16 May 2016
Silk Street

China leads the world in the production and export of illicit goods

Production and trade of counterfeit, pirated and other illicit goods are large and growing, and are led by China, writes John West.

We all enjoy buying fake Rolex watches, Nike shoes, Ray Ban sunglasses, and Louis Vuitton handbags, as well as carvings from trafficked ivory, when we travel to China or Hong Kong. Some of our youth have fun experimenting with drugs on their holidays to Bali or elsewhere.

But production and trade of counterfeit, pirated and other illicit goods are very serious matters. Such dirty business can endanger lives.

Some of the traps are: pharmaceuticals that make people sick or contribute to global microbial resistance and more virulent forms of disease; toys that harm children; baby formula that provides no nourishment; medical instruments that deliver false readings; and automobile parts that fail. Wildlife trafficking can destroy biodiversity and can trigger the spread of zoonotic disease, while a recreational drug habit is easier to start than to stop.

In addition, fake goods undermine our economy and employment as innovative individuals and companies see their good work stolen. Counterfeiting and piracy can impose additional costs for security and anti-counterfeiting technology, and affected companies can incur reputational damages. This robs them of their competitive advantage and discourages future efforts in innovation, thereby compromising long-term prosperity.

Organised criminal groups play an increasingly important role in the production and trade of fake, and other illicit goods, especially narcotics and wildlife products. Some profits from illicit trade finance terrorism and other nefarious activities. Narcotics trade is one of the primary sources of revenue of the Taliban. Dirty trade also robs governments of tax revenues, results in regulatory and enforcement costs, and undermines the integrity of public institutions.

In short, illicit trade has prospered alongside the rapid globalisation of the world economy, and represents the “dark side” of globalisation as criminal groups often exploit states with weak capacity, law and institutions. And East Asia’s vast number of special economic zones, which have very limited government regulation, are very fertile ground for illicit trade of all sorts.

Measuring counterfeiting and piracy

Getting a handle on the production of counterfeit, pirated and other illicit goods is not easy. But the OECD has recently published two excellent reports that have estimates of international trade in such goods. First, we look at counterfeit and pirated goods.

The OECD estimates that world imports of counterfeit and pirated goods were worth $461 billion in 2013, or nearly half a trillion dollars. This amounts to around 2.5% of global imports, significantly higher than an estimate of $250 billion or 1.8% in an earlier 2009 study. This means that national and international efforts to tackle this problem have not been effective. In the case of the European Union, up to 5% of imports are fakes. And since advanced countries are prime targets for fake imports, the US figure might be of a similar order.

But the reality of counterfeiting and piracy is much wider, as the OECD notes. Its study only deals with traded counterfeit and pirated goods. It does not treat the issue of fake goods which are produced and sold within the same domestic market. There are millions of Asians and others who purchase counterfeit and pirated goods produced at home. This is a lower risk activity for the purveyors of fake goods, as it avoids customs controls.

Furthermore, the OECD’s estimate does not cover pirated digital products that are distributed via the Internet, which is a further drain on the formal economy. It only covers all physical counterfeit goods, which infringe trademarks, design rights or patents, and tangible pirated products, which breach copyright.

As the OECD says, its data are largely “incomplete and limited”, just like data on any clandestine activity. Its quantitative results only illustrate “certain parts of the phenomenon of counterfeiting and piracy”.

Counterfeiting and piracy -- what, who and how?

Fake products crop up in everything from luxury items (like fashion apparel or deluxe watches), via intermediary products (such as machines, spare parts or chemicals) to consumer goods that have an impact on personal health and safety (such as pharmaceuticals, food and drink, medical equipment, or toys). While footwear is the most copied item, trademarks are infringed even on things like strawberries and bananas. And according to the United Nations Office on Drugs and Crime, one-third of malaria medicines used in East Asia and sub-Saharan Africa are fake.

How does trade in counterfeit goods happen? Postal parcels are the top method of shipping fake goods, accounting for 62% of seizures over 2011-13, reflecting the growing importance of E-commerce in international trade. Indeed, E-commerce has become a “major enabler for the distribution and sale of counterfeit and pirated tangible goods” according to the OECD.

