Intellectual Property
Observations on Efforts to Quantify the Economic Effects of Counterfeit and Pirated Goods Gao ID: GAO-10-423 April 12, 2010In October 2008, Congress passed the Prioritizing Resources and Organization for Intellectual Property Act of 2008 (PRO-IP Act), to improve the effectiveness of U.S. government efforts to protect intellectual property (IP) rights such as copyrights, patents, and trademarks. The act also directed GAO to provide information on the quantification of the impacts of counterfeit and pirated goods. GAO (1) examined existing research on the effects of counterfeiting and piracy on consumers, industries, government, and the U.S. economy; and (2) identified insights gained from efforts to quantify the effects of counterfeiting and piracy on the U.S. economy. GAO interviewed officials and subject matter experts from U.S. government agencies, industry associations, nongovernmental organizations, and academic institutions, and reviewed literature and studies quantifying or discussing the economic impacts of counterfeiting and piracy on the U.S. economy, industry, government, and consumers. GAO is making no recommendations in this report.
According to experts and literature GAO reviewed, counterfeiting and piracy have produced a wide range of effects on consumers, industry, government, and the economy as a whole, depending on the type of infringements involved and other factors. Consumers are particularly likely to experience negative effects when they purchase counterfeit products they believe are genuine, such as pharmaceuticals. Negative effects on U.S. industry may include lost sales, lost brand value, and reduced incentives to innovate; however, industry effects vary widely among sectors and companies. The U.S. government may lose tax revenue, incur IP enforcement expenses, and face risks of counterfeits entering supply chains with national security or civilian safety implications. The U.S. economy as a whole may grow more slowly because of reduced innovation and loss of trade revenue. Some experts and literature also identified some potential positive effects of counterfeiting and piracy. Some consumers may knowingly purchase counterfeits that are less expensive than the genuine goods and experience positive effects (consumer surplus), although the longer-term impact is unclear due to reduced incentives for research and development, among other factors. Three widely cited U.S. government estimates of economic losses resulting from counterfeiting cannot be substantiated due to the absence of underlying studies. Generally, the illicit nature of counterfeiting and piracy makes estimating the economic impact of IP infringements extremely difficult, so assumptions must be used to offset the lack of data. Efforts to estimate losses involve assumptions such as the rate at which consumers would substitute counterfeit for legitimate products, which can have enormous impacts on the resulting estimates. Because of the significant differences in types of counterfeited and pirated goods and industries involved, no single method can be used to develop estimates. Each method has limitations, and most experts observed that it is difficult, if not impossible, to quantify the economy-wide impacts. Nonetheless, research in specific industries suggest that the problem is sizeable, which is of particular concern as many U.S. industries are leaders in the creation of intellectual property.
GAO-10-423, Intellectual Property: Observations on Efforts to Quantify the Economic Effects of Counterfeit and Pirated Goods
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Report to Congressional Committees:
United States Government Accountability Office:
GAO:
April 2010:
Intellectual Property:
Observations on Efforts to Quantify the Economic Effects of
Counterfeit and Pirated Goods:
GAO-10-423:
GAO Highlights:
Highlights of GAO-10-423, a report to congressional committees.
Why GAO Did This Study:
In October 2008, Congress passed the Prioritizing Resources and
Organization for Intellectual Property Act of 2008 (PRO-IP Act), to
improve the effectiveness of U.S. government efforts to protect
intellectual property (IP) rights such as copyrights, patents, and
trademarks. The act also directed GAO to provide information on the
quantification of the impacts of counterfeit and pirated goods. GAO
(1) examined existing research on the effects of counterfeiting and
piracy on consumers, industries, government, and the U.S. economy; and
(2) identified insights gained from efforts to quantify the effects of
counterfeiting and piracy on the U.S. economy.
GAO interviewed officials and subject matter experts from U.S.
government agencies, industry associations, nongovernmental
organizations, and academic institutions, and reviewed literature and
studies quantifying or discussing the economic impacts of
counterfeiting and piracy on the U.S. economy, industry, government,
and consumers. GAO is making no recommendations in this report.
What GAO Found:
According to experts and literature GAO reviewed, counterfeiting and
piracy have produced a wide range of effects on consumers, industry,
government, and the economy as a whole, depending on the type of
infringements involved and other factors. Consumers are particularly
likely to experience negative effects when they purchase counterfeit
products they believe are genuine, such as pharmaceuticals. Negative
effects on U.S. industry may include lost sales, lost brand value, and
reduced incentives to innovate; however, industry effects vary widely
among sectors and companies. The U.S. government may lose tax revenue,
incur IP enforcement expenses, and face risks of counterfeits entering
supply chains with national security or civilian safety implications.
The U.S. economy as a whole may grow more slowly because of reduced
innovation and loss of trade revenue. Some experts and literature also
identified some potential positive effects of counterfeiting and
piracy. Some consumers may knowingly purchase counterfeits that are
less expensive than the genuine goods and experience positive effects
(consumer surplus), although the longer-term impact is unclear due to
reduced incentives for research and development, among other factors.
Three widely cited U.S. government estimates of economic losses
resulting from counterfeiting cannot be substantiated due to the
absence of underlying studies. Generally, the illicit nature of
counterfeiting and piracy makes estimating the economic impact of IP
infringements extremely difficult, so assumptions must be used to
offset the lack of data. Efforts to estimate losses involve
assumptions such as the rate at which consumers would substitute
counterfeit for legitimate products, which can have enormous impacts
on the resulting estimates. Because of the significant differences in
types of counterfeited and pirated goods and industries involved, no
single method can be used to develop estimates. Each method has
limitations, and most experts observed that it is difficult, if not
impossible, to quantify the economy-wide impacts. Nonetheless,
research in specific industries suggest that the problem is sizeable,
which is of particular concern as many U.S. industries are leaders in
the creation of intellectual property.
Table: Negative Effects of Counterfeiting and Piracy, by Stakeholder:
Stakeholders: Consumers;
Negative effects: Health and safety risks, low quality goods.
Stakeholders: Industries;
Negative effects: Lost sales and brand value, increased IP protection
costs.
Stakeholders: U.S. government;
Negative effects: Lost tax revenue, increased enforcement costs, and
risks to supply chains with national security or safety implications.
Stakeholders: U.S. economy;
Negative effects: Lower growth and innovation, declining trade with
countries having weak IP rights enforcement.
Source: GAO analysis.
[End of table]
View [hyperlink, http://www.gao.gov/products/GAO-10-423] or key
components. For more information, contact Loren Yager at (202) 512-
4347 or yagerl@gao.gov.
[End of section]
Contents:
Letter:
Background:
Counterfeiting and Piracy Have a Wide Range of Effects on U.S.
Consumers, Industry, Government, and the Economy:
Lack of Data Hinders Efforts to Quantify Impacts of Counterfeiting and
Piracy:
Appendix I: Objectives, Scope, and Methodology:
Appendix II: GAO Contact and Staff Acknowledgments:
Bibliography:
Tables:
Table 1: DHS Seizures of IP-Infringing Goods, Expressed as a
Percentage of Total Domestic Value of Goods Seized Annually, Fiscal
Years 2004-2009:
Table 2: Potential Direct Effects of IP Infringements in the United
States by Stakeholder:
Abbreviations:
BSA: Business Software Alliance:
CBP: Customs and Border Protection:
DHS: Department of Homeland Security:
FAA: Federal Aviation Administration:
FBI: Federal Bureau of Investigation:
FDA: U.S. Food and Drug Administration:
FTC: Federal Trade Commission:
HHS: Department of Health and Human Services:
IP: intellectual property:
ITC: International Trade Commission:
OECD: Organization for Economic Cooperation and Development:
PRO-IP ACT: Prioritizing Resources and Organization for Intellectual
Property Act of 2008:
RIMS II: Regional Input-Output Modeling System:
TRIPS: Agreement on Trade-Related Aspects of Intellectual Property
Rights:
USTR: Office of the U.S. Trade Representative:
WTO: World Trade Organization:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
April 12, 2010:
The Honorable Patrick J. Leahy:
Chairman:
The Honorable Jeff Sessions:
Ranking Member:
Committee on the Judiciary:
United States Senate:
The Honorable John Conyers, Jr.
Chairman:
The Honorable Lamar S. Smith:
Ranking Member:
Committee on the Judiciary:
House of Representatives:
In October 2008, Congress passed the Prioritizing Resources and
Organization for Intellectual Property Act of 2008 (PRO-IP Act) (P.L.
110-403), to strengthen and improve the effectiveness of U.S.
government efforts to protect the intellectual property (IP) of U.S.
industries and IP rights holders. In the PRO-IP Act, Congress noted
that U.S. IP industries have created millions of highly skilled, high-
paying U.S. jobs and continue to represent a major source of
creativity, innovation, economic growth, and competitiveness.
The PRO-IP Act directed GAO to provide information on the
quantification of the impacts of counterfeit and pirated goods on the
economy and industries of the United States to help the U.S.
government better protect the IP of rights holders.[Footnote 1] Our
work: (1) examined existing research on the effects of counterfeiting
and piracy on consumers, industries, government, and the U.S. economy;
and (2) identified insights gained from efforts to quantify the
effects of counterfeiting and piracy on the U.S. economy.
