Trevor Little

The European Observatory on Infringements of Intellectual Property Rights has released its latest study into the economic cost of IP rights infringement, revealing that the clothing, footwear and accessories sector loses approximately €26.3 billion of revenue annually due to the presence of counterfeit products in the EU market. It is the related finding that government revenues are being hit to the tune of €8.1 billion annually that will resonate with law and policy makers. 

The €26.3 billion of revenue losses (which includes losses in manufacture, wholesale and retail trade sectors) correspond to 9.7% of the sector’s total sales. Additionally, the study calculates that these lost sales translate into direct employment losses of approximately 363,000 jobs (this figure not taking account of the effect of imports, as in such cases the associated employment impacts occur outside of the EU). The distribution of lost employment by type of economic activity and the associated sales is outlined below:  

Lost due to

counterfeiting

Sales

(billion euros)

Employment

(thousand persons)

Manufacture

5.0

89.5

Wholesale trade

4.4

45.5

Retail trade

10.6

227.6

Imported

6.4

-

Total sectors

26.3

362.6


Adding the knock-on effects on other industries and on government revenue, when both direct and indirect effects are considered, counterfeiting in this sector is estimated to cause approximately €43.3 billion of lost sales to the EU economy, which in turn leads to employment losses of 518,281 and a loss of €8.1 billion in government revenue.

The total direct and indirect effects in the EU of lost sales due to counterfeiting as an annual average for the period 2007-2012 (million euros):

Textiles, wearing apparel and leather

6,574

Imported goods

6,419

Wholesale trade

5,544

Retail trade

10,774

Real estate

1,356

Legal and accounting

1,019

Land transport

794

Financial services

793

Electricity, gas

778

Warehousing services

740

Construction

606

Security and investigation

567

Chemical industry

534

Other industries

6,791

TOTAL

43,288


Such economic studies are bound to draw criticism. Creating a methodology to quantify the impact of a trade that, by its nature, operates under the radar, results in the need to make certain assumptions, the study itself acknowledging this difficulty when it states that “the nature of the phenomenon under investigation makes it extremely challenging to quantify reliably, as obtaining comprehensive data for a hidden, secretive and undeclared activity is by necessity difficult”.

In terms of its approach, to estimate the level of lost sales due to counterfeiting, it considers factors such as predicted and actual sales levels in the sector, with the difference between forecast and actual sales analysed to extract the effect of counterfeited consumption on legitimate sales. With respect the translation of lost sales into lost jobs and public revenue, data from Eurostat on employment is used to estimate the employment lost related to the reduction of legitimate business as a result of lost sales due to counterfeiting. Thus, assumptions do creep into the calculations that are made.

Additionally, certain findings come with an asterisk. For example, the study itself reports that while illicit activities do not generate the same levels of tax revenue as legal activities, to the extent that distribution and sales of counterfeits happen in the legitimate sales channels, some amount of direct and indirect taxes are levied on these products, and so the net reduction in government revenue may be smaller than the gross effect that has been calculated. When we previously reported on the Observatory’s study into the legitimate cosmetics and personal care sector, a user also commented that reliance on data from 2011 meant that the report is already out of date.

It is certainly important to take a critical perspective and consider the methodology and assumptions made during the creation of such studies, not least because these will be seized upon by those who feel that the counterfeit problem is overstated. However, the report is transparent on the approach it has taken and, given that a definitive objective methodology will likely be impossible to formulate given the nature of illicit trade, a considered approach is better than no approach. Equally, criticisms of the methodology don’t necessarily negate the results (for instance, economic studies often draw on previously reported figures as that provides a more complete dataset to base analysis on).

The findings certainly make for a powerful message for law and policymakers. A potential loss of €8.1 billion in government revenue, from just the clothing (including sports clothing), footwear and accessories sector, is a figure that will focus minds on the need to combat illicit trade. While significantly higher than the revenue lost due to the presence of counterfeit cosmetics (previously estimated as €4.7 billion annually), the percentage of total sales that counterfeits account for was in the same ballpark – 9.7% in the clothing (including sports clothing), footwear and accessories sector compared with 7.8% in the cosmetics and personal care sector. Should planned future studies into the sporting goods, games and toys, jewellery, handbags and luggage sectors find a similar level of sales lost to counterfeits, the billions lost in terms of government revenues will rise significantly.

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