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the Economic Effects of Counterfeit and Pirated Goods' which was 
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Report to Congressional Committees: 

United States Government Accountability Office: 
GAO: 

April 2010: 

Intellectual Property: 

Observations on Efforts to Quantify the Economic Effects of 
Counterfeit and Pirated Goods: 

GAO-10-423: 

GAO Highlights: 

Highlights of GAO-10-423, a report to congressional committees. 

Why GAO Did This Study: 

In October 2008, Congress passed the Prioritizing Resources and 
Organization for Intellectual Property Act of 2008 (PRO-IP Act), to 
improve the effectiveness of U.S. government efforts to protect 
intellectual property (IP) rights such as copyrights, patents, and 
trademarks. The act also directed GAO to provide information on the 
quantification of the impacts of counterfeit and pirated goods. GAO 
(1) examined existing research on the effects of counterfeiting and 
piracy on consumers, industries, government, and the U.S. economy; and 
(2) identified insights gained from efforts to quantify the effects of 
counterfeiting and piracy on the U.S. economy. 

GAO interviewed officials and subject matter experts from U.S. 
government agencies, industry associations, nongovernmental 
organizations, and academic institutions, and reviewed literature and 
studies quantifying or discussing the economic impacts of 
counterfeiting and piracy on the U.S. economy, industry, government, 
and consumers. GAO is making no recommendations in this report. 

What GAO Found: 

According to experts and literature GAO reviewed, counterfeiting and 
piracy have produced a wide range of effects on consumers, industry, 
government, and the economy as a whole, depending on the type of 
infringements involved and other factors. Consumers are particularly 
likely to experience negative effects when they purchase counterfeit 
products they believe are genuine, such as pharmaceuticals. Negative 
effects on U.S. industry may include lost sales, lost brand value, and 
reduced incentives to innovate; however, industry effects vary widely 
among sectors and companies. The U.S. government may lose tax revenue, 
incur IP enforcement expenses, and face risks of counterfeits entering 
supply chains with national security or civilian safety implications. 
The U.S. economy as a whole may grow more slowly because of reduced 
innovation and loss of trade revenue. Some experts and literature also 
identified some potential positive effects of counterfeiting and 
piracy. Some consumers may knowingly purchase counterfeits that are 
less expensive than the genuine goods and experience positive effects 
(consumer surplus), although the longer-term impact is unclear due to 
reduced incentives for research and development, among other factors. 

Three widely cited U.S. government estimates of economic losses 
resulting from counterfeiting cannot be substantiated due to the 
absence of underlying studies. Generally, the illicit nature of 
counterfeiting and piracy makes estimating the economic impact of IP 
infringements extremely difficult, so assumptions must be used to 
offset the lack of data. Efforts to estimate losses involve 
assumptions such as the rate at which consumers would substitute 
counterfeit for legitimate products, which can have enormous impacts 
on the resulting estimates. Because of the significant differences in 
types of counterfeited and pirated goods and industries involved, no 
single method can be used to develop estimates. Each method has 
limitations, and most experts observed that it is difficult, if not 
impossible, to quantify the economy-wide impacts. Nonetheless, 
research in specific industries suggest that the problem is sizeable, 
which is of particular concern as many U.S. industries are leaders in 
the creation of intellectual property. 

Table: Negative Effects of Counterfeiting and Piracy, by Stakeholder: 

Stakeholders: Consumers; 
Negative effects: Health and safety risks, low quality goods. 

Stakeholders: Industries; 
Negative effects: Lost sales and brand value, increased IP protection 
costs. 

Stakeholders: U.S. government; 
Negative effects: Lost tax revenue, increased enforcement costs, and 
risks to supply chains with national security or safety implications. 

Stakeholders: U.S. economy; 
Negative effects: Lower growth and innovation, declining trade with 
countries having weak IP rights enforcement. 

Source: GAO analysis. 

[End of table] 

View [hyperlink, http://www.gao.gov/products/GAO-10-423] or key 
components. For more information, contact Loren Yager at (202) 512-
4347 or yagerl@gao.gov. 

[End of section] 

Contents: 

Letter: 

Background: 

Counterfeiting and Piracy Have a Wide Range of Effects on U.S. 
Consumers, Industry, Government, and the Economy: 

Lack of Data Hinders Efforts to Quantify Impacts of Counterfeiting and 
Piracy: 

Appendix I: Objectives, Scope, and Methodology: 

Appendix II: GAO Contact and Staff Acknowledgments: 

Bibliography: 

Tables: 

Table 1: DHS Seizures of IP-Infringing Goods, Expressed as a 
Percentage of Total Domestic Value of Goods Seized Annually, Fiscal 
Years 2004-2009: 

Table 2: Potential Direct Effects of IP Infringements in the United 
States by Stakeholder: 

Abbreviations: 