To address these objectives, we interviewed officials and
representatives from U.S. government agencies, industry associations,
nongovernmental organizations, academic institutions, and a
multilateral organization, and we reviewed documents and studies
quantifying or discussing the impacts of counterfeiting and piracy on
the U.S. economy, industry, government, and consumers. We met with
officials and reviewed documents from the Departments of Justice
(Justice), Homeland Security (DHS), Commerce (Commerce), and Health
and Human Services (HHS), the Office of the U.S. Trade Representative
(USTR), and the International Trade Commission (ITC). We conducted a
literature search of studies and estimates of the economic impact of
IP infringements published since 1999 to examine various aspects of
the economic impacts of counterfeiting and piracy, and to identify
other insights about the role IP plays in the U.S. economy.[Footnote
2] Among the studies we reviewed was the Organization for Economic
Cooperation and Development's (OECD) 2008 report, The Economic Impact
of Counterfeiting and Piracy.[Footnote 3] Although this study was
global rather than focused on the U.S. economy, its unique nature and
prominence as the most comprehensive attempt to quantify the impacts
of counterfeiting and piracy warranted its inclusion within our
reviews. We also interviewed subject matter experts from a range of
governmental, nongovernmental, academic and industry sources, and OECD
officials to discuss efforts to quantify the economic impacts of
counterfeiting and piracy and to obtain their views on the range of
impacts of counterfeits and piracy, insights on counterfeiting
activities and markets, and the role of IP in the U.S. economy. Unless
otherwise noted, in our discussion of the impacts and insights on
counterfeiting and piracy, we do not distinguish between imported
counterfeit and pirated goods and those produced domestically. The
literature we reviewed and experts we spoke with focused primarily on
imported counterfeit goods rather than those produced within the
United States. We determined that the U.S. government did not
systematically collect data and perform analysis on the impacts of
counterfeiting and piracy on the U.S. economy and, based on our review
of literature and interviews with experts, we concluded that it was
not feasible to develop our own estimates or attempt to quantify the
economic impact of counterfeiting and piracy on the U.S. economy. We
shared a copy of the draft report with officials from Commerce, DHS,
HHS, Justice, ITC, USTR, and the Office of the U.S. Intellectual
Property Enforcement Coordinator to obtain technical comments. We
received comments from the DHS and Justice, and the Office of the U.S.
Intellectual Property Enforcement Coordinator and made changes as
appropriate.
We conducted our work from April 2009 to April 2010 in accordance with
all sections of GAO's Quality Assurance Framework that are relevant to
our objectives. The framework requires that we plan and perform the
engagement to obtain sufficient and appropriate evidence to meet our
stated objectives and to discuss any limitations to our work. We
believe that the information and data obtained, and the analysis
conducted, provide a reasonable basis for any findings and conclusions
in this product. For additional details regarding our scope and
methodology, see appendix I.
Background:
Importance of Protection for Innovators Has Long Been Recognized in
the United States:
The importance of patents and other mechanisms to enable inventors to
capture some of the benefits of their innovations has long been
recognized in the United States as a tool to encourage innovation,
dating back to Article 1 of the U.S. Constitution and the 1790 patent
law. Ensuring the protection of IP rights encourages the introduction
of innovative products and creative works to the public. Protection is
granted by guaranteeing proprietors limited exclusive rights to
whatever economic reward the market may provide for their creations
and products.
Today, eight federal agencies and entities within them undertake the
primary U.S. government activities in support of IP rights. These
agencies and entities include Commerce, HHS, DHS, Justice, ITC, State,
USTR, the Copyright Office, and entities such as Customs and Border
Protection (CBP), the U.S. Patent and Trademark Office, and the
Federal Bureau of Investigation (FBI).
In addition to domestic efforts for protecting IP, the U.S. government
participated actively in negotiating the World Trade Organization's
(WTO) Agreement on Trade-Related Aspects of Intellectual Property
Rights (TRIPS), which came into force in 1995 and broadly governs the
multilateral protection of IP rights. Under TRIPS, all WTO member
countries are obligated to establish laws and regulations that meet a
minimum standard for protecting various areas of IP rights. It also
provides for enforcement measures for members. One of USTR's
priorities in recent years has been negotiating free trade agreements.
Since 2000, USTR has completed negotiations for free trade agreements
that have entered into force with Australia, Bahrain, Central America,
[Footnote 4] Chile, Jordan, Morocco, Oman, Peru, and Singapore.
[Footnote 5] According to officials at USTR, these agreements offer
protection beyond that required in TRIPS.[Footnote 6]
Intellectual property is an important component of the U.S. economy,
and the United States is an acknowledged global leader in the creation
of intellectual property. According to the USTR, "Americans are the
world's leading innovators, and our ideas and intellectual property
are a key ingredient to our competitiveness and prosperity." The
United States has generally been very active in terms of advocating
strong IP protection and encouraging other nations to improve these
systems for two key reasons. First, the U.S. has been the source of a
large share of technological improvements for many years and,
therefore, stands to lose if the associated IP rights are not
respected in other nations. Secondly, a prominent economist noted that
IP protection appears to be one of the factors that has helped to
generate the enormous growth in the world economy and in the standard
of living that has occurred in the last 150 years. This economist
pointed out that the last two centuries have created an unprecedented
surge in growth compared to prior periods. Among the factors
attributed to creating the conditions for this explosion in economic
growth are the rule of law, including property rights and the
enforceability of contracts.[Footnote 7]
While these conditions are clearly important for generating economic
growth, determining the contributions of innovation to economic growth
at the level of the overall economy has been a challenging task.
Economists have used a variety of techniques to better understand the
role of innovation in growth, and historical evidence shows that
growth rates have periodically been driven upward by major
technological improvements, beginning with the industrial revolution
and the role of electricity, and continuing with the current
revolution in information technology.[Footnote 8]
Common Protections Related to IP:
Generally, individual countries grant and enforce IP rights. IP is any
innovation, commercial or artistic, or any unique name, symbol, logo,
or design used commercially. IP rights protect the economic interests
of the creators of these works by giving them property rights over
their creations.[Footnote 9]
* Copyright. A set of exclusive rights subsisting in original works of
authorship fixed in any tangible medium of expression now known or
later developed, for a fixed period of time. For example, works may be
literary, musical, or artistic.
* Trademark. Any sign or any combination of signs capable of
distinguishing the source of goods or services is capable of
constituting a trademark. Such signs--in particular, words (including
personal names), letters, numerals, figurative elements, and
combinations of colors, as well as any combination of such signs--are
eligible for registration as trademarks.
* Patent. Exclusive rights granted to inventions for a fixed period of
time, whether products or processes, in all fields of technology,
provided they are new, not obvious (involve an inventive step), and
have utility (are capable of industrial application).
"Pirated copyright goods" refer to any goods that are copies made
without the consent of the right holder or person duly authorized by
the right holder. "Counterfeit goods" refer to any goods, including
packaging or bearing without authorization, a trademark that is
identical to a trademark validly registered for those goods, or that
cannot be distinguished in its essential aspects from such a
trademark, and that, thereby, infringes the rights of the owner of the
trademark in question. According to the U.S. Food and Drug
Administration (FDA), "counterfeit drugs" are defined under U.S. law
as those sold under a product name without proper authorization, where
the identity of the source drug is knowingly and intentionally
mislabeled in a way that suggests that it is the authentic and
approved product.[Footnote 10]
Counterfeiting and Piracy Cover a Wide Range of Goods:
CBP data show that between fiscal years 2004 and 2009, the domestic
value and number of U.S. seizures of counterfeit goods imported from
other countries have fluctuated.[Footnote 11] These seizures have been
concentrated among certain types of products. For example, seizures of
footwear, wearing apparel, and handbags accounted for about 57 percent
of the aggregate domestic value of goods seized in those 6 years.
Table 1 shows the percent of total domestic value for different types
of commodities seized as well as the domestic value of all goods
seized and total number of seizures. The value of wearing apparel and
cigarette seizures generally declined, while the value of
pharmaceutical seizures generally increased. Several factors influence
trends in seizure values. For example, values of seized goods can vary
from year to year due to counterfeiters' responses to changes in
marketplace demand or enforcement actions. For instance, in fiscal
year 2006, a federal enforcement investigation resulted in the seizure
of 77 cargo containers of counterfeit Nike Air Jordan shoes and one
container of counterfeit Abercrombie & Fitch clothing. The estimated
domestic value of these goods was about $19 million, representing
about 12 percent of the total domestic seizure value that year. In
addition, the level of federal border enforcement effort varies across
ports, resulting in different seizure rates, which is discussed in a
later section of this report.
Table 1: DHS Seizures of IP-Infringing Goods, Expressed as a
Percentage of Total Domestic Value of Goods Seized Annually, Fiscal
Years 2004-2009:
Commodity: Footwear;
2004: 1%;
2005: 10%;
2006: 41%;
2007: 40%;
2008: 38%;
2009: 38%;
Reported percentage of 2004-2009 totals: 32%.
Commodity: Wearing apparel;
2004: 37%;
2005: 17%;
2006: 16%;
2007: 14%;
2008: 9%;
2009: 8%;
Reported percentage of 2004-2009 totals: 15%.
Commodity: Handbags/wallets/backpacks;
2004: 17%;
2005: 16%;
2006: 9%;
2007: 7%;
2008: 11%;
2009: 8%;
Reported percentage of 2004-2009 totals: 11%.
Commodity: Consumer electronics;
2004: 6%;
2005: 9%;
2006: 5%;
2007: 8%;
2008: 8%;
2009: 12%;
Reported percentage of 2004-2009 totals: 9%.
Commodity: Computers/hardware;
2004: 1%;
2005: 5%;
2006: 9%;
2007: 5%;
2008: 3%;
2009: 5%;
Reported percentage of 2004-2009 totals: 5.%
Commodity: Pharmaceuticals;
2004: [Empty];
2005: 2%;
2006: 1%;
2007: 6%;
2008: 10%;
2009: 4%;
Reported percentage of 2004-2009 totals: 5%.
Commodity: Cigarettes;
2004: 17%;
2005: 10%;
2006: [Empty];
2007: [Empty];
2008: 2%;
2009: 1%;
Reported percentage of 2004-2009 totals: 4%.
Commodity: Media;
2004: 4%;
2005: [Empty];
2006: 4%;
2007: 4%;
2008: 2%;
2009: 4%;
Reported percentage of 2004-2009 totals: 3%.
Commodity: Watches/parts;
2004: 2%;
2005: 3%;
2006: 2%;
2007: [Empty];
2008: [Empty];
2009: 6%;
Reported percentage of 2004-2009 totals: 2%.
Commodity: Toys/electronic games;
2004: 3%;
2005: 9%;
2006: [Empty];
2007: [Empty];
2008: [Empty];
2009: 2%;
Reported percentage of 2004-2009 totals: 2v.
Commodity: Batteries;
2004: 2%;
2005: [Empty];
2006: [Empty];
2007: [Empty];
2008: 1%;
2009: 1%;
Reported percentage of 2004-2009 totals: 1%.
Commodity: Sunglasses/parts;
2004: [Empty];
2005: [Empty];
2006: [Empty];
2007: 2%;
2008: 3%;
2009: 1%;
Reported percentage of 2004-2009 totals: 1%.
