Business Beyond the Reef

I write this while Wikipedia and others protest the faint possibility of censorship by censoring themselves. The web protests against SOPA and its bedmate PIPA strike me as being in the “I’ll take my ball and go home” genre. Most of the commentary online is highly biased and begins from the uncritical assumption that Congress wants to somehow censor what appears on the Internet. Congress doesn’t know what it wants, nor what it is doing. Is that such a surprise? Some of the more reasonable vitriol can be found here and here. A more balanced approach is taken by the Wall Street Journal.

Forgotten in the hyperbole about “Internet freedom” is that the basic issue here is international trade in health and safety-threatening counterfeit or pirated goods. The original intent of the companies and organizations that pushed for SOPA or legislation like it has been lost. I could care less about the film industry here. Yes, pirated films cost the industry a lot of moola, but I’m not likely to die from seeing a pirated movie (though some of the unpirated ones might bore me to death). I am concerned about the egregious international trade in such things as pharmaceuticals that don’t do what they say they will do, drugs that harm or possibly kill, adulterated food products, counterfeit auto parts, wine containing antifreeze – you know, stuff that kills the buyer. Always puts me off.

Knockoff toy producers need not worry about choking hazards or paint toxicity. Counterfeit auto parts are not subjected to the rigorous safety testing borne by their licit counterparts. Due to cheaper materials and workmanship, counterfeit batteries and cigarette lighters are prone to explode. Counterfeit medicines need not contain any active ingredient at all. Worse, they could contain a substandard dose, allowing the target microbes to develop resistance. – UN Office on Drugs & Crime, 2010

Unsafe products are what the legislation was meant for, but the debate has lost this. The protests appear to be of two varieties: those concerned about “freedom” and those that object to the technical implementation. “Freedom” automatically attracts unthinking support from no-nothings who like the idea, but can’t spell “responsibility”. We can have absolute freedom on the Net and elsewhere, but it has a cost: anarchy. It’s been tried in some places, but I’m not sure how that is working out. The “Occupy” movements, I am told, don’t tolerate the sale of stolen goods in their camps. Why should we tolerate the sale of counterfeits?

I’m not qualified to discuss the technical opposition, but I have faith in our geek community to come up with solutions. They are a creative bunch. Steve Jobs never let a technical problem stop him. Some object that the same software tools that oppressive regimes use to censor the Internet would be employed to stop the pirates. Uh, oppressive regimes use hammers, too, so should they be banned in America? By the way, I am not fond of oppressive regimes. I have become acquainted with several during my career – and there is a reason this blog can’t be read in China (where 2/3s of the world’s counterfeits are now produced, by the way).

In 2007, the OECD estimated that trade in counterfeit goods accounts for about 2% of world trade – or roughly $176 billion. Counterfeit goods were intercepted at the borders of 140 countries in 2008. But enforcement at the borders simply isn’t enough. Websites have become the primary means of advertising and selling counterfeits. We need to do something about that.

So, rather than blacking out websites and hurling epithets, let’s get some technically savvy people together to figure out how to stop the advertising and sale of unsafe counterfeited or pirated goods on the Internet. Surely, Wikipedia, Google and others have a few smart techies around, don’t they?

Full disclosure: I was one of the original signers of a letter recommending SOPA, or something like it, to get at this problem of trade in counterfeit goods.

I have harped about counterfeit or pirated goods since the early days of Business Beyond The Reef – even back to when BBR was still a radio show. And every year I post the results of the annual “notorious markets” review issued by the Office of the U.S. Trade Representative (USTR). Their latest report came out just before the holidays, but I thought I’d let you know about it since not many of us look for such things.

In the early days, the report was a virtual guidebook of where to go around the world to buy your fake Rolexes or Levis. The business rapidly moved into pharmaceuticals, computers, and now almost anything imaginable. USTR’s report reflects this change. While it still has physical markets that have earned their notoriety, today’s findings focus on notorious websites. A daunting task since these appear and disappear like lightening. Kind of electronic Whac-A-Mole.

The notorious websites were dominated by China, Russia and the Ukraine, but this year we see some globalization. Sites on the no-no list include pirate sellers in Canada, Sweden, the Netherlands, Romania, Switzerland, Panama, Bulgaria, Hong Kong, the United Kingdom and Luxembourg. These include B2B and B2C sites, music and film downloaders, and places you really don’t wanna go – which is why I am not passing on the links. They are in the USTR report, which is readable and not long.

USTR does still report the physical notorious markets, and I am amazed that no intrepid tour operator has used it to put together a notorious markets tour. Stops would include Ecuador, Paraguay, China, Indonesia, Argentina, India, Ukraine, Philippines, Colombia, Thailand, Mexico and Pakistan. Sort of a round the world tour.

Some past notorious markets have cleaned up their acts, so perhaps the report does have an impact.

Examples of positive action at markets that USTR identified in the February 2011 list include the Chinese website, Baidu, identified in the Notorious Markets List for several years, which entered into a landmark licensing agreement with U.S. and other rights holders from the recording industry. At the Ladies Market in Hong Kong, local customs officials took action to remove allegedly infringing goods from the premises, and authorities reported a commitment to continue to undertake enforcement actions at the market. Finally, at the Savelovskiy Market in Russia, management has implemented an action plan to stop the distribution of infringing goods.

These three aren’t on the list anymore. You can go there now.

There has been a curious juxtaposition (when is a juxtaposition not curious?) of reports about China and fraud or corruption. It ranges from the amusing (fake shopping bags and even fake receipts from well-known shops) to the tragic (dangerous toys and adulterated foods).

I pointed out last summer that China produces two-thirds of the world’s counterfeits, a dubious distinction of world leadership. As we celebrate the 10th anniversary of China’s membership in the World Trade Organization things seem to be going from bad to worse. Other countries gained and then battled reputations for copying, piracy and counterfeiting, but were able to recover once they began to move up-market themselves and to develop their own brand names that became susceptible to counterfeiters. China has been slow to develop brands and the companies that own those brands seem exceptionally reluctant to press the authorities to do anything about counterfeiting. That leads one to wonder about connections between Chinese officials and the counterfeiters, whether at the local and provincial levels, or even at the national level where officials are loath to upset the profits of state- or Peoples Army-owned manufacturers.

European jewelrymakers have discovered that they do better in China if they have their own stores, something Tiffany’s figured out several years ago. Knowing their countrymen’s penchant for fakes and knock-offs, no Chinese who can afford it is going to risk buying branded jewelry from non-branded sellers. Other articles in recent weeks have noted that Chinese buyers for any sort of luxury or high-tech product save their money until they can purchase outside of China, where the probability of a counterfeit is lower.

Pirated films have been a huge problem for Hollywood in China for a long time, but the infection is spreading to other markets now. Filipinos love their Pinoy music, but were dismayed to discover a container load of pirated Pinoy CDs coming into the Philippines direct from pirate manufacturers in – you guessed it – China.

Counterfeiting and piracy have been with us since the dawn of doing business. I have dealt with it since the heyday of fake Levis, counterfeit Rolexes and apparel for which you got to choose the label. We moved beyond that to pirated drugs and copied aircraft parts. China, however, has reached a new low with melamine-laced baby formula and toxic toys. When you lead the world in a prime category for crime, Beijing, it is long past time to do something about it. A high probability of being caught and punished is what stops the pirates, not the occasional Draconian show trial. The rest of the world calls it “rule of law”. China has none.