Why Do Countries Import Fakes?

1. Why do countries import fakes?

Illicit trade in counterfeit and pirated goods1 is a general threat that keeps growing in scope and magnitude. Globalisation and the rising economic importance of intellectual property (IP) have been fostering economic growth on the one hand, while on the other opening up new opportunities for criminal networks to expand the scope and scale of their operations. with serious negative consequences for the economy and society. Illicit trade in fakes undermines good governance, the rule of law and citizens’ trust in government. Counterfeiting not only has a corrosive impact on the sales and profits of affected firms and on the economy in general, but also poses critical threats to social welfare, and public safety. In addition, in some high-risk sectors, such as that of illicit pharmaceuticals, food or alcohol, the presence of counterfeit goods poses particularly severe health and safety threats for citizens.

Policymakers need solid empirical evidence for acting against this threat. In recent years, the OECD, and the European Union Intellectual Property Office (EUIPO) have been together gathering evidence on various aspects of the problem of illicit trade in IP-infringing goods. The OECD-EUIPO studies have found that imports of counterfeit and pirated goods were worth as much as USD 464 billion in 2019, or up to 2.5% of global trade (OECD/EUIPO, 2019[1]). In 2019, imports of counterfeit and pirated products into the EU amounted to as much as EUR 119 billion (USD 134 billion), which represents up to 5.8 % of EU imports. Results also showed that fakes are destined to all sorts of economies, including OECD countries, and a wide range of non-OECD economies in the Middle East, Southeast Asia, Africa, Latin America, Southeast Europe etc.

This report completes these previous analyses by looking into factors that determine the profiles of destination economies. It focuses on the economic features of destination economies, including the quantitative relationship between the intensities of counterfeiting, and selected, observable socio-economic factors.

1. Where do we source our information?

All information concerning trade in fake goods comes from the OECD-EUIPO database on customs seizures that originate from national customs administrations. Specifically, the data come from the WCO (World Customs Organisation), the European Commission’s Directorate-General for Taxation and Customs Union (DG TAXUD) and from the United States Department of Homeland Security (DHS). The latter submitted seizure data from US Customs and Border Protection (CBP), the American customs agency, and from the US Immigration and Customs Enforcement (ICE).

In each year analysed (2013 through 2019), the total number of customs seizures of counterfeit and pirated goods worldwide consistently exceeded 130 000. Overall, the unified database on customs seizures of IP-infringing goods includes almost 900 000 observations.

In the context of this report, and for the reasons highlighted in the following section, the focus is on customs seizures of counterfeit goods shipped by small parcels. Specifically, our analysis only relies on customs seizures whose reported quantity is equal or less than ten items, in accordance with the OECD/EUIPO report on misuse of small parcels for trade in counterfeit goods (OECD/EUIPO, 2018[2]). Thus, the analysis in this report refers only to the trade in counterfeit goods shipped in small packages, unless otherwise stated.

Imports vs. transit

A detailed analysis of the customs seizures data revealed a set of limitations. Some of them have to do with discrepancies between the datasets, others concern product classification levels or outliers in terms of seized goods or provenance economies. All limitations were thoroughly discussed in the (OECD/EUIPO, 2016[3]) and (OECD/EUIPO, 2019[1]) reports, and a methodological way forward was proposed for each limitation. This report also relies on the same methodology presented and discussed in the 2016 and 2019 studies, and it employs the same solutions to the seizure-data limitations.

In the context of this study, the main difficulty was related to determining whether a given economy is the final destination of a good or is a point of transit on its way. In the context of exports, a similar limitation resulted in the coining of the term “provenance economy”. This term was used in the OECD-EUIPO report (2016) and in all subsequent reports, following the OECD methodology developed in 2008 (OECD, 2008[4]).

The issue for imports is similar. In most cases, the data do not allow distinguishing whether seized goods were destined for the specific market where the seizure took place, or these were supposed to be shipped further, and the seizure concerned a transit point.

