ICT industries experienced the highest jobs losses. The share of job losses represented respectively 25% and 16% of employed in these two industries.

Table 4.4. Job losses in Korean manufacturing sectors, by year

Year	Job losses	Share of employees
2011	3 134	0.12%
2012	4 522	0.18%
2013	9 657	0.37%
2014	6 114	0.23%
2015	5 604	0.16%
2016	5 069	0.19%
2017	13 442	0.66%
2018	8 487	0.42%
2019	3 423	0.17%
2020	9 200	0.46%
2021	13 855	0.69%

Source: OECD calculations and OECD Structural and Demographic Business Statistics (SDBS) database.

Figure 4.2. Top Korean manufacturing industries impacted by IPR infringement in terms of absolute job numbers, 2018

Source: OECD global customs seizures.

Figure 4.3. Top Korean manufacturing industries impacted by IPR infringement in terms of job losses, 2021

4.4. What is the impact on Korean government revenue?

Lower sales and lower profits for Korean rights holders mean they pay lower corporate income tax to the government. Moreover, fewer employees mean lower personal income tax revenues and lower social security contributions collected by the Korean government. In 2018, this forgone tax revenue amounted to USD 925 million, equivalent to 0.45% of total Korean revenues collected on these two taxes. In 2021, this figure reached USD 1.5 billion, with USD 937 million lost in income taxes and social security contributions, and USD 633 million lost in corporate tax (Table 4.5).

Table 4.5. Public revenue losses due to infringements of Korean IPRs in global trade, 2018 and 2021

	2018		2021
Type of tax	Value in USD million	Share	Value in USD million	Share
Personal income tax and employees’ social security contributions	583.16	0.43%	937.02	0.55%
Corporate income tax	342.21	0.47%	633.12	0.91%
Total	925.37	0.45%	1 570.14	0.65%

Source: OECD calculations and OECD (2020[8]).

4.5. What are the main challenges and strategies to limit the impacts of trade in counterfeits violating Korean IPR?

4.5.1. Challenges faced to fight against counterfeiting

Korean industry representatives as well as members of the Korean Intellectual Property Office have also raised, during interviews, the issues and challenges in limiting the impacts of trade in counterfeit goods. The challenges faced by rights holders and law enforcement are multiple and concern different areas.

Low penalties

There is a range of sanctions imposed on counterfeit activities. While some regions like Korea have relatively low civil penalties, The People’s Republic of China (hereafter “China”) enforces harsher sanctions, particularly against repeat offenses. Despite these efforts, the penalties remain lower compared to those for health and safety risk-related crimes.

Raising penalties for counterfeiting activities to levels that discourage such counterfeiting is a key element in the fight against illicit trade activities.

Lack of co-operation

International co-operation within industries is limited, primarily occurring in enforcement raids, with no pre-arranged co-ordination or substantial collaborative actions in place. Indeed, cases that involve third countries can be accompanied by legal complexities and high costs, requiring the involvement of various agencies, and incurring substantial fees, further complicating efforts to combat counterfeiting. In this regard, it is worth noting that KIPO in collaboration with other agencies like Korea Trade Investment Agency (KOTRA) and the Korean Intellectual Property Protection Agency (KOIPA) provides support to Korean companies expanding overseas (Box 4.1). This includes guidance, counselling, and monitoring to companies to identify ways to enhance their defence against intellectual property infringement abroad.

The need for co-operation between e-commerce platform operators and legal systems has also been indicated as an area for improvement for anti-counterfeiting mechanisms.

Box 4.1. The Korean Intellectual Property Protection Agency (KOIPA)

KOIPA is a public agency under the Korean Intellectual Property Office (KIPO) which is committed to enhancing the competitiveness of Korean companies, protecting IP values, and promoting national economic development.

KOIPA is involved in providing both international and domestic IP protection support.

At the international level, KOIPA seeks to improve IPR protection of overseas exporting companies and enhance Korean brand protection. It also plays a key role in strengthening IP dispute resolution. In these fields, the KOIPA’s main activities are to provide:

• Strategic planning for dealing with IP dispute.