Commodity: Perfumes;
2004: [Empty];
2005: 3%;
2006: [Empty];
2007: 1%;
2008: 2%;
2009: 1%;
Reported percentage of 2004-2009 totals: 1%.
Commodity: Jewelry;
2004: [Empty];
2005: [Empty];
2006: [Empty];
2007: [Empty];
2008: [Empty];
2009: 4%;
Reported percentage of 2004-2009 totals: 1%.
Commodity: Headwear;
2004: [Empty];
2005: [Empty];
2006: 2%;
2007: [Empty];
2008: [Empty];
2009: [Empty];
Reported percentage of 2004-2009 totals: [Empty].
Commodity: Health care;
2004: [Empty];
2005: [Empty];
2006: 2%;
2007: [Empty];
2008: [Empty];
2009: [Empty];
Reported percentage of 2004-2009 totals: [Empty].
Commodity: All other commodities;
2004: 10%;
2005: 15%;
2006: 8%;
2007: 14%;
2008: 10%;
2009: 3%;
Reported percentage of 2004-2009 totals: 9%.
Commodity: Total domestic value of all seizures;
2004: $139 million;
2005: $93 million;
2006: $155 million;
2007: $197 million;
2008: $273 million;
2009: $261 million;
Reported 2004-2009 totals: $1,118 million.
Commodity: Total number of seizures;
2004: 7,255;
2005: 8,022;
2006: 14,675;
2007: 13,657;
2008: 14,992;
2009: 14,841;
Reported 2004-2009 totals: 73,442.
Source: GAO analysis of CBP data.
Note: Where percentages are not provided, CBP either did not report
the commodity as a separate category in a given year or the percentage
seized of the commodity was less than 1 percent of the total domestic
value of all commodities seized. Seizures of these commodities may be
included in the "All other commodities" category. The percentage
values may not add up to 100 percent due to rounding.
[End of table]
According to CBP data, seized counterfeit goods are dominated by
products from China. During fiscal years 2004 through 2009, China
accounted for about 77 percent of the aggregate value of goods seized
in the United States. Hong Kong, India, and Taiwan followed China,
accounting for 7, 2, and 1 percent of the seized value, respectively.
CBP data indicate certain concentrations of counterfeit production
among these countries: in 2009, about 58 percent of the seized goods
from China were footwear and handbags; 69 percent of the seized goods
from Hong Kong were consumer electronics and watch parts; 91 percent
of the seized goods from India were pharmaceuticals and perfume; and
85 percent of seized goods from Taiwan were computers and consumer
electronics. CBP data show that goods were also seized frequently from
Russia, Korea, Pakistan, Vietnam, and certain Southeast Asian
countries. Unlike imported counterfeits, there is little information
on the extent and sources for domestically produced counterfeits.
According to the Congressional Research Service, the United States is
especially concerned with foreign counterfeits of U.S. intellectual
property. Compared to foreign countries, counterfeits produced in the
United States are estimated to be relatively low.
Another significant aspect of IP infringement is the piracy of digital
copyrighted products, which is not captured by CBP seizure data. The
development of technologies that enable the unauthorized distribution
of copyrighted works is widely recognized as leading to an increase in
piracy. The rapid growth of Internet use, in particular, has
significantly contributed to the increase. Digital products are not
physical or tangible, can be reproduced at very low cost, and have the
potential for immediate delivery through the Internet across virtually
unlimited geographic markets. Sectors facing threats from digital
piracy include the music, motion picture, television, publishing, and
software industries. Piracy of these products over the Internet can
occur through methods including peer-to-peer networks, streaming
sites, and one-click hosting services. There is no government agency
that systematically collects or tracks data on the extent of digital
copyright piracy.
These technological developments, along with an increase in the
sophistication of packaging for counterfeit goods, have changed the
nature of counterfeiting and piracy substantially in recent years.
Industry associations with whom we met commented that technological
changes and increased sophistication among counterfeiters have
affected their businesses significantly.
Counterfeiting and Piracy Have a Wide Range of Effects on U.S.
Consumers, Industry, Government, and the Economy:
According to experts we spoke with and literature we reviewed,
counterfeiting and piracy have produced a wide range of effects on
consumers, industry, government, and the economy as a whole, depending
on the type of infringements involved and other factors. Most of the
information and views we obtained from our interviews and literature
review focused on the significant direct negative effects of
counterfeiting and piracy on stakeholders, including health and safety
risks, lost revenues, and increased costs of protecting and enforcing
IP rights. However, some experts and literature point out that certain
stakeholders may experience some positive effects from counterfeits
and piracy, though there is little information available on potential
positive effects. Table 2 summarizes the positive and negative effects
by stakeholder, based on our discussions with experts and literature
we reviewed.
Table 2: Potential Direct Effects of IP Infringements in the United
States by Stakeholder:
Stakeholders: Consumers;
Potential effects: Negative effects;
* Damage to health and safety;
* Costs incurred when product fails due to lower quality of
counterfeit good.
Stakeholders: Consumers;
Potential effects: Positive Effects;
* Perceived benefits from lower prices of counterfeit and pirated
goods.
Stakeholders: Industry;
Potential effects: Negative effects;
* Lost sales;
* Lost brand value or damage to public image;
* Cost of IP protection;
* Decreased incentive to invest in research and development.
Stakeholders: Industry;
Potential effects: Positive effects;
* Increased sales of legitimate goods based on consumer "sampling" of
pirated goods.
Stakeholders: Government;
Potential effects: Negative effects;
* Lost tax revenue due to illegal sales of counterfeit and pirated
goods;
* Cost of IP enforcement;
* Risks of counterfeits entering supply chains with national security
or civilian safety implications.
Stakeholders: Economy as a whole;
Potential effects: Negative effects;
* Lower economic growth as a result of reduced incentives to innovate;
* Lost revenue from declining U.S. trade in countries with weak IP
rights regimes.
Source: GAO analysis of data collected through interviews with experts
and literature reviewed.
Note: These effects may differ greatly in magnitude by industry and
stakeholder, with specific impacts depending on which product or
industry is being discussed.
[End of table]
Consumer Effects Include Danger to Health and Safety:
A commonly cited concern about counterfeit trade is that certain types
of counterfeit goods can have harmful effects on consumers' health and
safety, causing serious illness or death. Experts we spoke with and
literature we reviewed identified certain counterfeit products, such
as pharmaceuticals, automotive parts, electrical components, toys, and
household goods, as having potentially damaging health and safety
effects. According to experts we spoke with, a key characteristic of
these types of counterfeit goods, which distinguishes their effects
from other types of counterfeiting or piracy, is that U.S. consumers
are likely to have been deceived about the origin of the product. In
addition, some studies and an expert reported that counterfeiters have
increasingly diversified beyond their traditional products, such as
luxury goods, to more functional products such as baby shampoo and
household cleaners, and will continue to expand their product
portfolios since the profit incentives are large. Examples of the
types of counterfeit products that may have negative health and safety
effects on consumers are presented below.
Counterfeit pharmaceuticals may include toxic or nonactive
ingredients, correct ingredients in incorrect quantities, or other
mislabeling. These products can be ineffective in treating ailments or
may lead to adverse:
reactions, drug resistance, or even death.[Footnote 12] The FDA has
specifically highlighted and issued warnings to U.S. consumers on the
dangers of buying prescription drugs over the Internet.
Counterfeit automotive products may be substandard. A representative
of a U.S. automotive parts supplier stated that it tested a supply of
counterfeit timing belts that did not meet industry safety standards
and could potentially impair the safety of vehicles.
Counterfeit or pirated software may threaten consumers' computer
security. The illegitimate software, for example, may contain
malicious programming code that could interfere with computers'
operations or violates users' privacy.
Effects Vary Across Industries and Include Lost Sales and Reduced
Incentives to Innovate:
Counterfeit or pirated products that act as substitutes for genuine
goods can have a wide range of negative effects on industries,
according to experts we spoke with and literature we reviewed. These
sources further noted that the economic effects vary widely among
industries and among companies within an industry. The most commonly
identified effect cited was lost sales, which leads to decreased
revenues and/or market share. Many industries lose sales because of
consumers' purchases of counterfeit and pirated goods, particularly if
the consumer purchased a counterfeit when intending to purchase a
genuine product. In such cases, the industry may lose sales in direct
proportion to the number of counterfeit products that the deceived
consumers purchased. Industries in which consumers knowingly purchase
counterfeits as a substitute for the genuine good may also experience
lost sales. For example, recording companies have lost sales on a wide
scale as a result of pirated music distributed over the Internet and
producers of high-end fashion goods have lost sales from purchases of
counterfeit goods made to look similar to genuine products.
Lost revenues can also occur when lower-priced counterfeit and pirated
goods pressure producers or IP owners to reduce prices of genuine
goods. In some industries, such as the audiovisual sector, marketing
strategies must be adjusted to minimize the impact of counterfeiting
on lost revenues. Movie studios that use time-related marketing
strategies--introducing different formats of a movie after certain
periods of time--have reduced the time periods or "windows" for each
format as a countermeasure, reducing the overall revenue acquired in
each window. Experts stated that companies may also experience losses
due to the dilution of brand value or damage to reputation and public
image, as counterfeiting and piracy may reduce consumers' confidence
in the brand's quality. Consumers who are unaware that a product is
counterfeit may blame the manufacturer of the legitimate good for
negative effects of the fake. Some manufacturers learn of the
existence of counterfeit versions of their products from returns of
inferior counterfeit goods.
Companies are affected in additional ways. For example, to avoid
losing sales and liability issues, companies may increase spending on
IP protection efforts. In addition, experts we spoke with stated that
companies could experience a decline in innovation and production of
new goods if counterfeiting leads to reductions in corporate
investments in research and development. Another variation in the
nature of the effects of counterfeiting and piracy is that some
effects are experienced immediately, while others are more long-term
in nature, according to the OECD. The OECD's 2008 report cited loss of
sales volume and lower prices as short-term effects, while the medium-
and long-term effects include loss of brand value and reputation, lost
investment, increased costs of countermeasures, potentially reduced
scope of operations, and reduced innovation.
Finally, one expert emphasized to us that the loss of the IP rights is
much more important than the loss of revenue. He stated that the
danger for the United States is in the accelerated "learning effects"--
companies learn how to produce and will improve upon these goods. They
will no longer need to illegally copy a given brand--they will be in
the aftermarket. He suggested that companies should work to ensure
their competitive advantage in the future by inhibiting undesired
knowledge transfer.