China (including Hong Kong) is far and away the world’s single biggest producer and exporter of counterfeit and pirated goods (including pharmaceuticals), accounting for 84% of estimated trade in fake goods. By comparison, China's share of global manufactured exports in 2013 was only 17%. China is way ahead of the next most guilty country, which is Turkey with 3%. Four other Asian countries made into the top ten of offending countries, namely Singapore, Thailand, India and Pakistan.

Traffic in counterfeit and pirated goods usually goes through complex routes via major trade hubs like Hong Kong and Singapore and free trade zones such as those in the United Arab Emirates. Other transit points include countries with weak governance and widespread organised crime such as Afghanistan and Syria But trade routes can change greatly from year to year as counterfeit gangs spot new weak points. In many cases, the proceeds of counterfeit trade go towards organised crime which are also involved in trafficking drugs, firearms and people.

The top countries whose companies had their intellectual property rights infringed were the United States, whose brands or patents were affected by 20% of the knock-offs, then Italy with 15%, and France and Switzerland with 12% each. Japan and Germany stood at 8% each followed by the UK and Luxembourg at 4% and 3% respectively. With China still being more of a copycat, rather than an innovation, nation, Chinese companies which suffered from fake production represented only 1% of total.

Tackling counterfeiting and piracy

Massive efforts are required to promote “clean trade”. National governments need to implement and enforce effective legislation, and to cooperate with other governments and international organisations, given the global nature of the problem. A multi-stakeholder approach involving partnerships with relevant business and civil society groups (including consumer protection advocates) is also necessary. In addition, educational and public awareness campaigns can play an important role.

But there are many factors which make tackling counterfeiting and piracy a daunting task, especially in the case where products are obviously fakes or even presented on the market as being fakes. After all, there is a strong demand for such goods in all our countries, especially by our youth.

Why? Prices are usually much lower than for the genuine article and depending on the product, quality of the fake article can also be satisfactory. In this context, the growing gap between rich and poor, and rising poverty in advanced OECD countries are just some of the factors driving such demand, especially when the risk of being being prosecuted is usually low. Ignorance of the safety and security risks of consuming fake goods can be another factor.

What is much more worrying is the case where fake products are presented as being genuine, but their apparent high quality results in consumers being deceived. In these circumstances, people unwittingly purchase counterfeit and pirated goods, and are involuntarily exposed to the full range of product safety and security risks.

The very big money to be made from counterfeit and pirated goods also means that implementing regulation and legislation, and especially their enforcement, remains a gigantic challenge. The criminal organisations behind today’s counterfeiting and piracy are very nimble. In addition, with intellectual property playing an ever-growing role in our economies, there are more and more opportunities to produce counterfeit and pirated goods.

It was hoped that following China’s membership of the World Trade Organisation in 2001, and rapid economic development, the Chinese government would begin to take intellectual property protection more seriously. Indeed, it is natural that improvements in institutions and governance in middle income countries follow behind economic development. And as innovation becomes a more important component of China’s growth story, it should have an interest in protecting intellectual property.

But despite repeated promises by government leaders, this has manifestly not occurred. Indeed, many Chinese officials seem to show no shame for their country’s counterfeiting and piracy. Indeed, as it seemingly pursues a grudge match against the West for its sufferings through its “century of humiliation”, counterfeiting and piracy of Western products is often considered to be fair game. And with the Chinese economy currently struggling, and President Xi Jinping pushing a highly nationalist agenda, we cannot expect the Chinese government to invest much effort into protecting Western intellectual property.

One day, we may hope that China will become an innovation power-house, and will therefore have a stake in fighting counterfeiting and piracy. But even if China does eventually lift its game on counterfeit and pirated goods, it might well be replaced by India or Russia as the global capital for counterfeiting and piracy. International crime syndicates are very quick to change their business plans in response to new circumstances.

Beyond counterfeit and pirated goods, there is a vast array of other illicit trade such as drug trafficking, and trade in wildlife, timber, art & cultural property, human organs, arms, diamonds, weapons, tobacco, and alcohol. In the next section, we review drug trafficking and trade in wildlife, two areas where Asia plays a major role on global markets.