• Support for patent dispute risk.

• Aid for investigating and responding to fake goods and trademark squatting.

• A foundation for IP dispute resolution.

• A collaboration with overseas e-commerce platforms in order to combat fake goods.

At the national level, KOIPA’s role is to improve legal support for IP protection and to promote a culture that respects IP rights. It is also involved in combating pirated goods and boosting trade secret protection.

High costs

The fight against counterfeiting represents a burden for IPR holders. In addition to the erosion of their brand image, the cost of taking criminal actions against manufacturers of counterfeit goods remains very high and can be discouraging.

Companies must also dedicate resources to monitoring the presence of counterfeit products on the market, authenticating and destroying them in the event of proven counterfeiting. This can represent significant costs for companies.

Small parcels

Addressing counterfeiting transported in small parcels presents a challenge due to difficulties in immediate assessment and incomplete and/or inaccurate information in customs documents. The work of customs officers is often hampered by inconsistencies and false information in the details of the consignment. There is a need for strengthening co-operation with small parcel companies and regular delivery services to address challenges.

4.5.2. Strategies to counter the trade of Korean IPR-violating goods

Discussions with Korean experts on counterfeit trade also focused on strategies for limiting the scale of this activity. Although there are many areas in which action can be taken, Korean experts indicated that only global and combined action would enable them to combat this phenomenon effectively.

Consumer and company awareness

Awareness campaigns are needed to emphasize that counterfeiting is a criminal activity that poses health and safety risks. It is important to make consumers aware of the practices of counterfeiters, particularly regarding the preferred distribution channels for fake products so that they can exercise discernment and limit their deception.

Raising awareness among companies regarding counterfeiting is also key for fighting against this illicit practice. The Korean Intellectual Property Office (KIPO) is involved in building awareness campaigns aimed at businesses, with particular attention to Small and Medium-sized Enterprises (SMEs), which often lack the level of awareness of larger companies which have greater capacity to combat counterfeiting.

Prevention strategies

It is essential to develop and maintain a proactive stance against counterfeit products. The consensus is that complete elimination of counterfeits is challenging, but constant monitoring, prevention strategies, and adoption of a pro-brand mindset are crucial in mitigating the issue and protecting consumers.

Enforcement

Globally, utilising customs approaches, like customs-issued applications for actions,1 have proven to be efficient and relatively inexpensive methods in addressing counterfeiting. However, there is still a need to bolster judicial police resources.

Prioritising crackdowns at customs and enhancing training are pivotal. Strengthening the capacities of customs officers and raising inspection rates at borders are essential to enhance anti-counterfeiting efforts, necessitating more resources and a strategic focus on relationship building and raising interest among enforcement officers.

Both online and offline measures, including cracking down on production sites, are crucial in combating the spread of counterfeit products in the market. It is worth noting that in this area KIPO’s role is important. It conducts meticulous online and offline investigations to counteract infringement. Online investigations often involve detecting infringements or receiving reports from owners and platform operators, followed by detailed procedures to identify sellers of the counterfeits and initiate prosecution. Offline investigations focus on on-site confirmations and further legal procedures, with a view towards achieving comprehensive enforcement actions.

Co-operation

The cost and lack of sufficient co-operation from e-commerce platforms present significant challenges in combating counterfeiting. Various enforcement agencies are willing to cooperate, but challenges remain, particularly with uncooperative trading partners.

As for collaboration between IP offices and enforcement, partnerships already exist but some need to be consolidated. Indeed, partnerships between various IP offices, including the Chinese State Intellectual Property office (SIPO) have been already established to strengthen enforcement mechanisms, especially in significant markets like China.

Note

← 1.  Application for Action (AFA) is a preventive measure that can be taken to protect IPR holders from counterfeit goods, even if they are unaware that their IPRs may have been violated. It allows customs authorities to temporarily impound goods suspected of IPR violation, giving time to IPR holders to defend their rights.