Counterfeiting costs US business and taxpayers billions every year and robs the country of jobs. In 2012, the US Department of Homeland Security seized 22,848 IP-infringing products worth $1.3 billion, according to the US Customs and Border Protection, Office of International Trade seizure statistics.

But it’s not just a US problem. According to a Frontier Economics report on the global impact of counterfeiting and piracy, G20 governments and consumers lose $125 billion annually.

And aside from lost revenues, counterfeiting puts the public at risk. Aside from issues such as lead paint in counterfeit toys, the World Health Organization estimates that counterfeit drugs account for 60 per cent of all pharmaceuticals in developing countries and that 16 per cent of these contain wrong ingredients, 17 per cent contain incorrect amounts of proper ingredients and 60 per cent have no active ingredients in them at all.

Copycat Culture

The US Customs and Border Protection report reveals that China and Hong Kong are the primary sources of intercepted goods resulting from IP infringement investigations, representing 84 per cent of seizures.

“China has a kind of copycat culture, it always has done,” says Peter Humphrey, CFE, Managing Director of ChinaWhys, a business risk advisory firm focused on China. “It’s not that they don’t understand the value of intellectual property; they do. For example, pharmacists in China for hundreds of years understood the value of their prescriptions. And because they knew they could easily be copied by someone, they passed their recipes for their prescriptions by word of mouth to an apprentice or son.”

Copying is a long tradition that goes back hundreds, if not thousands, of years, explains Humphrey. “Add to that the fact that once China opened its doors to Western economic interaction and to market their products, suddenly everyone wanted to get rich as fast as they could and took every shortcut they could,” he says.

Part of the problem stems from weaknesses in China’s education system. “There’s a tendency to mimic and recite rather than to think, analyze and come up with something new. This is a traditional problem in China,” says Humphrey.

Legal Environment

Before China joined the World Trade Organization in 2001, there was a lengthy process of negotiation to improve China’s legal framework on intellectual property protection and make significant changes to the Chinese economy. China had to reach a certain standard in its IP legislation as one of the conditions to join the WTO.

“So China does have a very detailed and solid legal framework to protect IP,” says Humphrey. “The problem is with enforcement… There are not enough enforcement resources in China to enforce every violation of IP.”

Corruption

And then there’s the problem of corruption in China. “The organizations that are supposed to protect and enforce IP have become corrupted,” says Humphrey. He gives the example of an agency called the AIC, which is responsible to raid and seize counterfeit products but instead sometimes tips off the counterfeiters for a bribe. “And next morning when the raid takes place they’ve gone and the product’s gone.”

Humphrey adds that the violation of IP is not confined to Chinese people copying Western brands, products and ideas. “Chinese companies also copy each other,” he says. “Chinese companies also violate each other’s IP and get involved in disputes.”

It may sound like the Wild West, but fortunately there are ways that companies can protect their IP through vigilant market monitoring and being proactive when it comes to registrations. Tomorrow’s blog post will address these steps.