Illegal drug production and trafficking in Asia

Asia has long attracted recreational drug tourism to take advantage of opium and heroin produced in its infamous “Golden Triangle” region, spanning Myanmar, Laos and Thailand. But the region is now also following the Western world’s descent into a drug crisis, as the consumption and production of methamphetamine grows rapidly. East and Southeast Asia may also be emerging as driver of the global market for “ecstasy”.

In short, Asia is a major player in this global drug trade, which was estimated at $320 billion in 2011 by Global Financial Integrity. Indeed, global trade in illegal narcotics is perhaps the single largest black market worldwide and finances notorious transnational criminal organisations. Narcotics have an adverse impact on human health and well-being, while drug trafficking is usually accompanied by criminal violence that undermines state institutions and is often difficult to reverse.

Let’s look at a few country cases, drawing on material from the US State Department’s excellent International Narcotics Control Strategy Report, and other sources.

Myanmar is a major source of opium and exporter of heroin, second only to Afghanistan. Since the mid-1990s, Burma has also become a regional source for amphetamine-type stimulants. Production sites for heroin and methamphetamine are often co-located and are primarily situated along Myanmar's eastern borders in areas controlled by ethnic armed groups beyond the government's.

A general lack of capacity and resources hinder counter-narcotics efforts, which are also hampered by extremely porous borders with India, Laos, China, Bangladesh, and Thailand that continue to be exploited by traffickers. There are also informal reports that some senior government officials benefit financially from narcotics trafficking, and credible reports from NGOs and media that mid-level military officers and government officials are engaged in drug-related corruption.

Myanmar's northeastern neighbor, Laos is a major transport hub for amphetamine-type stimulants, opium, and heroin, and is a major producer of opium. Indeed, the country sits at the heart of the regional drug trade in mainland Southeast Asia and shares remote and poorly-controlled borders with Burma, Thailand, Cambodia, Vietnam, and China.

The US State Department reports that, ironically, economic development and the improvement of Laos’ transportation infrastructure have created opportunities for the illicit drug trade to grow. Like Myanmar, Laos lacks the necessary capacity and resources to tackle narcotics production and trade, and corruption in Laos continues to plague law enforcement and government.

Highlighting the regional nature of Southeast Asia's illicit drug production and trade, crackdowns on drug trafficking in Thailand and China in recent years have pushed traffickers to use alternate routes, including through Cambodia. Indeed, the manufacturing, trafficking, and use of illicit narcotics within Cambodia has escalated. Thailand and Vietnam are illicit drug transshipment points for local and international criminal organizations, while Indonesia is both a transshipment point and destination country for illegal drugs. Indonesia is a significant consumer of cannabis, methamphetamine, and heroin.

Drug trafficking through Malaysia to supply both domestic and regional markets remains a problem. Nigerian and Iranian drug trafficking organizations continue to use Kuala Lumpur as a trafficking hub. The Philippines remains a transshipment point and destination country for large shipments of methamphetamine, with the trade being dominated by Chinese drug trafficking organizations.

China, which shares borders with most of the aforementioned Southeast Asian countries, is a significant destination and transit country for illicit drugs, as well as a major producer of synthetic drugs and drug precursor chemicals. Heroin is the most abused drug in China followed by synthetic drugs. Ethnic Chinese criminal groups control most large-scale drug and precursor chemical criminal activities in China, while there are a large and increasing number of transnational criminal organizations from other countries operating in China. North Korea is also believed to be a major source of methamphetamine in China.

The Chinese government is making efforts to tackle its drug problem. However, the US State Department reports that China’s collaborative law enforcement efforts with U.S. law enforcement officials are often hindered by cumbersome bureaucracy that limits direct access to local Chinese counterparts.

Tackling Asia’s illegal drug production and trafficking

As with counterfeiting and privacy, tackling Asia’s illegal drug production and trafficking requires a multi-pronged strategy attacking both the demand and supply side of Asia’s drug problem. Strong legislation and enforcement, buttressed by international cooperation is necessary to tackle the traffickers who run the drug business. Demand reduction strategies must focus on prevention of drug use, and treatment and rehabilitation of drug users.

