The Knockoff Effect: The Hidden Environmental and Social Impact of Counterfeit Goods

Retailers, brands and online marketplaces have taken a tough stance against counterfeiters lately due to lost profits and damage to brand reputation, but the problems associated with fakes run so much deeper than monetary losses.

Counterfeiting isn't a victimless crime. There are serious unintended and damaging effects counterfeiting leaves in its wake, including exploiting child labor and increased pollution, while also stalling innovation and fair economic opportunities across industries.

The Impact on Continued Innovation and the Global Economic Landscape

Weak IP laws can actually damage a country's ability to attract foreign direct investment and build hubs of business and innovation. Why would companies invest in a country where their intellectual property can be more easily stolen? Take China, for example. As part of the trade conflict, the U.S. has significantly pressured China to curb IP theft by improving upon its IP laws and enforcement.

On the other hand, intellectual property protection actively promotes innovation, according to the International Chamber of Commerce (ICC). Research and development and other innovations flourish when there are strong intellectual property rights (IPR) and companies realize there's more value from innovations protected by IPR than those that are not.

The ICC also estimates that the global economic value of counterfeiting and piracy could reach $4.2 trillion by 2022, and put 5.4 million legitimate jobs at risk over that time period. The potential losses from this are huge. In the U.S. alone, it's estimated that counterfeiting and piracy have caused the country to lose out on more than $100 billion in foreign direct investment. Ultimately, counterfeiting hurts society as it loses out on the knowledge and innovation “spillovers” that come with foreign direct investment.

Environmental Impact

Seeing as counterfeits are produced under unregulated circumstances, manufacturers creating fake goods often use pollution-creating and dangerous machinery and materials. Not only that, but after large quantities of counterfeits are seized by law enforcement, the products are often destroyed by incineration. This leads to massive amounts of air pollution.

This is even more problematic with products originally intended to reduce consumers’ environmental footprint and brands whose core business models are rooted in sustainable practices. Many companies across industries are using environmentally friendly and nontoxic materials to address the growing environmental crisis. However, when counterfeits of these products pop up on the market, not only are they profiteering from the creativity of others, but they're also undermining brands’ sustainability efforts.

The Social Impact on Consumers and Manufacturers

The wider social costs arising from counterfeiting and piracy are another significant issue affecting brands, workers and consumers alike. Research by World Trademark Review into the global economic and social impacts of counterfeiting finds that the link between counterfeiting and piracy and gross domestic product establishes further a link between illicit activity and dampened growth.

The diversion from genuine to criminal activity reduces government tax revenues, but may also have serious consumer effects due to regulatory noncompliance. Just recently, there has been a spike in illnesses and deaths related to counterfeit THC vaping products. Because the fakes aren’t subject to mandated health and safety regulations, and are generally made from lower quality components, dangerous chemicals could be lurking inside — which led to this public safety epidemic.

Not only are consumers potentially put in harm’s way by buying and using counterfeits, but fakes are often produced in extremely dangerous conditions, putting the people who make these products at serious risk as well.

Counterfeit goods are often produced in developing regions of the world, and exploit child labor, where laws are hardly (if at all) enforced to protect their rights and safety. It's generally widely known that in developing regions around the world, counterfeit manufacturers use child labor to create fake goods, particularly knockoff luxury goods.

The erosion of IP rights is associated with poorer standards of governance and transparency, reducing incentives to invest or innovate and affecting long-term economic growth. The displacement of genuine activity by illicit activity is also likely to reduce efficiency, as the underground economy is likely to have more irregular supply chains which do not optimally allocate resources.

In this time of instant gratification, consumers need to recognize that the cost of counterfeit goods goes far beyond the bottom-line impact, and has a negative knock-on effect that harms brands, economies, the environment, and society as a whole.

Danae Vara Borrell is vice president of product at Red Points, a company using artificial intelligence and machine learning to detect and remove counterfeits online.