U.S. Government Loses Tax Revenue, Incurs Enforcement Expenses, and
Faces Risks to Supply Chains:
Many of the experts we interviewed identified lost tax revenue as an
effect of counterfeiting and piracy on governments. IP owners or
producers of legitimate goods who lose revenue because of competition
from counterfeiters pay less in taxes. The U.S. government also incurs
costs due to IP protection and enforcement efforts. Researchers have
found anecdotal evidence that organized criminal and terrorist
organizations are involved in counterfeiting and piracy. A 2009 RAND
Corporation study, for example, presented case studies showing the
involvement of organized crime or terrorist groups involved in film
piracy to generate funding for their activities.[Footnote 13] Because
criminal networks are involved, government law enforcement priorities
may be affected since more resources are devoted to combating these
networks. Researchers have identified economic incentives that have
contributed to the increase in counterfeiting and piracy in recent
years. Economic incentives include low barriers to entering the
counterfeiting and piracy business, potentially high profits, and
limited legal sanctions if caught.
The federal government also incurs costs to store and destroy
counterfeit and pirated goods. Seized goods have to be secured, as
they have potential value but cannot be allowed to enter U.S.
commerce. Storage may be prolonged by law enforcement actions, but the
goods are generally destroyed or otherwise disposed of when they are
determined to be illegal and are no longer needed. According to CBP
officials, as seizures have increased, the agency's storage and
destruction costs have grown and become increasingly burdensome. CBP
reported that it spent about $41.9 million to destroy seized property
between fiscal years 2007 and 2009.
Counterfeits also pose a threat to the reliability of supply chains
that have national security or civilian safety significance. According
to a recent Commerce report, counterfeit electronics parts have
infiltrated U.S. defense and industrial supply chains and almost 40
percent of companies and organizations--including the Department of
Defense--surveyed for the report have encountered counterfeit
electronics.[Footnote 14] Commerce reported that the infiltration of
counterfeit parts into the supply chain was exacerbated by weaknesses
in inventory management, procurement procedures, and inspection
protocols, among other factors. The Federal Aviation Administration
(FAA) tracks and posts notifications of incidents of counterfeit or
improperly maintained parts entering airline industry supply chains
through its Suspected Unapproved Parts Program in an effort to improve
flight safety. The FAA program has identified instances of counterfeit
aviation parts, as well as fake data plates and history cards to make
old parts look new. FAA's program highlights the risks that
counterfeit parts pose to the safety of commercial aircraft.
The U.S. Economy May Experience Slower Growth:
The U.S. economy as a whole may grow at a slower pace than it
otherwise would because of counterfeiting and piracy's effect on U.S.
industries, government, and consumers. According to officials we
interviewed and OECD's 2008 study, to the extent that companies
experience a loss of revenues or incentives to invest in research and
development for new products, slower economic growth could occur. IP-
related industries play an important role in the growth of the U.S.
economy and contribute a significant percentage to the U.S. gross
domestic product. IP-related industries also pay significantly higher
wages than other industries and contribute to a higher standard of
living in the United States. To the extent that counterfeiting and
piracy reduce investments in research and development, these companies
may hire fewer workers and may contribute less to U.S. economic
growth, overall. The U.S. economy may also experience slower growth
due to a decline in trade with countries where widespread
counterfeiting hinders the activities of U.S. companies operating
overseas.
In addition to the industry effects, the U.S. economy, as a whole,
also may experience effects of losses by consumers and government. An
economy's gross domestic product could be measured as either the total
expenditures by households (consumers), or as the total wages paid by
the private sector (industry). Hence, the effect of counterfeiting and
piracy on industry would affect consumers by reducing their wages,
which could reduce consumption of goods and services and the gross
domestic product. Finally, the government is also affected by the
reduction of economic activity, since fewer taxes are collected.
Certain Stakeholders May Experience Positive Economic Effects of
Counterfeiting and Piracy:
Some experts we interviewed and literature we reviewed identified
potential positive economic effects of counterfeiting and piracy. Some
consumers may knowingly purchase a counterfeit or pirated product
because it is less expensive than the genuine good or because the
genuine good is unavailable, and they may experience positive effects
from such purchases. For example, consumers in the United States and
other countries purchase counterfeit copies of high-priced luxury-
branded fashion goods at low prices, although the products' packaging
and sales venues make it apparent they are not genuine. Consumers may
purchase movies that have yet to be released in theaters and are
unavailable in legitimate form. Lower-priced counterfeit goods may
exert competitive pressure to lower prices for legitimate goods, which
may benefit consumers. However, according to the OECD, the longer-term
impact for consumers of falling prices for legitimate goods is
unclear, as these changes may affect the speed of innovation.
There are also certain instances when IP rights holders in some
industries might experience potentially positive effects from the
knowing consumption of pirated or counterfeit goods. For example,
consumers may use pirated goods to "sample" music, movies, software,
or electronic games before purchasing legitimate copies, which may
lead to increased sales of legitimate goods. In addition, industries
with products that are characterized by large "switching costs," may
also benefit from piracy due to lock-in effects. For example, some
experts we spoke with and literature we reviewed discussed how
consumers after being introduced to the pirated version might get
locked into new legitimate software because of large switching costs,
such as a steep learning curve, reluctance to switch to new products,
and search costs incurred by consumers to identify a new product to
use.
Some authors have argued that companies that experience revenue losses
in one line of business--such as movies--may also increase revenues in
related or complementary businesses due to increased brand awareness.
For instance, companies may experience increased revenues due to the
sales of merchandise that are based on movie characters whose
popularity is enhanced by sales of pirated movies. One expert also
observed that some industries may experience an increase in demand for
their products because of piracy in other industries. This expert
identified Internet infrastructure manufacturers (e.g., companies that
make routers) as possible beneficiaries of digital piracy, because of
the bandwidth demands related to the transfer of pirated digital
content. While competitive pressure to keep one step ahead of
counterfeiters may spur innovation in some cases, some of this
innovation may be oriented toward anticounterfeiting and antipiracy
efforts, rather than enhancing the product for consumers.
Lack of Data Hinders Efforts to Quantify Impacts of Counterfeiting and
Piracy:
According to experts we spoke with and literature we reviewed,
estimating the economic impact of IP infringements is extremely
difficult, and assumptions must be used due to the absence of data.
Assumptions, such as the rate at which consumers would substitute
counterfeit goods for legitimate products, can have enormous impacts
on the resulting estimates and heighten the importance of
transparency. Because of the significant differences in types of
counterfeit and pirated goods and industries involved, no single
method can be used to develop estimates, and each method has
limitations. Nonetheless, research in specific industries suggest that
the problem is sizeable. Most experts we spoke with and the literature
we reviewed observed that despite significant efforts, it is
difficult, if not impossible, to quantify the net effect of
counterfeiting and piracy on the economy as a whole.
Lack of Data Is the Primary Challenge for Quantifying Economic Impacts
of Counterfeiting and Piracy:
Quantifying the economic impact of counterfeit and pirated goods on
the U.S. economy is challenging primarily because of the lack of
available data on the extent and value of counterfeit trade.
Counterfeiting and piracy are illicit activities, which makes data on
them inherently difficult to obtain. In discussing their own effort to
develop a global estimate on the scale of counterfeit trade, OECD
officials told us that obtaining reliable data is the most important
and difficult part of any attempt to quantify the economic impact of
counterfeiting and piracy. OECD's 2008 report, The Economic Impact of
Counterfeiting and Piracy, further states that available information
on the scope and magnitude of counterfeiting and piracy provides only
a crude indication of how widespread they may be, and that neither
governments nor industry were able to provide solid assessments of
their respective situations. The report stated that one of the key
problems is that data have not been systematically collected or
evaluated and, in many cases, assessments "rely excessively on
fragmentary and anecdotal information; where data are lacking,
unsubstantiated opinions are often treated as facts."
In cases in which data on counterfeits are collected by federal
agencies, such as CBP or FAA, it is difficult to know how complete the
data are. For example, it is difficult to determine whether CBP's
annual seizure data in table 1 reflect the extent and types of
counterfeits entering the United States in any given year, the
counterfeit products that were detected, or the level of federal
border enforcement effort expended. FAA's notifications on counterfeit
parts through its Suspect Unapproved Parts Program rely, in part, on
reported incidents or complaints from members of the aviation
community.
Commerce and FBI officials told us they rely on industry statistics on
counterfeit and pirated goods and do not conduct any original data
gathering to assess the economic impact of counterfeit and pirated
goods on the U.S. economy or domestic industries. However, according
to experts and government officials, industry associations do not
always disclose their proprietary data sources and methods, making it
difficult to verify their estimates. Industries collect this
information to address counterfeiting problems associated with their
products and may be reluctant to discuss instances of counterfeiting
because consumers might lose confidence. OECD officials, for example,
told us that one reason some industry representatives were hesitant to
participate in their study was that they did not want information to
be widely released about the scale of the counterfeiting problem in
their sectors.
Assumptions Are Used to Compensate for the Lack of Data:
Because of the lack of data on illicit trade, methods for calculating
estimates of economic losses must involve certain assumptions, and the
resulting economic loss estimates are highly sensitive to the
assumptions used. Two experts told us that the selection and weighting
of these assumptions and variables are critical to the results of
counterfeit estimates, and the assumptions should, therefore, be
identified and evaluated. Transparency in how these estimates are
developed is essential for assessing the usefulness of an estimate.
Two key assumptions that typically are required in calculating a loss
estimate from counterfeit goods include the substitution rate used by
consumers and the value of counterfeit goods.
* Substitution rate. The assumed rate at which a consumer is willing
to switch from purchasing a fake good to the genuine product is a key
assumption that can have a critical impact on the results of an
economic loss estimate. For example, if a consumer pays the full
retail price for a fake movie thinking that it is the genuine good, an
assumption can be made that a legitimate copy would have been bought
in the absence of the fake product, representing a one-to-one
substitution rate. However, this one-to-one substitution rate requires
three important conditions: (1) the fake good is almost identical in
quality to the genuine one; (2) the consumer is paying full retail
price for the fake product; and (3) the consumer is not aware he is
purchasing a counterfeit product. When some of these conditions are
not met (e.g., the consumer paid a significantly lower price for the
counterfeit), the likelihood that the consumer would have purchased
the genuine product at full price is not clear. Substitution rates
also vary by industry, since factors such as product quality,
distribution channels, and information available about the product can
differ significantly.
