You bought some workout supplements from an ad you saw on YouTube. The package came in the mail, with the return label in Mandarin. The flatware you bought for 50% off at Amazon came from the same country, made from cheaper steel and putting American flatware companies out of business. While most of those items are legitimate, hundreds of millions of dollars-worth of copycat goods and stolen IP are coming in from China as American consumers continue to shop online, with their orders going directly to Chinese manufacturers.
What does it all mean?
For starters, China continues to be the world’s leading source of counterfeit and pirated goods, reflecting its failure to take decisive action to curb the widespread manufacture, domestic sale, and export of counterfeit goods, the U.S. Trade Representative said in their Section 301 Intellectual Property Protection report, released today.
As in prior years, China and Hong Kong account for over 80% of U.S. IP seizures, the report states, saying, “The massive problem affects not only interests of IP right holders, but also poses health and safety risks. Right holders report that the production, distribution, and sale of counterfeit medicines, fertilizers, pesticides, and under-regulated pharmaceutical ingredients remain widespread in China.”
Widespread counterfeiting in China’s e-commerce markets, the largest in the world, has been exacerbated by the migration of infringing sales from physical to online markets, which accelerated during the lockdown mandates in the U.S.
Counterfeiters have become adept at evading enforcement efforts, thanks to so-called “de minimis” protection rules granted to small parcels. This is also a major headwind to physical retail operations who will find it harder to compete with e-commerce that is increasingly becoming a B2C business – with the B being China business and the C being the American consumer.
On Friday, the Customs and Border Protection Agency (CBP) said in a press release that foreign manufacturers continue to exploit the rapid growth of e-commerce to not only sell legitimate goods, but also to sell counterfeit products in the United States. Last year, CBP seized more than 26,500 shipments containing counterfeit goods that would have been worth nearly $1.3 billion had they been genuine.
“When you buy counterfeit goods, you’re getting an inferior product that may contain deadly chemicals, faulty wiring, or other health hazards,” said John Leonard, Acting Executive Assistant Commissioner for the CBP Office of Trade.
Recent CBP seizures include:
- $4.26 million of counterfeit jewelry in Cincinnati, Ohio, shipped from China.
- Nearly $636,000 of counterfeit designer handbags, jewelry, and accessories at the International Mail Facility in Chicago, Illinois.
- $366,000 of counterfeit designer perfumes at the Port of Los Angeles/Long Beach. Counterfeit perfumes and cosmetics can contain harmful chemicals.
- More than 500 counterfeit iPhones bound for Miami, Florida. Counterfeit electronics can pose serious fire hazards to consumers, shipped from Japan.
CBP data indicates that handbags, wallets, wearing apparel, footwear, watches, jewelry, and consumer electronics are at higher risk of being counterfeited. Counterfeit versions of popular brands are regularly sold through online ads and on websites set up to sell those products to American consumers.
China accounts for 92% of the estimated MSRP value of all of those seizures, according to the CBP.
Fake Goods, Stolen IP, Lost Jobs
Fostering innovation and creativity is essential to U.S. economic growth, competitiveness, and the estimated 45 million American jobs that directly or indirectly rely on intellectual property-intensive industries, from manufacturers to software developers, and even apparel makers using special fabrics to make heat resistant clothing, or special athletic gear. These industries generated 38.2% of the U.S. gross domestic product, according to the USTR report today.
Some 27.8 million workers are employed by IP-sensitive industries and are paid, on average, 46% higher than workers in non-IP-intensive industries.
Businesses may also scour the U.S. for product lines either made here or abroad, mimic them, and sell competing products directly to the consumer thanks to e-commerce. Without e-commerce, most of these products would not find themselves on a shelf at CVS or on the rack at Macy’s.
From the USTR report:
“Trademark counterfeiting harms consumers, legitimate producers, and governments. Consumers may be harmed by fraudulent and potentially dangerous counterfeit products, particularly medicines, automotive and airplane parts, and food and beverages that may not be subject to the rigorous good manufacturing practices used for legitimate products. Infringers often disregard product quality and performance for higher profit margins. Legitimate producers and their employees face diminished revenue and investment incentives, adverse employment impacts, and reputational damage when consumers purchase fake products.”