But there is also the situation of the poor farmers who grow opium or cocaine because they are their only potential source of income. This is why it is also necessary to implement "alternative development" strategy which can provide sustainable alternative livelihoods to communities that cultivate illicit drug crops. As the United Nations Office on Drugs and Crime (UNODC) has said the reality is that "drug crop growing areas are mostly areas where isolation and poverty are inherent and where farmers cultivate illicit drug crops because they are unable to obtain sufficient income from legal activities due to lack of markets, conflict, marginal land and absence of basic infrastructures". Indeed, there are hundreds of thousands of farmers affected by poverty, food insecurity, lack of land, instability who as a result engage in illicit drug cultivation.

Alternative development has brought about a significant decline in poppy cultivation in Thailand, which now accounts for only a negligible portion of total global opium cultivation, according to UNODC figures. The UNODC now supports and promotes sustainable alternative development programmes and projects in countries like Laos and Myanmar. The focus is on helping small farmers with licit income generation activities to reduce their dependency on income from opium. But much more needs to be done, and much greater donor support is necessary.

Wildlife trafficking from Africa to Asia

Keeping up with the Jones (or perhaps the Chans) is very much the obsession of Asia’s nouveau riche especially from China, Thailand and Vietnam. So what better thing to do than buying works of art made from precious elephant ivory. To feed your sophisticated appetite, some scaly anteater, marine turtle or shark meat and fin is delicious. And to stay healthy, why not a dose of traditional medicine made from rhinoceros horn.

It is not surprising then that wildlife trafficking is now the fifth most lucrative criminal activity, after the global trade in narcotics, arms, counterfeits and humans. And it has more than doubled since 2007, reports the OECD. Sub-saharan Africa has been the region most affected by Asia’s rapacious appetite for wildlife. But it is not the only. Southeast Asia, especially Indonesia, is also seeing the decimation of its natural wildlife.

According to the United Nation’s Convention on International Trade in Endangered Species, some 1,215 rhinos were killed in South Africa in 2014, a record high and ten-times the number of rhinos killed for their horn in 2009. In the last three years, poachers have killed 100,000 African elephants.

The slaughter of wildlife is not just a matter of conserving biodiversity. In some countries the reserves where these animals live are important sources of tourism revenues and employment. But tackling wildlife trafficking in sub-Saharan Africa is a daunting undertaking, as governments have few resource to patrol massive tracts of land. Violent confrontation with poachers also occurs regularly.

It is imperative to employ a coordinated and comprehensive strategy is needed that both reduces demand for illegal products and enhances enforcement capacities. It must cover all points along the global supply chain, from the poachers to land crossings, air and maritime ports, and points of distribution. But this is no simple task. For example, China accounted for nearly 80% of the reported seizures of illegal rhino horns in Asia between 2009 and 2013, despite a national ban on the illicit trade.

Closing comments

In this note we have reviewed several aspects of Asia’s trade in illicit goods. As disturbing as each of these is, perhaps the most disturbing aspect is that modern crime entrepreneurs and syndicates are now increasingly diversifying into several illicit activities, and are globalising their operations through transnational criminal networks, as the OECD has noted.

For example, criminal syndicates involved in human trafficking might also be active in the drug trade, illegal fishing, environmental crimes, arms trafficking, maritime piracy and tobacco smuggling. Distribution chains for trafficking in counterfeit tobacco are sometimes used for counterfeit pharmaceuticals and counterfeit currency. This business of illicit trade is also facilitated by corruption through all its various phases, while the profits are then laundered through tax havens, like Asia’s seemingly clean cities of Hong Kong and Singapore.

As the OECD concludes, “This level of sophistication presents a substantial challenge to government law enforcement agencies and international institutions that are often unable to cooperate as rapidly as criminals can adapt their business practices to avoid identification”.
Tags: china, illicit trade, counterfeiting and piracy, narcotics trafficking, wildlife trafficking

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