* Value of fake goods. Valuation of the fake goods constitutes another
set of assumptions that has a significant impact. There are several
measures of value that can be used, such as the production cost, the
domestic value, or the manufacturer's suggested retail price. For
example, CBP announced in a January 2010 press release that it had
seized 252,968 DVDs with counterfeit trademarks. The agency reported
that the manufacturer's suggested retail price of the shipment was
estimated to be more than $7.1 million and the domestic value was
estimated at $204,904. Officials from the International Trade
Commission stated that counterfeits are very difficult to price and
estimates of economic impact would benefit from including a range of
prices, from the spot price of the fake on the street corner at the
bottom to the manufacturer's suggested retail price at the top.
The level or extent of deception that consumers face is also an
important factor to consider when developing assumptions for the
substitution rate and value of the fake goods. If a consumer is
completely deceived, it could be reasonable to assume a one-to-one
substitution rate (i.e., the purchase of a legitimate good in lieu of
the counterfeit one) and a full retail price (i.e., the manufacturer's
suggested retail sales price). Price, packaging, and location of the
transaction are the most important signs to the consumer indicating
the legitimacy of a good. Many of the experts we interviewed said that
a one-to-one substitution rate is not likely to exist in most
circumstances where counterfeit goods are significantly cheaper than
the legitimate goods. Some experts also noted that the level of
consumer deception varies across industries. For example, consumers
who purchase counterfeit pharmaceuticals are more likely to be
deceived, particularly when the counterfeit good is sold through the
same distribution channel as the genuine product. Some experts
observed that few, if any, consumers would willingly purchase a
pharmaceutical product they knew might be counterfeit.[Footnote 15]
However, the extent of deception among consumers of audiovisual
products is likely lower because sales venues for counterfeit
audiovisual goods tend to be separate from the legitimate ones. Unless
the assumptions about substitution rates and valuations of counterfeit
goods are transparently explained, experts observed that it is
difficult, if not impossible, to assess the reasonableness of the
resulting estimate.
Three Widely Cited Estimates Sourced to U.S. Agencies Cannot Be
Substantiated:
Three commonly cited estimates of U.S. industry losses due to
counterfeiting have been sourced to U.S. agencies, but cannot be
substantiated or traced back to an underlying data source or
methodology. First, a number of industry, media, and government
publications have cited an FBI estimate that U.S. businesses lose $200-
$250 billion to counterfeiting on an annual basis. This estimate was
contained in a 2002 FBI press release, but FBI officials told us that
it has no record of source data or methodology for generating the
estimate and that it cannot be corroborated. Second, a 2002 CBP press
release contained an estimate that U.S. businesses and industries lose
$200 billion a year in revenue and 750,000 jobs due to counterfeits of
merchandise. However, a CBP official stated that these figures are of
uncertain origin, have been discredited, and are no longer used by
CBP. A March 2009 CBP internal memo was circulated to inform staff not
to use the figures. However, another entity within DHS continues to
use them. Third, the Motor and Equipment Manufacturers Association
reported an estimate that the U.S. automotive parts industry has lost
$3 billion in sales due to counterfeit goods and attributed the figure
to the Federal Trade Commission (FTC). The OECD has also referenced
this estimate in its report on counterfeiting and piracy, citing the
association report that is sourced to the FTC. However, when we
contacted FTC officials to substantiate the estimate, they were unable
to locate any record or source of this estimate within its reports or
archives, and officials could not recall the agency ever developing or
using this estimate. These estimates attributed to FBI, CBP, and FTC
continue to be referenced by various industry and government sources
as evidence of the significance of the counterfeiting and piracy
problem to the U.S. economy.
No Single Approach for Quantifying Impacts of Counterfeiting and
Piracy Can Be Used, but Different Studies Indicate Problem Is Sizeable:
There is no single methodology to collect and analyze data that can be
applied across industries to estimate the effects of counterfeiting
and piracy on the U.S. economy or industry sectors. The nature of data
collection, the substitution rate, value of goods, and level of
deception are not the same across industries. Due to these challenges
and the lack of data, researchers have developed different
methodologies. In addition, some experts we interviewed noted the
methodological and data challenges they face when the nature of the
problem has changed substantially over time. Some commented that they
have not updated earlier estimates or were required to change
methodologies for these reasons. Nonetheless, the studies and experts
we spoke with suggested that counterfeiting and piracy is a sizeable
problem, which affects consumer behavior and firms' incentives to
innovate. The most commonly used methods to collect and analyze data,
based on our literature review and interviews with experts, are
presented below.
Extrapolation of Enforcement Seizure Data:
Seizure data from CBP is one of the few types of hard data sources
available and is often used to extrapolate the level of counterfeit
and pirated trade. This approach provides hard evidence of the minimum
quantity of counterfeit goods, but a major limitation is that levels
of border enforcement efforts can vary. For example, in our study of
seizures made by the CBP field offices, we calculated "seizure rates"
for the top 25 U.S. ports, based on the dollar value of IP seizures at
each port compared to the dollar value of IP-related imports there.
These ports accounted for over 75 percent of the value of all IP-
related imports into the United States in fiscal year 2005.[Footnote
16] We found that the top 3 ports seized over 100 times more IP
counterfeits than the lowest 5 of these ports per dollar of IP-related
imports. As a result, it appears that the importance of IP enforcement
and the skill of the personnel at the ports have significant impact on
the level of seizures. This suggests that seizure data might be useful
as a floor, but are not indicative of the actual level of U.S. imports
of counterfeit goods.
A study conducted by the Los Angeles County Economic Development
Corporation, A False Bargain: The Los Angeles County Economic
Consequences of Counterfeit Products,[Footnote 17] used extrapolation
of seizure data as one of its three approaches to estimate the
economic impact of counterfeits.[Footnote 18] he authors noted that
the key variable in extrapolating seizure data from CBP was to
determine CBP's success rate in interdicting illegal goods, which they
acknowledged was "unknowable." One of the study's estimates that used
CBP seizures to extrapolate the value of counterfeit and pirated goods
in Los Angeles County calculated a range between $1 billion and $4.6
billion in 2005. This range was based on different assumptions used
for seizure rates and other variables.
Another challenge when extrapolating seizure data is determining the
dollar value to assign to the seized good, which can have a
significant impact on the magnitude of the estimates. For example, in
2009, CBP seized a shipment of counterfeit sunglasses from China and
reported an estimated total domestic value at $12,146 and a
manufacturer's suggested retail price at $7.9 million.
Surveys of Supply and Demand:
Researchers have conducted surveys to gather data on the consumption
or sales patterns of counterfeit or pirated goods. The main advantage
of this method is that it can also show consumers' behavior in terms
of their preferences. For example, a survey could collect information
on the consumer's willingness to pay for a counterfeit good; the
number of counterfeit units purchased in a determined period of time;
the minimum expected quality; the necessary price reduction of the
legitimate good to avoid the consumer's purchase of the counterfeit
good; the knowledge of sanctions if caught purchasing the counterfeit
good; and the knowledge of potential "side effects" due to the
purchase of fake goods. However, a survey can be a labor-intensive
project and can cost in the millions of dollars. Moreover, one expert
stated that the bias in surveys is hard to identify. For example, he
commented that students, who are often the subjects in surveys of
illegal file sharing, may either not admit that they are engaging in
illegal activity, or may admit to such behavior because it may be
popular for this demographic.
The Business Software Alliance publishes piracy estimates based on a
set of annual surveys it conducts in different countries.[Footnote 19]
Based on its survey results, the industry association estimated the
U.S. piracy rate at 20 percent for business software, carrying a loss
of $9 billion in 2008. This study defined piracy as the difference
between total installed software and legitimate software sold, and its
scope involved only packaged physical software. While this study has
an enviable data set on industries and consumers located around the
world from its country surveys, it uses assumptions that have raised
concerns among experts we interviewed, including the assumption of a
one-to-one rate of substitution and questions on how the results from
the surveyed countries are extrapolated to nonsurveyed countries.
Another example of the use of surveys is the study by the Motion
Picture Association, which relied on a consumer survey conducted in
several countries.[Footnote 20] This study found that U.S. motion
picture studios lost $6.1 billion to piracy in 2005. It is difficult,
based on the information provided in the study, to determine how the
authors handled key assumptions such as substitution rates and
extrapolation from the survey sample to the broader population.
In a smaller-scale example of a survey method, Rob and Waldfogel
[Footnote 21] surveyed students in American universities during parts
of 2003 and 2004, asking not only about the amount of music albums
they purchased and illegally downloaded, but also the titles and their
valuation for the albums they purchased and illegally downloaded.
Their main findings are: (1) downloading reduces legitimate purchases
by individuals by 20 percent in the sample, that is, every five music
downloads substitute one legitimate purchase; (2) on average,
respondents downloaded music that they valued one-third to one-half
less than their legitimately purchased music, suggesting that some of
the music that was downloaded would never have been purchased as an
album; and (3) while downloading reduces per capita expenditures by
$25, it raises per capita consumers' surplus by $70. The study
indicated that downloading illegal music can have a positive effect on
total consumer welfare. However, as explained by the authors, this
experiment cannot be generalized; the data consist of a snapshot of
undergraduate students' responses, which is not representative of the
general population.
As previously discussed, Commerce recently conducted a survey of 387
companies and organizations participating in U.S. defense and
industrial supply chains and reported that almost 40 percent of them
encountered counterfeit products between 2005 and 2008.[Footnote 22]
The report focused on basic electronic parts and components, including
microcircuits and circuit boards, throughout the entire electronics
industrial base in the United States. The report noted that these
parts are key elements of electronic systems that support national
security missions and control essential commercial and industrial
operations. Information provided by these companies and organizations
also demonstrated an increase in the number of reported counterfeit
incidents from 3,868 in 2005 to 9,356 in 2008. Some of these
counterfeit incidents could include DOD-qualified parts and components.
