WWD.com/business-news/government-trade/a-growing-headache-fakes-from-china-seen-as-rising-woe-in-2008-472164/
government-trade
government-trade

A Growing Headache: Fakes From China Seen As Rising Woe in 2008

It looks like 2008 is going to be another tough year for brands trying to fend off fakes.

Immigration and Customs officials with a portion of the $230 million in goods seized in a series of June raids.

WASHINGTON — It looks like 2008 is going to be another tough year for brands trying to fend off fakes.

This story first appeared in the December 27, 2007 issue of WWD.  Subscribe Today.

The U.S. is cracking down on counterfeiters and on China — notorious for lax intellectual property protections — but the manufacturing powerhouse, while taking some steps, hasn’t done enough to satisfy the concerns of the American government.

And tensions continue to build. China, always sensitive to Western pressure, is showing signs of digging in its heels over a U.S. legal challenge in the World Trade Organization of the Asian nation’s intellectual property protections. Meanwhile, Democrats in Congress are threatening to take punitive action against China for its lack of currency reform because they contend it injures American manufacturers.

The standoff over the issues comes as fashion brands continue to face an ever-growing wave of fakes from China. The U.S. Chamber of Commerce estimates that counterfeiting and piracy strips $200 billion to $250 billion from the U.S. economy annually.

“Counterfeiting and piracy in China remain at unacceptably high levels and cause serious harm to U.S. businesses,” said a Bush administration report to Congress.

The Dec. 11 report from U.S. Trade Representative Susan Schwab, which detailed China’s progress on commitments made when it joined the WTO in 2001, found the country still needed to do more to uphold its own laws against counterfeiting.

“Enforcement is hampered by lack of coordination among Chinese government ministries and agencies, lack of training, resource constraints, lack of transparency in the enforcement process and its outcomes, and local protectionism and corruption,” said the report.

At high-level meetings in Beijing earlier this month, the U.S. and China agreed to improve coordination, share information on customs seizures of counterfeit goods and strengthen enforcement of laws that prevent the improper use of a company’s name.

“We do have to go out jointly and address, literally, these crime rings that have been surfacing around the world and very specifically in China,” said U.S. Commerce Secretary Carlos Gutierrez. “I hate to say it, but it’s become a worldwide business and we need to tackle it, and I believe there is a commitment and a desire to tackle it together.”

For the six months ended March 31, 81 percent of the fakes seized by U.S. Customs & Border Protection originated in China. Footwear, apparel and accessories made up 75 percent of those seizures and all together had a domestic value of $67.6 million.

But what is seized by Customs seems to be just a drop in the bucket.

As anyone shopping online, on New York’s Canal Street or any number of flea markets around the country can tell, plenty of fakes are one way or another finding their way to the streets. Most recently, federal officials in New York broke up what they called one of the largest-ever counterfeit smuggling rings, estimated at $200 million, for apparel, shoes and accessories.

U.S. laws allow brands to go after their illicit doppelgangers in a variety of ways, but the sheer number of counterfeiters, their overseas operations and a law enforcement emphasis on other kinds of fakes, such as pharmaceuticals, make it a particularly hard issue to tackle for the fashion world.

“We basically harass them until they don’t want to do our product anymore,” said Robin Gruber, vice president of Chanel.

That harassment includes taking them to court and seizing their property. When possible, the company goes to the source.

“If you find them in China and you serve them by hand a cease-and-desist letter, it really has a huge effect because it says, ‘I know where you are,'” said Gruber. “Our success rate of doing that is somewhere between 50 and 75 percent because once you know who they are and where they are, they get scared.”

The lesson is that companies need to be proactive.

“If you want criminal action, these things don’t happen automatically,” said Barbara Kolsun, general counsel Seven For All Mankind, which is owned by VF Corp. “You have to work with private investigators.”

Tracking down factories in China can be a tall order, though.

“The roads lead to nowhere,” said Kolsun. “Certainly with China, you really have to use the resources of the U.S. Trade Representative, the World Trade Organization and those kinds of large bodies that have a lot more power and influence than companies like ours. I don’t think we put China’s feet to the fire when we let them join the World Trade Organization in terms of their lack of respect for intellectual trade policy and their lack of respect for human rights.”

It is unclear what impact the Bush administration’s steps to crack down on China have had.

Two trade cases filed in April that address protections for intellectual property rights are winding their way through the machinery of the WTO and might force China, if found to be in the wrong, to either reform its policies or face retaliatory tariffs. However, Beijing also loathes being seen as bullied by the U.S.

Jon W. Dudas, undersecretary for intellectual property rights at the Commerce Department and head of the U.S. Patent Office, acknowledged that Chinese officials, while not entirely mum on the subject, have been less willing to have discussions about how to fight counterfeiting.

“By filing the WTO suit, it now puts it into a litigious situation of China versus the U.S., the U.S. versus China,” said Lyle Vander Schaaf, a Washington-based intellectual property law expert and attorney at Bryan Cave. “This is such a massive problem, the counterfeiting issue, it grows as China develops. They are making progress in shutting things down, but as the economy develops, the demand for counterfeiting increases. Nike is not selling Nike shoes in China because [Chinese consumers] are buying the knockoffs.”

Part of the challenge is to persuade local authorities in China to crack down on factories accused of counterfeiting because their owners often have standing in the community and their operations are sources of employment, he said.

“There is oftentimes a lack of will power on the part of local officials in China to administer seizure orders,” said Vander Schaaf.

In October, the USTR’s Schwab joined forces with the European Union and six other trading partners to begin negotiations for an anticounterfeiting trade agreement that might ultimately help the bloc present a united front against China.

As illegal businesses go, though, counterfeiting is more profitable than the drug trade and carries milder punishments if caught. Crooks spending $3 to $5 to bring goods into the U.S. market can turn around and resell them for $20, or more in the cases of watches and handbags, said Roxanne Elings, a Greenberg Traurig attorney.

“If you’re consistent and you have a program, usually within three years you can see a difference,” said Elings of Web-based operations. “You’ll never eradicate counterfeiting, but you can control it and you can reduce it. But you have to be systematic.”