China’s weak intellectual property rights boost Europe’s counterfeit industry

By Susanna Lukacs, Policy Fellow at the Property Rights Alliance 

Despite advances in the adoption of formal Intellectual Property Rights (IPR) protection, the enforcement of IPR regulations remains an unsolved problem in China.

Recently, intellectual property rights infringements have come into the forefront. The Financial Times reported that between 2019 and 2020, the Chinese government made amendments to its IP-related regulations, such as decreasing “the burden of proof” for defendants for patent law and increasing damages for copyright law infringements. The number of IP-related court cases tripled from 2016 to 2020.

Foreign direct investment into China in the mid-1980’s was approximately $4 billion, but exponentially grew to $35 billion by 1995. As more multinationals invested in  China, the government advanced stronger intellectual property laws. While China’s IP rights are comparable to the West on paper, reality is vastly different. Despite the many IP regulations in place, violations of intellectual property are frequent and quite normalised . The enforcement of IPR regulation is criticized as weak when compared to the region, namely Hong Kong and Singapore. In 2019, one in five corporations alleged that Chinese-based companies took possession of their intellectual property. Based on the European Union’s Intellectual Property Office’s research, the threat that counterfeiting poses to firms’ performance is particularly dangerous to SMEs. SMEs are more exposed to the risk of IPR abuse than large firms. Consequently, they are targets for counterfeiters and other IPR infringers. On April 26, 2023, the Office of the US Trade Representative disclosed its Special 301 Report on Intellectual Property Protection and Enforcement describing China as a “priority watch list” country. In a press release announcing the report, the USTR’s Office stated, “[t]here remain many serious concerns regarding IP protection and enforcement in China […] the pace of reforms aimed at addressing IP issues slowed” and there are “concerns about the adequacy and effective implementation” of the newly introduced measures. 

According to the International Property Rights Index, China’s (intellectual) property rights index score is the lowest in the region. Reflecting this dire reality, the U.S. Trade Representative’s report notes most seizures of counterfeit goods – including counterfeit pharmaceuticals – entering the United Stated originated in China. In regard to online and broadcast piracy, the report claims optical disc counterfeiting, illegal rebroadcasting via illicit streaming devices, and camcordering or live recordings of copyrighted material mainly derive from China as well. What is more, China is deemed to have weak trade secret protection and enforcement, “largely lack[ing] effective tools to combat widespread bad faith trademark applications.

The United States isn’t alone in highlighting China as a main source for global IP infringement. An analysis conducted by the Organization for Economic Cooperation and Development (OECD) and the European Union Intellectual Property Office (EUIPO) found that close to 85% of all seized counterfeit goods derive from China. The total trade of counterfeit and illegal goods accounts for 2.5% of global trade, and 6.8% of EU imports. Remarkably, illicit trade has grown 10,000% since 2000. 

How does China combat counterfeiting?

China provides some enforcement mechanisms for rights holders via administrative, civil or criminal channels. Administrative channels are most commonly implemented, “but the benefits that they afford in terms of time and cost savings are often tempered by the relatively low fines assessed against pirates, which are unlikely to deter determined counterfeiters.” Recently, administrative authorities have issued higher penalties, but administrative fines do not tend to put off repeated offenders, and do not compensate rights holders. In that regard, rights holders should seek administrative enforcement actions coupled with civil or criminal suits, depending on the type of the offence.

The main drive behind counterfeiting and intellectual property theft is its lucrativeness. The counterfeiting enterprise has been viewed as more profitable than the drug trade – it is low risk, with low enforcements. In case an individual is caught punitive damages are comparatively low to the profits accumulated. Individuals in transition economies are willing to spend “disproportionate parts of their income for symbolic products, claims a study. Counterfeit goods are expanding – the quality of counterfeits has increased, especially as manufacturers have seen great feats in new technology. The crackdown on the industry is difficult.

Europol claimed in 2022 that there is a stark rise in the amount of counterfeit goods being produced in the EU. Chinese organised criminal groups selling counterfeit goods are mobile. Those operating in Italy have ties to the Camorra and team up to import counterfeits. Chinese diaspora communities across Europe are vast – with businesses in several Italian provinces that are linked to the textile and fashion industries. Parts of Madrid are also permeated by Chinese organised crime groups operating across Europe, mobilising their counterfeit products via legitimate businesses. They have oiled in networks with money transfer agencies, facilitating money laundering and money transfers to China.

Illicit trade in fake goods is a significant and growing threat in today’s globalised and innovation-driven economy. Its detrimental impact on economic growth, innovation, and the rule of law is not an understatement. Counterfeits support the wider black market, and they rarely function in isolation, but with a vast criminal network. Counterfeiting leads to a loss in revenue for the government and loss of employment with 750,000 jobs being lost each year in Europe alone.