Dealing with the Threat Posed by Chinese Counterfeiting

In the fiscal year ending Sept. 30, 2007, the International AntiCounterfeiting Coalition (IACC) wrote that China was the origin of 80% of the counterfeit and pirated products seized by customs authorities of the U.S. Department of Homeland Security, and these seized products had a U.S. domestic value of over $158 million. “China remains the single largest source of fake products found in global markets,” said IACC President Bob Barchiesi. “Brand owners are also seeing more fake labels and components shipped separately from China for assembly and distribution in other countries.”

Counterfeiting not only steals money from legitimate manufacturers and jobs from their employees, it also endangers the people who buy or use the counterfeit products. In consumer goods this is pretty obvious, as evidenced by the toothpaste made with antifreeze, the dairy products and pet food made with plastic waste, the children’s jewelry made of lead or cadmium and the counterfeit medicines. But with industrial products like valves, the risk may be hidden from the end user; a factory’s customers seldom here about production problems caused by faulty valves.

A criminal mentality

Much of the counterfeit trade, said Collins’s blog, can be attributed to criminal syndicates, but an argument could be made that the Chinese government, like any authoritarian regime, is itself an ongoing criminal enterprise, and can be expected to behave as such. Like today’s drug cartels in Mexico, and Tammany Hall in New York in the 19^th and early 20^th centuries, its tentacles touch every part of the economy, and by a combination of bullying and distributing favors it retains the acquiescence of the populace.

Some would say that China is waging economic war against the whole world, but in reality is it simply advancing its own interests, and condoning or ignoring wholesale counterfeiting of foreign goods is just one element of its strategy. A large trade surplus contributes to steady employment, which helps to prevent the civil unrest that is the government’s biggest fear. It also brings in large amounts of money that can be used for vital national priorities: the expenditures needed to maintain the yuan’s peg to the dollar (accomplished by buying dollars), improving infrastructure within China (which also keeps the people more content and quiet) and building up the military.

For all those reasons and more American or other Western companies can’t expect much help from Chinese authorities when it comes to stopping counterfeiting. In October of 2009 Secretary of Commerce Gary Locke spoke at the International Forum on Innovation and Intellectual Property in Guangzhou, China, but no concrete action was promised. “They’re looking the other way,” said Collins. “Occasionally what I’ve seen is they’ll go out when there’s just irrefutable proof and they’ll close the plant down for two weeks, or put somebody in jail for three days and then they’ll release them.” And the counterfeiting goes on as before.

And the Chinese government may be actively helping the counterfeiters, Collins suggested in his blog. “Encryption codes for products like secure routers, anti spam and anti-hacking software databases and other high tech products will have to be reviewed by a government panel, which could be leaked to Chinese competitors.”

In February 2008 the IACC called on the U.S. Trade Representative to make China a Priority Foreign Country for its failure to provide adequate and effective protection and enforcement of intellectual property rights. “Until China removes longstanding obstacles to criminal prosecution,” said Barchiesi, "piracy and counterfeiting in China will probably get worse.”

Don’t count on the government for help

American law enforcement doesn’t seem to be helping very much either. While considerable quantities of counterfeit goods are seized, what’s caught is only a tiny fraction of what comes in. And what can customs enforcement do? “When you’ve got 100,000 containers sitting in Long Beach,” said Collins, “the idea of checking the valves as they come in and clear customs is ridiculous.” And, he added, “The fact is I don't think the government, the FBI or the State Department or anybody else is working very hard to stop the criminal enterprises right now.”

And when you come down to it, how much pressure can the U.S. put on China? Despite elaborate ceremonies and the signing of agreements, not much is likely to change. We need them in so many ways: we need them internationally, to help contain North Korea, or to acquiesce in putting sanctions on Iran, but the biggest reason we need them is to continue lending us the money for our government’s deficit. As of March of this year China held $895.2 of U.S. Treasury securities, according to the Treasury Dept., and the Washington Times recently cited an estimate by Cornell University economist Eswar Prasad that a more realistic figure could be as much as $1.7 trillion. When you’re drowning in debt you don’t want to make an enemy of your banker.

What can be done?

While law enforcement may not be much help, and you can’t sue the manufacturer, there is another approach, suggests Collins: Go after the importer and the seller. He told the story of a man who had invented and patented a versatile new wrench. The Chinese immediately began copying it, but rather than go after the Chinese suppliers, said Collins, the inventor “went to the big retailers that bought the Chinese version and he sued them.” Rather than face the American legal system and the possibility of large settlements, Collins said, the retailers stopped selling the fakes.

Perhaps a grass roots effort will succeed where government action fails. A story by AP writer Carolyn Thompson that recently appeared in publications around the country told the story of an American entrepreneur who is starting a chain of stores that sell only U.S.-made goods. So far the effort is very small, and may be called a curiosity, but perhaps it will grow. Years ago when there was so much worry about the U.S. trade deficit with Japan it was noted that many Japanese felt that buying imported goods was unpatriotic, and that the Japanese government and Japanese companies had erected a thicket of regulations and practices that effectively excluded many imported goods (just as the Chinese have). Perhaps Americans should adopt some of that attitude (which might be a hard sell in some areas; in Northern California, for example, it’s tough to find an American sedan), but it might be worth a try.

But striking back at all imports, as good as that might make us feel, would do little or nothing to solve the counterfeiting problem, because counterfeit goods are, by definition, labeled falsely. A Chinese copy of a Crane valve would be labeled Crane.

The U.S. isn’t the only country victimized by counterfeit goods, of course; Asian manufacturers are feeling the effects as well. The Indian valve manufacturer BDK Engineering Industries published a newsletter in April that recommended dealing only with manufacturers and distributors that are well known to one’s company and engineers and “to maintain frequent personal contact with authorized suppliers because counterfeiters can set up false representatives and corporations to support their fake products and documentation.” It also suggested close examination of certifications: “besides checking that documents aren’t bitmapped images and telephoning to confirm suppliers claims and identities, buyers also must be responsible for their valves audit trails, and make sure where, when and who makes these products.”

But don’t think the counterfeiting is a problem that can be solved quickly, if at all. Collins’s blog ends with a stark warning: “By stealing our technology, copying our products, forcing us into a trade deficit, manipulating their own currency and then buying our debt, the Chinese may win the long-term war of globalization.”

Reach Pete Cleaveland at pcleaveland@earthlink.net.

Survey on anti-counterfeiting and brand protection

ARC Advisory Group is doing a survey on anti-counterfeiting and brand protection best practices. The purpose, says ARC, “is to develop a better understanding of the best practices being used by manufacturers, distributors and packers to manage the supply chain and address anti-counterfeiting and brand protection.” It will look at a variety of technologies and methods. To participate, click on the link above or go to http://survey.constantcontact.com/survey/a07e2te7k60g77kpskm/a01q5ga9q6kmn/greeting.