Counterfeit goods also include high-tech items like semiconductors and other electronics, chemicals, medicines, food and beverages, household consumer products, personal care products, apparel and footwear, toys, sporting goods, and even airplane and auto parts. All of these items are making their way from China and other source countries, such as India for counterfeit medicines and Turkey for counterfeit apparel and food.
Turkey is not on the Priority Watch List. But China and India are. Of the two, China is the one to watch.
CPA thinks that one way to slow the flow is to ban countries on the Priority Watch List from shipping duty-free under de minimis trade rules.
Exclude Priority Watch List Countries from De Minimis
In 2015, Congress raised our de minimis threshold to $800. Mexico’s is $50, Canada’s is $120, Europe’s is €150, and China’s is under $10. Why the cheapest of all the producers would have the lowest threshold to ship duty-free is a mystery.
Once a small part of international trade, de minimis shipments (aka Section 321 shipments in USTR parlance) have exploded in volume with the rise of e-commerce. It’s not just Amazon. Many YouTube ads for new products run by small businesses you’ve never heard of are manufacturing directly in China, legally, and shipping duty-free. This would also include duty-free shipments of goods currently facing tariffs.
For regular imports, the law requires importers to provide Customs an advance manifest of the incoming cargo describing it. But de minimis shipments typically arrive with no advance information. The information scrawled on the packages, completed at a foreign post office, is often incomplete and unverifiable and it is easy to undervalue the cost of the item inside. No one at the post office is going to ask to see the product or verify its price.
The CBP has to process a whopping 2 million of these shipments daily and does not have the capability to detect and seize the illicit and dangerous goods that are among the onslaught of China imports via e-commerce sales.
“We need to bar China and any priority watchlist country from using our de minimis informal entry procedures at customs,” says Michael Stumo, CEO of CPA.
Take Administrative Action and Deny ‘Informal Entry’ to Merchandise from Bad Actor Countries
- De Minimis shipments are given ‘Informal Entry’ status by CBP, meaning the foreign vendor doesn’t even need to use a U.S. customs broker. Customs Brokers have important KYC (know-your-client) responsibilities.
- Over 90% of all intellectual property seizures occur in Informal Entry shipments, and China accounts for 92% of the estimated MSRP of IP seizures.
- USTR maintains a Congressionally-mandated list of countries “that do not adequately or effectively protect and enforce intellectual property (IP) rights.” The worst offenders are on USTR’s Priority Watch List are Algeria, Argentina, Chile, China, India, Indonesia, Russia, Saudi Arabia, Ukraine, and Venezuela.
- The Treasury Department and CBP have existing statutory authority to deny ‘Informal Entry’ via rule-making. The United States is under zero international obligations to provide informal entry to any other country.
The USTR said that some countries are working with the U.S. to crack down on their private sector trafficking in stolen IP and imitation goods.
For example, Brazil’s law enforcement, with support from the Department of Justice’s International Computer Hacking and Intellectual Property Advisor for Latin America, launched “Operation 404.2,” which seized the domain names of multiple commercial websites engaged in illegal reproduction and distribution of copyrighted works.
China has a massive market to patrol, and USTR recognized that it was a daunting task, saying “The United States’ engagement with China has been demonstrating progress since the signing of the United States-China Economic and Trade Agreement (Phase One Agreement) in January 2020.” That agreement contains separate chapters on IP protections addressing long-standing concerns of a wide range of U.S. industries.
Oddly enough, Mexico and Canada are still on the Watch List. Once again, enforcement in poorer Mexico is weak. “Mexico continues to operate on reduced resources for numerous government agencies,” the USTR report states.
U.S. consumers might not always suffer. But any company in the U.S., including small and large retail stores, will increasingly have to compete with this new B2C digital model that connects U.S. shoppers directly to China.