Furthermore, criminals who run illicit trade networks do not document their shipments accurately, to conceal the true destinations of their fake goods. This is particularly the case for modes of transport with larger economies of scale, for example container ships. Consequently, for large shipments of fakes in containers, the final destination indicated on a shipping manifest often refers to an intermediate transit point. These transit points are used for example to re-package the goods, or to change the mode of transport, while the final consumers are not even necessarily in the same country.

To address the problem of discrepancy between the economy of import, and the true destination markets for fakes, this report will rely on seizures of fakes in small parcels. In these cases, absence of economies of scale disincentivizes criminals to abuse small parcels to send fakes to an intermediate point. Consequently, it can be assumed that seizures of fakes in small parcels are carried out in the economies of destination.

Importantly, seizures of counterfeits in small packages constitute most of the total number of seizures. Between 2017 and 2019, 61% of the total number of customs seizures of counterfeit and pirated goods worldwide referred to small packages. However, the value of counterfeits in small packages is logically low and represented 13% of the global seized value during the same period. A study by DG TAXUD of the European Commission states that 76% of fake goods intercepted in the EU in 2017 were courier and postal small shipments (EUIPO, 2022[5])

2. What can shape demand for fakes?

Intentional vs. unintentional demand

There are several groups of factors that could shape the countries’ import propensity for fakes. These features were discussed in several reports, including (OECD, 2008[4]) and (OECD/EUIPO, 2016[3]). These reports categorized and discussed several demand factors for counterfeit products.

In the context of demand for counterfeit and pirated goods, it is important to bear in mind that two types of demand exist. There is an intentional demand and an unintentional one. In the context of a macroeconomic, country-level analysis, it implies that the total intentional demand for counterfeits in an economy is smaller than the total volume of imports of counterfeits by the economy. This is because a certain volume of counterfeit products is purchased by consumers who believe they buy genuine goods, in other terms, by deceived consumers.

Global customs data seizures that around 54% of global counterfeit and pirated products imported through small parcels between 2017 and 2019 were sold to consumers who knew they were buying fake products with the remaining 46% purchased unwittingly. Table 1.1, which identifies the share of secondary market for counterfeit products, shows that the share of fakes destined for secondary markets varies significantly by sector, ranging from 11% for chemicals to 57.3% for electronics appliances. Few consumers buy fakes knowingly for product categories with a potential health or safety issue (such as chemicals and pharmaceuticals).

Annex A of this report provides more details on methodology used to estimate the share of secondary market. The notion of consumer deception has been introduced in the (OECD, 2008[4]) study that analysed how markets for fakes operated. The study used the distinction between primary markets, where buyers of counterfeit goods are deceived and believe that they are purchasing legitimate items, and secondary markets where consumers willingly purchase infringing products.

Table 1.1. Share of secondary markets for counterfeit products imported in small parcels, 2017-2019

Sector	Share of secondary market
Chemical and allied products; except pharmaceuticals, perfumery, and cosmetics	10.9%
Pharmaceutical and medicinal chemical products	18.0%
Basic metals and fabricated metal products (except machinery and equipment)	39.4%
Household cultural and recreation goods; including toys and games, books, and musical instruments	47.8%
Furniture, lighting equipment, carpets, and other manufacturing n.e.c	48.0%
Motor vehicles and motorcycles	50.9%
Textiles and other intermediate products (e.g. plastics; rubbers; paper; wood)	51.6%
Perfumery and cosmetics	53.6%
Clothing, footwear, leather, and related products	54.6%
Watches and jewelry	54.9%
Electrical household appliances, electronic and telecommunications equipment	55.4%
Food, beverages, and tobacco	57.1%
Machinery, industrial equipment; computers and peripheral equipment; ships and aircrafts	57.3%

Source: OECD/EUIPO calculations.

