Counterfeiting of clothes, cosmetics and toys: evaluation of its economic impact

The European Union Intellectual Property Office (EUIPO) has recently released a study on the economic impact of counterfeiting in the European Union in different sectors: clothing (including footwear), cosmetics, and toys.

Link: https://www.euipo.europa.eu/en/publications/clothing-cosmetics-and-toy-sectors-in-the-eu-2024

Indeed, the report illustrates the impact of counterfeiting on the economies of European countries and, as a result, the job losses it generates.

The study is divided into two main phases, which are necessary to quantify the economic impact of counterfeiting on legitimate businesses.

The first stage is to analyze the annual sales for each industry in every EU Member State from 2008 to 2021. A forecast model predicts sales in each country for the years 2018 to 2021 for each of the three selected industries, based on sales trends since 2008.

The second stage is to analyze forecast errors, i.e. the discrepancy between predicted and actual sales, in a panel data model. These models use socioeconomic factors, including those connected to counterfeiting, to explain why sales forecasting errors occur. Like any illicit activity, counterfeiting is impossible to quantify accurately, although there are a number of factors and variables that serve as signals or indicators of the prevalence of the practice in a given nation.

Examples of these variables which can be considered as indicators of the level of counterfeiting in a country, are the percentage of individuals who admit to purchasing counterfeit goods in a nation, the number of goods detained at the border by each EUMS, the declared offenses related to drugs and corruption, and the perception of increased corruption among the population. It is indeed remarkable to note that in the EUIPO/EUROPOL (2020) study is shown how intellectual property crime is connected to many types of criminal activity, such as money laundering, document fraud, cybercrime, fraud, drug manufacturing and trafficking, and terrorism.

The study also looks at the damage caused by counterfeiting in terms of employment, as a decrease in sales, inevitably leads to an increase in employment loss for those employees in the sectors most affected by counterfeiting.
Below are some of the most significant data that emerged from the released EUIPO study related to the period between 2018 and 2021, divided by sectors:

• Clothing: due to the existence of counterfeit goods on the domestic market, the apparel industry is estimated to lose an average of 5.2% of its total sales (at market prices) between 2018 and 2021, or over 12 billion Euro. In the 27 EU MS, the influence varies from 3.8% in Spain to 10.8% in Cyprus. EU sales lost as a result of counterfeiting also contribute to a decrease in employment in the apparel industry. Indeed, between 2018 and 2021, an average of more than 160.000 jobs per year were lost in the EU.
• Cosmetics: according to the report, counterfeiting has cost the cosmetics industry 3 billion Euro in lost sales, or 4.8% of total sales. In terms of absolute losses in sales, the French cosmetics industry is the most affected, losing 800 million Euro a year. Approximately 32.000 individuals in the EU are estimated to have lost their jobs because of counterfeiting.
• Toys: out of the three industries examined in the research, the toy business is the smallest, but it has the largest percentage of lost sales due to counterfeiting (8.7%), turning into lost revenue of 1 billion Euro. One-third of the sales lost as a result of counterfeit toys was in the German toy sector. A total of 3.600 persons in the EU have lost their jobs as a result of the existence of counterfeit toys, among which 1.250 are in the German toy industry.

It is however necessary to specify that, in order to properly understand these findings, it is important to consider that the three sectors' sales values fell precipitously in 2020 because of COVID-19 pandemic. To verify a recovery to pre-crisis levels or an evolution in the way that counterfeiting affects various industries, a longer analysis length is indeed required.

In overall terms, the examination of sales statistics across three counterfeiting-affected industries has indeed demonstrated the extent of the issue for legitimate businesses, which have experienced a reduction in sales and consequent unemployment.