Let Them Eat Fake Cake: The Rational Weakness of China’s Anti-Counterfeiting Policy

Abstract

By many measures China is the world’s largest luxury goods market. China is also widely viewed as the world’s chief counterfeiter and pirate. How can authentic luxury products, with their often-stratospheric prices, have such astonishing success in China when knockoff versions are so widely available? We argue that the answer to this puzzle is two-fold. First, much of the harm assumed to flow from counterfeits in the luxury goods sector is difficult to demonstrate empirically, and there are good theoretical reasons to doubt its magnitude. Indeed, the conventional wisdom about the perils of piracy is more a matter of inference than evidence. There is even some evidence, including evidence from China itself, that counterfeits can strengthen brands as well as undercut them. Second, from a domestic Chinese perspective counterfeits have many virtues. Given China’s enormous income inequality and rapidly urbanizing population, a tolerance for counterfeits can serve important social and political goals. In short, China’s relaxed approach to IP enforcement is a rational strategy — the harms are diffuse and likely much overstated and the benefits are tangible.

Keywords: China, trademark, copyright, counterfeits, luxury goods, fashion, piracy, counterfeiting