Revealing study by L Yager (GAO): ‘Observations on efforts to quantify the economic effects of counterfeit and pirated goods’

The 6th session of the WIPO Advisory Committee on Enforcement 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 can be found here:/node/681.

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‘ 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. economy.

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.