Use of Economic Multipliers to Estimate Effects on the U.S. Economy:
Economic multipliers show how capital changes in one industry affect
output and employment of associated industries. Commerce's Bureau of
Economic Analysis guidelines make regional multipliers available
through its Regional Input-Output Modeling System (RIMS II). These
multipliers estimate the extent to which a one-time or sustained
change in economic activity will be attributed to specific industries
in a region[Footnote 23]. Multipliers can provide an illustration of
the possible "induced" effects from a one-time change in final demand.
For example, if a new facility is to be created with a determined
investment amount, one can estimate how many new jobs can be created,
as well as the benefit to the region in terms of output (e.g., extra
construction, manufacturing, supplies, and other products needed). It
must be noted that RIMS II multipliers assume no job immigration or
substitution effect. That is, if new jobs are created as a result of
investing more capital, those jobs would not be filled by the labor
force from another industry.
In the case of estimating the effect of counterfeiting and piracy,
RIMS II economic multipliers are applied to U.S. industry loss
figures, which have been derived from other studies, and used to
calculate the harm on employment and output due to reduced
investments. Using the RIMS II multipliers in this setting does not
take into account the two-fold effect: (1) in the case that the
counterfeit good has similar quality to the original, consumers have
extra disposable income from purchasing a less expensive good, and (2)
the extra disposable income goes back to the U.S. economy, as
consumers can spend it on other goods and services.
Most of the experts we interviewed were reluctant to use economic
multipliers to calculate losses from counterfeiting because this
methodology was developed to look at a one-time change in output and
employment. Nonetheless, the use of this methodology corroborates that
the effect of counterfeiting and piracy goes beyond the infringed
industry. For example, when pirated movies are sold, it damages not
only the motion picture industry, but all other industries linked to
those sales.
The Institute of Policy Innovation has commissioned three studies in
the audiovisual industries using economic multipliers; the most
expansive of the studies covers motion pictures, sound recordings,
business and entertainment software, and video games for the year
2005. Footnote 24] This study found that losses in the U.S. economy
due to piracy accounted for $58 billion in output, over 370,000 jobs,
and $2.6 billion in tax revenue. It was calculated by taking industry
estimates of loss revenue and applying the RIMS II multipliers to
these figures.[Footnote 25]
Other Data Collection and Modeling Methods:
Several additional studies that we reviewed provided alternative data
collection and modeling techniques to quantify the effect of
counterfeiting on a specific industry or, in the case of the OECD, on
world trade. The OECD, for example, adopted an approach of combining
different methodologies to develop a single estimate. The OECD
triangulated a combination of data sets: extrapolating seizure data
provided by national customs authorities, comparing the seizure data
to international trade data, and using these data in an econometric
model. The seizure data were used to develop a model that would
measure the magnitude of global counterfeit trade.
The OECD estimated that the magnitude of counterfeit and pirated goods
in international trade could have accounted for up to $200 billion in
2005, and later updated this estimate to $250 billion based on 2005-
2007 world trade data.[Footnote 26],[Footnote 27] As noted by the
OECD, most of the international trade data were supplied by national
governments and relevant industries, and the OECD did not
independently assess the reliability of the figures. Its methodology
is based on matching, to the best of its knowledge, the industry data
with customs seizure data from the OECD members, acknowledging the
limitations of working with customs seizure data. OECD heavily
qualified this estimate, however, reporting that "the overall degree
to which products are being counterfeited and pirated is unknown and
there do not appear to be any methodologies that could be employed to
develop an acceptable overall estimate." A second phase of the OECD
project covered digital piracy, but did not attempt to quantify the
effects.
In a more narrowly focused study on downloads of music, Oberholzer-Gee
and Strumpf[Footnote 28] used modeling to determine that illegal
downloads have no effect on record sales. They concluded that, in
contrast with industry estimates, declining sales over the period of
2000-2002 were not primarily caused by illegal downloads. The results
were found after compiling a data set of illegal downloads from a
prominent server and testing the variation between illegal downloads
and legal sales in the United States of specific albums on a weekly
basis for 17 weeks in the second half of 2002. This was done by
modeling album sales as a function of the quantity of album downloads
and other album specific characteristics. While this is an enviable
data set of actual illegal downloads, the study has two main
limitations: first, the study uses a static model which does not
reflect the effect of downloads apart from the week the download
occurred. Second, the study only observed the supply side of music.
Thus, it is not clear if consumers who are illegally downloading music
would have purchased the genuine albums.
Hui and Png's[Footnote 29] study provided another example that used
modeling. This study estimated that piracy in the music industry
caused revenue losses of 6.6 percent in 1998. The authors stated that
their estimate is significantly less than the industry loss estimate.
In particular, for the year 1998 in the United States, legitimate
sales of CDs were 3.73 CDs per capita, and the average loss in sales
per capita due to piracy was 0.044 CDs. The data set included CD
prices, music CD demand, piracy level and country-specific
characteristics for 28 countries, mostly provided by the International
Federation of the Phonographic Industry.[Footnote 30] The main
limitation for this study was that it only covered physical piracy.
While digital piracy was not a major concern during the time period
sampled, it has become so for at least the last decade due to the
Internet. Another limitation is that the study used piracy rates that
assumed a one-to-one substitution rate, including those used by the
Business Software Alliance.
Many experts we interviewed also agreed that general or partial
equilibrium models would offer useful insights if the input data
existed. These involve modeling the supply and demand of a good and
simulating the effect of how counterfeiting affects the market for
that good (in the case of a partial model) and the economy as a whole
(for a general equilibrium model). The approach allows a systematic
analysis of the problem, but depends on the quality of the data used
to develop the models. The benefit of an equilibrium model is that
assumptions can be tested based on the results obtained and modified
if the results fall outside of established parameters. Experts agreed
on the potential benefits of this approach, but recognized that data
limitations make it currently close to impossible to implement.
Officials from the International Trade Commission and other industry
experts said that this would be their preferred approach to think of
the problem in question, but they also acknowledged that data
reliability is a major concern, as with the other methodologies.
"Rule of Thumb" for Measuring Counterfeit Trade as a Proportion of
World Trade:
According to experts we interviewed and the literature we reviewed,
there is no evidence to support a "rule of thumb" that measures
counterfeit trade as a proportion of world trade to estimate the
amount of counterfeit trade that occurs in a local economy. The
advantage of finding a so-called "rule of thumb" for counterfeit trade
is that it can be applied generally and does not try to take into
consideration the different rates of counterfeiting and piracy for
each of the different industry sectors. However, as noted earlier,
piracy rates differ enormously across industries, so it is not
possible to generalize findings. Moreover, not all goods from world
trade can be counterfeited or pirated.
The most commonly cited "rule of thumb" is that counterfeit trade
accounts for 5 to 7 percent of world trade, which has been attributed
to the International Chamber of Commerce. The Office of the
Comptroller of the City of New York used this rule of thumb in its
2004 study to estimate the total dollar exchange of counterfeit goods
in the United States and in New York State.[Footnote 31] This study
first applied a 6 percent rule (an average of 5 to 7 percent "rule of
thumb") to the total value of world trade in 2003 ($7.6 trillion) to
calculate the value of world trade that is made up of counterfeit
goods, arriving at $456 billion.[Footnote 32]
This rule of thumb was widely spread by a 1998 OECD report, although
OECD and experts cautioned that this estimate was not verifiable and
the source data were not independently calculated. In its 2008 report,
The Economic Impact of Counterfeiting and Piracy, the OECD commented
that the "metrics underlying the International Chamber of Commerce's
estimates are not clear," nor is it clear what types of IP
infringements are included in the estimate. In a 2009 update to the
report, the OECD estimated the share of counterfeit and pirated goods
in world trade as 1.95 percent in 2007, increasing from 1.85 percent
in 2000. Many of the experts we interviewed also expressed skepticism
over the estimate that counterfeit trade represents 5 to 7 percent of
world trade.
Economy-Wide Impact of Counterfeiting and Piracy Is Unknown:
While experts and literature we reviewed provided different examples
of effects on the U.S. economy, most observed that despite significant
efforts, it is difficult, if not impossible, to quantify the net
effect of counterfeiting and piracy on the economy as a whole. For
example, as previously discussed, OECD attempted to develop an
estimate of the economic impact of counterfeiting and concluded that
an acceptable overall estimate of counterfeit goods could not be
developed. OECD further stated that information that can be obtained,
such as data on enforcement and information developed through surveys,
"has significant limitations, however, and falls far short of what is
needed to develop a robust overall estimate." One expert characterized
the attempt to quantify the overall economic impact of counterfeiting
as "fruitless," while another stated that any estimate is highly
suspect since this is covert trade and the numbers are all
"guesstimates."
To determine the net effect, any positive effects of counterfeiting
and piracy on the economy should be considered, as well as the
negative effects. Experts held different views on the nature of
potentially offsetting effects. While one expert we interviewed stated
that he did not believe there were any positive effects on the economy
due to counterfeiting and piracy, other experts stated that there were
positive effects and they should be assessed as well. Few studies have
been conducted on positive effects, and little is known about their
impact on the economy. Although some literature and experts suggest
that negative effects may be overstated, in general, literature and
experts indicate the negative effects of counterfeiting and piracy on
the U.S. economy outweigh the positive effects. Since there is an
absence of data concerning these potential effects, the net effect
cannot be determined with any certainty.
The experts we interviewed also differed regarding the extent to which
net effects of counterfeiting and piracy could be measured in certain
parts of the economy. For example, one expert we spoke with has
conducted research that found that employment numbers may be lost to
the U.S. economy when copyright industries lose business due to
piracy. Other experts we interviewed stated that, in their view,
employment effects are unclear, because employment may decline in
certain industries or rise in other industries as workers are hired to
produce counterfeits. Another expert told us that effects of piracy
within the United States are mainly redistributions within the economy
for other purposes and that they should not be considered as a loss to
the overall economy. He stated that "the money does not just vanish;
it is used for other purposes." Other experts we spoke with focused
more on the difficulties of aggregating the wide variety of effects on
industries into a single assessment.
We are sending copies of this report to interested congressional
committees; the Secretaries of Commerce, Health and Human Services,
and Homeland Security; the Attorney General; the Chairman of the
International Trade Commission; the U.S. Trade Representative, and the
Intellectual Property Enforcement Coordinator. This report will also
be available at no charge on GAO's Web site at [hyperlink,
http://www.gao.gov].
If you or your staffs have any questions about this report, please
contact me at (202) 512-4347 or yagerl@gao.gov. Contact points for our
Offices of Congressional Relations and Public Affairs may be found on
the last page of this report.