Factors that drive imports of counterfeits are those that shape intentional demand in secondary markets, and demand expressed by unaware consumers in primary markets. These factors are related to: (i) the individual consumer characteristics (e.g. attitude towards counterfeiting and piracy, awareness about the risks), (ii) the institutional environment in which the consumer operates, and (iii) the product itself (e.g., its price or perceived quality).

Regarding the individual consumer, factors that drive the demand for counterfeit or pirated goods include his or her general economic situation and, consequently, budget constraints. They also include any concerns related to the purchase and consumption of a counterfeit or pirated good a consumer might have. These concerns could be either ethical or associated with any health and safety risks related to consumption of a counterfeit or pirated (i.e., potentially substandard) product. These factors could be shaped by consumers age, peer group, education levels, etc.

Several factors that refer to the individual consumer, also affect the likelihood of individual deception. Consequently, these factors also influence the total demand for fakes i.e., demand generated by unaware consumers. These factors reflect the overall likelihood of a consumer being deceived by counterfeiters and refer to the overall awareness of consumers about the risk which can be proxied by the education levels, and demographic factors.

Product features include the cost of acquisition of the legitimate good and its general quality, as perceived by the demander. The importance of product features for consumer decisions of whether to buy counterfeit products was confirmed in several empirical economic studies that relied on hedonic price regressions. These regressions assume that the price of a product reflects its embodied features valued by some implicit pricing (Rosen, 1974[6]). Furthermore, apart from the price itself, the cost of acquisition of a counterfeit good is another factor that shapes the propensity to demand fakes. These factors could refer for example to availability of counterfeit goods online, and broader access to Internet, and availability and affordability of express delivery services in a country.

The last set of factors that affect demand for counterfeit products refers to the socio-economic environment in which the demander operates. It encompasses the risk of discovery, prosecution, and penalty with respect to the intentional consumption of counterfeit or pirated goods, in jurisdictions that impose penalties for consumers of these goods. It also captures the overall presence of traded goods in an economy. Since most fake products are traded internationally, the relative openness of a country to imported goods is also likely to affect the presence of fakes in local markets.

Focus on intentional demand for fakes

This section aims to provide insights on the intentional demand of fakes. More specifically, it seeks to show what are the different factors that motivate consumers to deliberately turn to the illicit market. The insights discussed in the following paragraphs rely on a literature review in this field.

By purchasing counterfeit products, consumers strive to obtain prestige associated with branded original goods for much lower price (Penz, E., & Stöttinger, B., 2008[7]). However, voluntary participation in these types of transaction endorses illegal activity (Cordell, V. V., Wongtada, N., & Kieschnick Jr, R. L., 1996[8]). The sheer scale of counterfeit trade suggests than counterfeit goods may attract buyers who otherwise are unlikely to support or engage in other types of illegal deeds. Therefore, the factors driving demand for counterfeit have been a subject of academic investigations involving scholars representing different strands of research. Extant literature divides factors shaping demand for counterfeit into three groups: individual, psychographic factors; product or transaction related features and socio-demographic factors (Wee, C.-H., Ta, S.-J., & Cheok, K.-H., 1995[9]). The delimitations between those three broadly sketched groups of factors is not clear-cut. For instance, predominant psychological traits may be influenced by the cultural norms prevailing in a country and those may be subject of changes during periods of rapid economic transformations.

In the academic literature most attention is given to the individual psychological attributes of consumers and the way they may influence decisions to buy counterfeit goods. Among the features most investigated in the research papers were:

• Personal integrity, with higher importance of moral values negatively correlated with propensity to buy counterfeit (Cordell, V. V., Wongtada, N., & Kieschnick Jr, R. L., 1996[8]); (Hoon Ang, S., Sim Cheng, P., Lim, E. A., & Kuan Tambyah, S., 2001[10]); (Koklic, M. K., et al., 2011[11]); (Turkyilmaz, C. A., & Uslu, A., 2014[12])). Some scholars highlight the positive correlation between higher education level and their ethical behaviour ( (Craft, 2013[13])), which may discourage educated people from buying counterfeit goods ( (Elsantil, Y. G., & Hamza, E. G. A., 2021[14]));

