Magazine

The Counterfeit Catastrophe


From the barbary pirates to the rumrunners of Prohibition to today's e-mail spammers, every period has its distinctive form of economic criminal: people who flout or break the rules of commerce for their own benefit. Such problems can't be eliminated, but a successful society keeps them under control.

By that measure, the era of globalization may be facing one of its biggest challenges. The astonishing expansion of manufacturing capabilities in less developed countries, notably China, has raised incomes and boosted trade around the world. But the same production and distribution also have created a frightening phenomenon: an ever-rising flood of counterfeits and fakes coming onto world markets.

These days it's far more than Rolex watches. As factories in China and elsewhere gain experience with high-end manufacturing, counterfeits have become more sophisticated as well. Auto parts, pharmaceuticals, high-end golf clubs, cell-phone batteries, PlayStation controllers, motorcycles: If it can be made, it can be faked -- and fast. By one estimate, counterfeiting now accounts for 5% to 7% of world trade. Soon profit margins may be in serious peril.

The global economy is at a critical juncture. If the economic criminals are left unchecked, they will undermine the reasons for investing in new products and new brands. Why should Yamaha (YAMCY) put the money into developing a new line of motorcycles if they will be copied as soon as they hit the streets?

That's why a crackdown on counterfeiting -- or, as the trade negotiators put it, the protection of intellectual property -- has to be moved to the top of the trade agenda. In a global economy driven by innovation, protecting new products and technologies from pirates is more important than pulling down the few remaining trade barriers. A recent report from the Council on Competitiveness got it right when it said "there must be an international rule of law that supports global innovation."

It's encouraging that Chinese authorities, long unconcerned about counterfeiting, have begun to realize that their own growing corporations are getting just as vulnerable. As Chinese companies create brands and intellectual property, they may pressure Beijing to act against counterfeiters.

If China starts lowering its tolerance for piracy, that will be a sign that it is starting to see itself as a major economic power, not a poor nation. Then and only then will globalization be safe from this kind of pervasive economic corrosion.


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