Signed by:
Loren Yager:
Director, International Affairs and Trade:
[End of section]
Appendix I: Objectives, Scope, and Methodology:
The Prioritizing Resources and Organization for Intellectual Property
Act of 2008 (PRO-IP Act) directed GAO to conduct a study on the
quantification of the impacts of imported and domestic counterfeits on
the U.S. manufacturing industry and the overall economy of the United
States. After conducting initial research, we determined that the U.S.
government did not systematically collect data and perform analysis on
the impacts of counterfeiting and piracy on the U.S. economy, and
concluded that it was not feasible to generate our own data or attempt
to quantify the economic impact of counterfeiting or piracy on the
U.S. economy based on the review of existing literature and interviews
with experts. In addition, we noted that many of the existing studies
and literature on economic effects address both counterfeiting and
piracy. Based on discussions with staff from the House and Senate
Judiciary Committees, we agreed that we would (1) examine existing
research on the effects of counterfeiting and piracy on consumers,
industries, government, and the U.S. economy; and (2) identify
insights gained from efforts to quantify the effects of counterfeiting
and piracy on the U.S. economy. To address both of these objectives,
we interviewed officials and representatives from industry
associations, nongovernmental organizations, academic institutions,
and U.S. government agencies and the multilateral Organization for
Economic Cooperation and Development (OECD). We also reviewed
documents and studies quantifying or discussing the impacts of
counterfeiting and piracy on the U.S. economy, industry, government,
and consumers.
Specifically, we reviewed quantitative and qualitative studies
published since 1999 of the economic impact of intellectual property
(IP) infringements to examine the range of impacts of counterfeiting
and piracy on various stakeholders (both positive and negative) and to
identify other insights about the nature of counterfeit markets,
approaches to developing estimates, and the role IP plays in the U.S.
economy. We identified these reports and studies through a literature
search and discussions with representatives from industry
associations, nongovernmental organizations, academic institutions,
U.S. government agencies, and the OECD to obtain their views on the
most relevant studies to review. Our literature review also included
the OECD studies that examined the economic impact of counterfeiting
and piracy. Although the OECD studies are global in scope rather than
focused on the U.S. economy, their unique nature and prominence as the
most comprehensive attempt to quantify the impacts of counterfeiting
and piracy warranted their inclusion within our scope. See the
bibliography for a partial list of references we consulted. We did not
assess or evaluate the accuracy of quantitative estimates or other
data found in these studies. We reviewed the studies primarily to
obtain information on the range of effects from counterfeiting and
piracy, different methods and assumptions used in determining effects,
and insights gained from these efforts. In selecting studies for
review, we sought to include a range of industries and methodologies.
In some cases, we interviewed the authors of these reports to obtain
additional information.
We conducted structured interviews with subject matter experts to
obtain their views on efforts to quantify the economic impacts of
counterfeiting and piracy and methodological approaches, the range of
impacts of counterfeits and piracy, and insights on counterfeiting
activities and markets. We identified experts through a literature
review and discussions with relevant government officials, industry
and consumer representatives, academics, and other stakeholders. These
subject matter experts were selected from a population of individuals
from government, academia, industry, and professional organizations.
More specifically, our criteria for selecting experts to interview
included:
* type and depth of experience, for instance, whether the expert had
authored a widely referenced study or article on the topic, and
whether the expert was referred to us by at least one other
interviewee as someone knowledgeable about the topic;
* relevance of published work to this engagement;
* representation of a range of perspectives;
* representation of relevant organizations and sectors including,
where applicable, representatives from government, academia, industry,
and professional organizations; and:
* other subject matter experts' recommendations.
[End of section]
We developed a common list of structured interview questions that we
asked of each of the experts. We pretested our questions with two of
our initial respondents and refined our questions based on their
input. The structured interviews included questions on definitions of
counterfeit and pirated goods; effects of counterfeiting and piracy;
and their views on methodologies and studies that quantify the effects
of counterfeiting and piracy, as well as assumptions used. Individuals
or organizations that we met with for these structured interviews are
listed below:
* Business Software Alliance (BSA):
* Peggy Chaudhry, Villanova University:
* International Trade Commission:
* Joe Karaganis, Social Science Research Council:
* Keith Maskus, University of Colorado:
* OECD:
* Felix Olberholzer-Gee, Harvard University:
* Stephen Siwek, Economists Inc.
* John Spink, Michigan State University:
* Thorsten Staake, ETH Zurich, Department of Management, Technology,
and Economics:
[End of section]
* Office of the U.S. Trade Representative:
* Alan Zimmerman, City University of New York:
We also met with representatives from other industry associations and
other organizations outside of the structured interview process in
order to gain more in-depth information and additional perspectives on
both of our objectives. In addition, we interviewed U.S. agency
officials and reviewed documents from the Departments of Justice,
Homeland Security, Commerce, and Health and Human Services, the Office
of the U.S. Trade Representative, and the International Trade
Commission. U.S. agency documents that we reviewed included
counterfeiting and piracy studies, press releases, and other
documents. For background purposes, we updated CBP data on counterfeit
seizures and costs to store and destroy seized counterfeit goods from
our 2007 report, Intellectual Property: Better Data Analysis and
Integration Could Help U.S. Customs and Border Protection Improve
Border Enforcement Efforts (GAO-07-735). To assess the reliability of
the seizure data, we reviewed our prior work that reported on seizure
data, examined them for internal consistency, and discussed with CBP
how the data are collected and reviewed. We found the data to be
sufficiently reliable for background purposes of reporting trends in
law enforcement seizures. We shared a copy of the draft report with
officials from the Departments of Commerce, Justice, Homeland
Security, Health and Human Services, the Office of the U.S. Trade
Representative, the International Trade Commission, and the Office of
the U.S. Intellectual Property Enforcement Coordinator to obtain
technical comments. We received comments from the Departments of
Homeland Security and Justice, and the Office of the U.S. Intellectual
Property Enforcement Coordinator and made changes as appropriate.
The PRO-IP Act also directed us to report on the nature and scope of
IP statutory and case laws and the extent that they are being used to
investigate and prosecute acts of trafficking and counterfeits. As
agreed with Congressional committees, this part of the mandate was
addressed by our 2008 report, Intellectual Property: Federal
Enforcement Has Generally Increased, but Assessing Performance Could
Strengthen Law Enforcement Efforts (GAO-08-157).
We conducted our work from April 2009 to April 2010 in accordance with
all sections of GAO's Quality Assurance Framework that are relevant to
our objectives. The framework requires that we plan and perform the
engagement to obtain sufficient and appropriate evidence to meet our
stated objectives and to discuss any limitations to our work. We
believe that the information and data obtained, and the analysis
conducted, provide a reasonable basis for any findings and conclusions
in this product.
[End of section]
Appendix II: GAO Contact and Staff Acknowledgments:
GAO Contact:
Loren Yager, (202) 512-4347 or yagerl@gao.gov:
Staff Acknowledgments:
In addition to the contact named above, Christine Broderick, Assistant
Director; Jeremy Latimer; Catherine Gelb; Pedro Almoguera; Shirley
Brothwell; Karen Deans; Matthew Jones; and Diahanna Post made key
contributions to this report. In addition Virginia Chanley and Ernie
Jackson provided technical assistance.
[End of section]
Bibliography:
Studies and Literature on the Nature of Counterfeiting and Piracy and
Their Economic Effects:
Studies and Government Estimates We Reviewed that Quantify Economic
Impacts on the U.S. Economy or Industry Sectors:
Business Software Alliance (BSA), Sixth Annual BSA-IDC Global Software
08 Piracy Study, Washington, D.C.: BSA, May 2009.
Customs and Border Protection. Press Release, May 29, 2002,
Washington, D.C.: May 2002, [hyperlink,
http://www.cbp.gov/xp/cgov/newsroom/news_releases/archives/legacy/2002/5
2002/05292002.xml] (accessed April 4, 2009).
Federal Bureau of Investigation. Press Release, July 17, 2002,
Washington, D.C.: July 2002, [hyperlink,
http://www.fbi.gov/pressrel/pressrel02/outreach071702.htm] (accessed
March 30, 2010).
Freeman, Gregory, Nancy D. Sidhu, and Michael Montoya, A False
Bargain: The Los Angeles County Economic Consequences of Counterfeit
Products. Los Angeles, Calif.: Los Angeles County Economic Development
Corporation, February 2007.
Hui, Kai-Lung and Ivan Png, "Piracy and the Legitimate Demand for
Recorded Music," Contributions to Economic Analysis & Policy, vol. 2,
issue 1, article 11 (2003).
International Chamber of Commerce, Counterfeiting Intelligence Bureau,
London: 2010. [hyperlink, http://www.icc-
ccs.org/index.php?option=com_content&view=article&id=29&Itemid=39]
(accessed March 30, 2010).
L.E.K. Consulting, The Cost of Movie Piracy, sponsored by the Motion
Picture Association, 2006.
Motor & Equipment Manufacturers Association (MEMA), Stop
Counterfeiting of Automotive and Truck Parts. MEMA, 2005.
Oberholzer-Gee, Felix and Koleman Strumpf, "The Effect of File Sharing
on Record Sales: An Empirical Analysis," Journal of Political Economy,
vol. 115, no. 1, 2007.
Organisation for Economic Cooperation and Development (OECD), The
Economic Impact of Counterfeiting and Piracy. Paris: OECD, 2008.
OECD, Magnitude of Counterfeiting and Piracy of Tangible Products: An
Update, Paris: OECD, November 2009.
OECD, Piracy of Digital Content. Paris: OECD, 2009.
Rob, Rafael and Joel Waldfogel, "Piracy on the High C's: Music
Downloading, Sales Displacement, and Social welfare in a Sample of
College Students," Journal of Law and Economics, vol. XLIX, (April
2006).
Siwek, Stephen E., The True Cost of Copyright Industry Piracy to the
U.S. Economy, Institute for Policy Innovation (IPI), IPI Center for
Technology Freedom, Policy Report 189, (October 2007).
Thompson, William C. Jr., Bootleg Billions: The Impact of the
Counterfeit Goods Trade on New York City, City of New York, Office of
the Comptroller, November 2004.