• Value consciousness. Consumers who are after good deal terms (are more value conscious) are more likely to purchase counterfeit goods ( (Agarwal, S., & Panwar, S., 2016[15]); (Hoon Ang, S., Sim Cheng, P., Lim, E. A., & Kuan Tambyah, S., 2001[10]); (Penz, E., & Stöttinger, B., 2012[16]); (Turkyilmaz, C. A., & Uslu, A., 2014[12]);

• Value attached to status (Bian, X., & Veloutsou, C., 2007[17]); (Eisend, M., Hartmann, P., & Apaolaza, V., 2017[18]); (Grossman, G. M., & Shapiro, C., 1988[19]). Some individuals may be inclined to improve their social position by purchasing goods conferring high status or recognition among peers. Counterfeit goods may be for some of them more attractive that non-branded alternatives which are deprived of those signalling qualities (Geiger-Oneto, S., Gelb, B. D., Walker, D., & Hess, J. D., 2013[20])

Among features related to qualities of specific transactions, most indicated are:

• Perceived risk related to transaction (Liao, C.-H., & Hsieh, I., 2013[21]). Partially it depends on individual psychological traits as there may be quite large differences in risk susceptibility between individuals (Wee et al., 1995). However, willingness to buy counterfeits by individual consumers may be also affected by the type of counterfeit good. Ceteris paribus people who may be leaning towards buying counterfeit handbag, may be more diligent while assessing the risks of buying counterfeit toys or pharmaceuticals;

• Perceived financial value of transaction. The bigger the price difference between genuine good and counterfeit the higher likelihood to purchase counterfeit good ( (Bian, X., Wang, K.-Y., Smith, A., & Yannopoulou, N., 2016[22]); (Cordell, V. V., Wongtada, N., & Kieschnick Jr, R. L., 1996[8]); (Hoon Ang, S., Sim Cheng, P., Lim, E. A., & Kuan Tambyah, S., 2001[10]); (Penz, E., Schlegelmilch, B. B., & Stöttinger, B., 2008[23]). This factor may be moderated however by the perception of original brand, as it affects to a greater extent brands with negative image (Poddar, A., Foreman, J., Banerjee, S. S., & Ellen, P. S., 2012[24]) ;

• Perceived quality of counterfeit goods (Cordell, V. V., Wongtada, N., & Kieschnick Jr, R. L., 1996[8]); (Gentry, J. W., Putrevu, S., & Shultz, C. J., 2006[25]) ; (Hoon Ang, S., Sim Cheng, P., Lim, E. A., & Kuan Tambyah, S., 2001[10]) and perceived similarity between counterfeit and original goods (Penz, E., & Stöttinger, B., 2008[7]).

Those individual and transaction-related features are however unlikely to explain differences in the demand for counterfeits between countries. Certainly, they are unable to explain the involuntary transactions, where buyers are misled as regards origin of the purchased product. Also, willingness to purchase counterfeit goods is necessary but not sufficient condition of counterfeit transaction. This depends also on relative ease of access to counterfeit goods in the local market.

Availability of counterfeit goods depend on whether some entrepreneurial individuals decide to engage in production or import of those commodities instead of engaging in alternative legal activity. This may be driven by specific country-level factors setting up pay-offs systems which are not sufficient to discourage socially unproductive entrepreneurship like IPR infringement (Baumol, 1990[26]). Country level differences in the counterfeit imports may be therefore most likely explained by specific socio- demographic and socio-economic contrasts that can be summarized in country level statistical indicators. Some of those indicators that have been investigated in the literature so far are:

• Economic wealth ( (Elsantil, Y. G., & Hamza, E. G. A., 2021[14]); (Wee, C.-H., Ta, S.-J., & Cheok, K.-H., 1995[9]). Beyond the fact that it directly influences purchasing power, countries with lower GDP per capita tend to put less emphasis on IPR protection (Maskus, 2000[27]). Economic wealth has been previously confirmed in empirical studies to be important factor for explanation of software piracy rates (Husted, 2000[28]); (Moores, 2008[29]);

