Are Companies Benefiting From the Counterfeit Goods Trade?

One thing you will notice walking the streets of any eastern Chinese city these days is the burgeoning consumer middle class. What might not be initially as evident is whether the Nike, Louis Vuitton or Polo they are sporting is real or counterfeit.

According to a recent New York Times Magazine article, “Inside the Knockoff Factory”, the US Customs and Border Protection seized over $260 million worth of counterfeit goods last year, 80% of which came from China. The article focuses specifically on the international counterfeit trade, but because the middle class in China is growing at such furious clip and will soon usurp the US as the world’s greatest consumers, let’s look at how knockoff goods could play an unintended role in China and actually provide an advantage for those companies whose product is being counterfeited.

The manufacturing and sale of counterfeit goods is illegal. And while companies discourage this behavior for obvious reasons, governments such as the US and those in Europe see this business as a global crime that can encompass drug dealing and possibly terrorism. However, we know how these types of international efforts go- money is thrown at the cause with little regard to strategy and the hole deepens (the “War on Drugs” is a good example and is explicitly referenced in the article).

Similarly, many development economists will tell you that a disregard for international property rights (IPR) will stunt development because businesses will be less likely to set up shop in those countries. In the case of China this has been false, as access to cheap labor and raw materials has triumphed.

The Chinese middle class can’t seem to get enough material goods. However, while they may not be able to afford the real thing, they would like to be seen with the label. Therefore, it seems that these knockoffs may be doing less harm to businesses such as Nike as they are actually creating future customers that will potentially purchase their goods as salaries rise. If nothing else, the companies making knockoffs are not competitors, as middle class Chinese would not be buying the real product anyway. Interestingly an anonymous source at a major footwear company is the most indifferent interview in the article saying “Does it cut into our business? Probably not. Is it frustrating?… Of course. But we put it as a form of flattery, I guess.”

The alternative given by the main character in the article, a large producer of counterfeit goods in a well know area called Putian, maybe of greater worry. He states, “Making counterfeit shoes is a transitional choice. We are developing our own brand now. In the longer term we want to make all our own brands, to make our own reputation.”

This potential competition should be of much greater concern to companies like Nike and although policy should be no means discourage competition, maybe it’s time for policy makers to put failed attempts in their back pocket and give a more unconventional approach a chance.

Image Credit by anti-factory redux via Flickr under a CC license