Other Literature We Reviewed:
Baumol, William J. The Free Market Innovation Machine: Analyzing the
Growth Miracle of Capitalism. Princeton and Oxford: Princeton
University Press, 2002.
Chaudhry, Peggy and Alan Zimmerman, The Economics of Counterfeit
Trade: Governments, Consumers, Pirates, and Intellectual Property
Rights. Berlin: Springer, 2009.
Fink, Carsten and Carlos M. Correa, The Global Debate on the
Enforcement of Intellectual Property Rights and Developing Countries.
International Centre for Trade and Sustainable Development. Issue
Paper No. 22, February 2009.
Forzley, Michele, Counterfeit Goods and the Public's Health and
Safety. International Intellectual Property Institute, 2003.
Horan, Amanda, Christopher Johnson, and Heather Sykes, Foreign
Infringement of Intellectual Property Rights: Implications for
Selected U.S. Industries. No. ID-14, U.S. International Trade
Commission, Office of Industries Working Paper, October 2005.
Mansfield, Edwin, Industrial Research and Technological Innovation.
New York, N.Y.: W.W. Norton, 1968.
RAND Corporation, Film Piracy, Organized Crime, and Terrorism, RAND
Safety and Justice Program and the Global Risk and Security Center,
(Santa Monica, Calif., 2009).
Rosenberg, Nathan, Exploring the Black Box: Technology, Economics, and
History, Cambridge, United Kingdom: Cambridge University Press, 1994.
Schumpeter, J.A. Business Cycles: A Theoretical, Historical and
Statistical Analysis of the Capitalist Process, New York: McGraw-Hill,
1939.
Siwek, Stephen E., Engines of Economic Growth: Economic Contributions
of the US Intellectual Property Industries. Washington, D.C.:
Economists Incorporated, 2005.
Staake, Thorsten, Frederic Thiesse and Elgar Fleisch, "The Emergence
of Counterfeit Trade: A Literature Review," European Journal of
Marketing, Vol. 43 No. 3/4, (2009).
Staake, Thorsten and Elgar Fleisch, Countering Counterfeit Trade:
Illicit Market Insights, Best-Practice Strategies, and Management
Toolbox. Berlin: Springer, 2008.
U.S. Department of Commerce, Bureau of Industry and Security, Office
of Technology Evaluation. Defense Industrial Base Assessment:
Counterfeit Electronics. Washington, D.C., January 2010.
U.S. Department of Commerce, Bureau of Economic Analysis and Economics
and Statistics Administration, Regional Multipliers. A User Handbook
for the Regional Input-Output Modeling System (RIMS II) 3rd ed.,
Washington, D.C.: 1997.
[End of section]
Footnotes:
[1] The PRO-IP Act also directed GAO to report on the nature and scope
of IP statutory and case laws and the extent that they are being used
to investigate and prosecute acts of trafficking and counterfeits. As
agreed with congressional committees, this part of the mandate was
addressed by GAO's report, Intellectual Property: Federal Enforcement
Has Generally Increased, but Assessing Performance Could Strengthen
Law Enforcement Efforts, [hyperlink,
http://www.gao.gov/products/GAO-08-157] (Washington, D.C.: Mar. 11,
2008).
[2] See the Bibliography for a list of studies and estimates that we
reviewed.
[3] Organisation for Economic Cooperation and Development (OECD), The
Economic Impact of Counterfeiting and Piracy. Paris: OECD, 2008.
[4] Participants in the Central America Free Trade Agreement are Costa
Rica, the Dominican Republic, El Salvador, Guatemala, Honduras,
Nicaragua, and the United States.
[5] The United States also has signed free trade agreements with
Colombia, Korea, and Panama, but Congress must enact legislation to
approve and implement each individual agreement in order for them to
go into effect. Prior to 2000, two other free trade agreements had
entered into force: the U.S.-Israel Free Trade Agreement (entered into
force in 1985) and the North American Free Trade Agreement between
Canada, Mexico, and the United States (entered into force in 1994).
[6] For example, these protections include adherence to new World
Intellectual Property Organization Internet treaties, a longer minimum
time period for copyright protection, additional penalties for
circumventing technological measures controlling access to copyrighted
materials, transparent procedures for protection of trademarks,
stronger protection for well-known marks, patent protection for plants
and animals, protection against arbitrary revocation of patents, new
provisions dealing with domain name disputes, and increased
enforcement measures.
[7] William J. Baumol, The Free-Market Innovation Machine: Analyzing
the Growth Miracle of Capitalism. (Princeton, N.J.: Princeton
University Press, 2002).
[8] Edwin Mansfield, Industrial Research and Technological Innovation.
(New York, N.Y.: W.W. Norton, 1968); Nathan Rosenberg, Exploring the
Black Box: Technology, Economics, and History. (Cambridge, United
Kingdom: Cambridge University Press, 1994); J. Schumpeter, Business
Cycles, A Theoretical and Statistical Analysis of the Capitalist
Process. (New York, N.Y.: McGraw-Hill, 1939).
[9] In addition to copyrights, trademarks, and patents, two other IP
protections are trade secrets and geographical indications. Trade
secrets are defined as any type of valuable information, including a
formula, pattern, compilation, program device, method, technique, or
process that gains commercial value from not being generally known or
readily obtainable; and for which the owner has made reasonable
efforts to keep secret. Geographical indications are defined as
indications that identify a good as originating in a country, region,
or locality, where a given quality, reputation, or other
characteristic of the good is essentially attributable to its
geographic origin. Definitions used in this report for the various
types of IP are provided by the U.S. Patent and Trademark Office.
[10] Counterfeit drugs under this definition may include products
without the active ingredient, with an insufficient quantity of the
active ingredient, with the wrong active ingredient, or with packaging
that falsely suggests the drug was manufactured by an FDA-approved
manufacturer.
[11] CBP data represent seizures made by CBP or Immigration and
Customs Enforcement. CBP measures IP activity two ways: number of
seizure actions and estimated domestic value of goods seized. The
number of goods in one seizure action can range from a few items
shipped via international mail to hundreds of boxes in an ocean-going
cargo container. Domestic value is calculated as the landed cost plus
profit (the cost of the merchandise when last purchased, plus all
duties, fees, broker's charges, profit, unlading charges, and U.S.
freight charges to bring the good to the importer's premises), a value
generally lower than the price at which the goods might sell to the
final consumer.
[12] For example, the FDA in recent years has found cases of a
counterfeit HIV/AIDS drug that contained nonsterile tap water instead
of an active ingredient; a fake schizophrenia medication that
contained aspirin; a counterfeit influenza vaccine; and a misbranded
cough suppressant that caused the death of five consumers.
[13] RAND Corporation, Film Piracy, Organized Crime, and Terrorism,
RAND Safety and Justice Program and the Global Risk and Security
Center, (Santa Monica, Calif., 2009).
[14] Commerce, Bureau of Industry and Security, Office of Technology
Evaluation, Defense Industrial Base Assessment: Counterfeit
Electronics (Washington, D.C., January 2010).
[15] A FDA official told us that most of the fake pharmaceutical
purchases were made through the Internet, where consumers were seeking
drugs without prescription.
[16] This method enabled us to perform a better comparison across
ports by reducing the influence of non-IP-related imports, as well as
eliminating the impact of the fact that some ports handle many times
the volume of imports compared to other ports. For a more detailed
explanation of U.S. custom seizure data and our analysis see GAO,
Intellectual Property: Better Data Analysis and Integration Could Help
U.S. Customs and Border Protection Improve Border Enforcement Efforts,
[hyperlink, http://www.gao.gov/products/GAO-07-735] (Washington, D.C.:
Apr. 26, 2007).
[17] Gregory Freeman, Nancy D. Sidhu, and Michael Montoya, A False
Bargain: The Los Angeles County Economic Consequences of Counterfeit
Products. (Los Angeles, Calif.: Los Angeles County Economic
Development Corporation, February 2007).
[18] The authors used the extrapolation method in combination with two
other methods as tests of reasonableness.
[19] Business Software Alliance (BSA), Sixth Annual BSA-IDC Global
Software 08 Piracy Study. (Washington, D.C.: BSA, May 2009).
[20] L.E.K. Consulting, The Cost of Movie Piracy, sponsored by the
Motion Picture Association, 2006.
[21] Rafael Rob and Joel Waldfogel, Piracy on the High C's: Music
Downloading, Sales Displacement, and Social Welfare in a Sample of
College Students. Journal of Law and Economics, vol. XLIX, April 2006.
[22] Commerce, Bureau of Industry and Security, Office of Technology
Evaluation, Defense Industrial Base Assessment: Counterfeit
Electronics (Washington, D.C., January 2010).
[23] Commerce, Bureau of Economic Analysis and Economics and
Statistics Administration, Regional Multipliers. A User Handbook for
the Regional Input-Output Modeling System (RIMS II) 3rd ed.,
Washington, D.C.: 1997.
[24] Stephen E. Siwek, The True Cost of Copyright Industry Piracy to
the U.S. Economy, Institute for Policy Innovation (IPI), IPI Center
for Technology Freedom, Policy Report 189, (October 2007).
[25] In some cases, the author adjusted the industry estimates of loss
revenue in order to make them comparable across industries.
[26] The OECD estimate was limited to internationally traded hard
goods and did not include digital piracy or counterfeit goods produced
and consumed within the same country.
[27] OECD, Magnitude of Counterfeiting and Piracy of Tangible
Products: An Update, Paris: OECD, November 2009.
[28] Felix Oberholzer-Gee and Koleman Strumpf, The Effect of File
Sharing on Record Sales: An Empirical Analysis. Journal of Political
Economy, vol. 115, no. 1, 2007.
[29] Kai-Lung Hui and Ivan Png, Piracy and the Legitimate Demand for
Recorded Music, Contributions to Economic Analysis & Policy, Volume 2
Issue 1, Article 11, 2003.
[30] The piracy rates used in the study were provided by the
International Federation of the Phonographic Industry and Business
Software Alliance for music cassettes and business computer software,
respectively.
[31] William C. Thompson, Jr., Bootleg Billions: The Impact of the
Counterfeit Goods Trade on New York City, (New York City Office of the
Comptroller, November 2004).
[32] This study does not specify which industries are covered or
whether it includes piracy, and does not explain the linear proportion
between trade and counterfeiting for the world or the United States.
[End of section]
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