• Age distribution. Young people are more likely to buy counterfeits ( (Bian, X., & Veloutsou, C., 2007[17]); (Li, T., & Seaton, B., 2015[30]) ; (Rod, 2015[31]); (Tom, G., Garibaldi, B., Zeng, Y., & Pilcher, J., 1998[32]). They are relatively less well-off, and their threshold of acceptable risk behaviour is in general lower than in case of older people;

• Probability of punishment. This factor concerns not only formal punishments stipulated in the national laws, but also informal sanctions, such as social ostracism or embarrassment (Penz, E., Schlegelmilch, B. B., & Stöttinger, B., 2008[23]). Although the risk is evaluated on the individual level, it will differ depending on country and culture specific system of formal and informal sanctions related to illegal transactions involving counterfeit goods. This may be important element in the cost-benefit analysis performed by potential importers of counterfeit goods before engaging in criminal activity (Becker, 1968[33]); (Reardon, J., McCorkle, D., Radon, A., & Abraha, D., 2019[34])Reardon et al., 2019). Lenient legal penalties associated with IPR related crimes coupled with high potential returns from such criminal activity may directly encourage people to trade with counterfeit goods.

There are some factors that are potentially relevant antecedents of the import of counterfeit goods that were not given sufficient attention in the extant economic research. For instance, availability of counterfeit goods in a country may be related to flows of genuine imports and import facilities in general, as the counterfeiters often use the same facilities as original brands’ owners to deliver goods to their customers. This may include existence of large port infrastructure, but also access to high-quality Internet connections in case of online purchase of counterfeit goods. The latter has been confirmed to be important in context of music piracy (Bhattacharjee, S., Gopal, R. D., & Sanders, G. L., 2003[35]).

Scope of the study

This report builds on the individual-level analysis, and analyzes the imports of fakes at a macroeconomic, economy-level perspective.

Specifically, the analysis considers both intentional and unintended demand looking at an-economy level manifestations of specific drivers identified by the microeconomic literature and discussed above. Conceptually, whenever it is possible the country-specific factors are aggregates of individual characteristics identified by the microeconomic studies. For example, the microeconomic analysis finds that ease of access of fakes at an individual level is considered as an individual driver. Since today many fakes can be found in the on-line environment, on a country-level a corresponding measure could be related to the availability and intensity of use of the Internet.

The factors taken into consideration to explain the imports of fakes are the following:

• economic factors (GDP per capita)

• demographics (age structure)

• education (% of tertiary education)

• use of Internet

logistical and trade performance (Logistics Performance Index - quality of transport infrastructure). All factors used in this analysis are described in Annex B.

3. What has our research told us so far?

A preliminary check of data that refer to seizures carried out in small parcels indicates the economies that import fakes the most. Consequently, information presented in this report is skewed towards OECD member countries, where affordable small parcels services and e-commerce are widely available.

Data on global customs seizures show that most of counterfeit goods sent in small parcels were destined to developed countries with the United States representing 35% of total global customs seizures (see Figure 1.1). They were followed by European countries such as Germany (25%), Belgium (11%) and Italy (6%)

Figure 1.1. Top destination economies of counterfeit goods shipped in small parcels

Source: OECD/EUIPO global customs seizures database.

Among EU member states, Germany is the main importer of counterfeit products shipped in small parcels in terms of both number of seizures and seized value (see Figure 1.2). Almost 40% of seizures of fake goods imported into the EU through small packages were destined to Germany between 2017-2019.

Figure 1.2. Top destination economies of counterfeit goods shipped in small parcels to the EU

Note: *United Kingdom is included in EU countries as the analysis refers to the period prior to the Brexit.

Source: OECD/EUIPO global customs seizures database.

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Note

← 1.  Goods that infringe trademarks, copyrights, patents, or design rights.