[Ip-health] Revealing study by L Yager (GAO): 'Observations on efforts to quantify the economic effects of counterfeit and pirated goods'

Thiru Balasubramaniam thiru at keionline.org
Wed Dec 1 06:10:35 PST 2010


Revealing study by L Yager (GAO): 'Observations on efforts to quantify  
the economic effects of counterfeit and pirated goods'
By thiru
Created 24 Nov 2010 - 8:01am
The 6th session of the WIPO Advisory Committee on Enforcement [1] is  
taking place in Geneva from 1-2 December 2010. KEI's observations on  
the 5th session, entitled, Positive outcome reached at WIPO Advisory  
Committee on Enforcement while ACTA looms in the East [2] can be found  

WIPO commissioned Mr. Loren Yager, Director, International Affairs and  
Trade, Government Accountability Office (GAO), Washington, D.C. to  
prepare a paper on 'Observations on Efforts to Quantify the Economic  
Effects of Counterfeit and Pirated Goods [3]' for the Committee to  
consider this week. Here are some key extracts from this nine page  
study which are relevant to policy discussions related to enforcement.

1. 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.”
2. In cases in which data on counterfeits are collected by federal  
agencies, such as United States (US) Customs and Border Protection  
(CBP) or the Federal Aviation Administration (FAA), it is difficult to  
know how complete the data are. For example, it is difficult to  
determine whether seizure data collected by CBP 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.
3. 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.
4. 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.
8. 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 Federal Bureau of Investigation (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 Department of  
Homeland Security (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.  

11. 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.
13. The Business Software Alliance publishes piracy estimates based on  
a set of annual surveys it conducts in different countries...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. 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 non-surveyed countries.
14. 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...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.
26. 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.14 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...
27. 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.
31. Numerous efforts have been made by industries and others to  
estimate the impact of counterfeiting on the economy. Some of these  
studies have employed innovative techniques to address challenges such  
as estimating consumer preferences, black or grey market goods, and   
changing markets. Many of these studies demonstrate the risks and  
costs associated with counterfeit trade in specific industries, and  
contribute to policy discussions about the appropriate type and level  
of enforcement. In addition, the studies contribute to the broader  
discussion of costs to the economy and on important issues such as the  
potential impact on innovation and growth, and future efforts should  
be encouraged to bring light to this challenging task. Unfortunately,  
however, a number of the comprehensive estimates of counterfeiting  
turned out to be unreliable and due to the enormous differences  
between industries, geographic markets, and over time, comprehensive  
estimates will continue to be elusive. On the other hand, GAO has made  
numerous recommendations to U.S. government agencies suggesting more  
analysis and transparency with regard to their IP enforcement efforts,  
which would contribute to policy discussions concerning more effective  
means of enforcement as well as to finding the appropriate level and  
focus of federal enforcement efforts.

Source URL: http://keionline.org/node/1025
[1] http://www.wipo.int/meetings/en/details.jsp?meeting_id=20199
[2] http://keionline.org/node/681
[3] http://keionline.org/Observations%20on%20Efforts%20to%20Quantify%20the%20Economic%20Effects%20of%20Counterfeit%20and%20Pirated%20Goods


Thiru Balasubramaniam
Geneva Representative
Knowledge Ecology International (KEI)
thiru at keionline.org

Tel: +41 22 791 6727
Mobile: +41 76 508 0997

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