BSA: Business Software Alliance: 

CBP: Customs and Border Protection: 

DHS: Department of Homeland Security: 

FAA: Federal Aviation Administration: 

FBI: Federal Bureau of Investigation: 

FDA: U.S. Food and Drug Administration: 

FTC: Federal Trade Commission: 

HHS: Department of Health and Human Services: 

IP: intellectual property: 

ITC: International Trade Commission: 

OECD: Organization for Economic Cooperation and Development: 

PRO-IP ACT: Prioritizing Resources and Organization for Intellectual 
Property Act of 2008: 

RIMS II: Regional Input-Output Modeling System: 

TRIPS: Agreement on Trade-Related Aspects of Intellectual Property 
Rights: 

USTR: Office of the U.S. Trade Representative: 

WTO: World Trade Organization: 

[End of section] 

United States Government Accountability Office: 
Washington, DC 20548: 

April 12, 2010: 

The Honorable Patrick J. Leahy: 
Chairman: 
The Honorable Jeff Sessions: 
Ranking Member: 
Committee on the Judiciary: 
United States Senate: 

The Honorable John Conyers, Jr. 
Chairman: 
The Honorable Lamar S. Smith: 
Ranking Member: 
Committee on the Judiciary: 
House of Representatives: 

In October 2008, Congress passed the Prioritizing Resources and 
Organization for Intellectual Property Act of 2008 (PRO-IP Act) (P.L. 
110-403), to strengthen and improve the effectiveness of U.S. 
government efforts to protect the intellectual property (IP) of U.S. 
industries and IP rights holders. In the PRO-IP Act, Congress noted 
that U.S. IP industries have created millions of highly skilled, high- 
paying U.S. jobs and continue to represent a major source of 
creativity, innovation, economic growth, and competitiveness. 

The PRO-IP Act directed GAO to provide information on the 
quantification of the impacts of counterfeit and pirated goods on the 
economy and industries of the United States to help the U.S. 
government better protect the IP of rights holders.[Footnote 1] Our 
work: (1) examined existing research on the effects of counterfeiting 
and piracy on consumers, industries, government, and the U.S. economy; 
and (2) identified insights gained from efforts to quantify the 
effects of counterfeiting and piracy on the U.S. economy. 

To address these objectives, we interviewed officials and 
representatives from U.S. government agencies, industry associations, 
nongovernmental organizations, academic institutions, and a 
multilateral organization, and we reviewed documents and studies 
quantifying or discussing the impacts of counterfeiting and piracy on 
the U.S. economy, industry, government, and consumers. We met with 
officials and reviewed documents from the Departments of Justice 
(Justice), Homeland Security (DHS), Commerce (Commerce), and Health 
and Human Services (HHS), the Office of the U.S. Trade Representative 
(USTR), and the International Trade Commission (ITC). We conducted a 
literature search of studies and estimates of the economic impact of 
IP infringements published since 1999 to examine various aspects of 
the economic impacts of counterfeiting and piracy, and to identify 
other insights about the role IP plays in the U.S. economy.[Footnote 
2] Among the studies we reviewed was the Organization for Economic 
Cooperation and Development's (OECD) 2008 report, The Economic Impact 
of Counterfeiting and Piracy.[Footnote 3] Although this study was 
global rather than focused on the U.S. economy, its unique nature and 
prominence as the most comprehensive attempt to quantify the impacts 
of counterfeiting and piracy warranted its inclusion within our 
reviews. We also interviewed subject matter experts from a range of 
governmental, nongovernmental, academic and industry sources, and OECD 
officials to discuss efforts to quantify the economic impacts of 
counterfeiting and piracy and to obtain their views on the range of 
impacts of counterfeits and piracy, insights on counterfeiting 
activities and markets, and the role of IP in the U.S. economy. Unless 
otherwise noted, in our discussion of the impacts and insights on 
counterfeiting and piracy, we do not distinguish between imported 
counterfeit and pirated goods and those produced domestically. The 
literature we reviewed and experts we spoke with focused primarily on 
imported counterfeit goods rather than those produced within the 
United States. We determined that the U.S. government did not 
systematically collect data and perform analysis on the impacts of 
counterfeiting and piracy on the U.S. economy and, based on our review 
of literature and interviews with experts, we concluded that it was 
not feasible to develop our own estimates or attempt to quantify the 
economic impact of counterfeiting and piracy on the U.S. economy. We 
shared a copy of the draft report with officials from Commerce, DHS, 
HHS, Justice, ITC, USTR, and the Office of the U.S. Intellectual 
Property Enforcement Coordinator to obtain technical comments. We 
received comments from the DHS and Justice, and the Office of the U.S. 
Intellectual Property Enforcement Coordinator and made changes as 
appropriate. 

We conducted our work from April 2009 to April 2010 in accordance with 
all sections of GAO's Quality Assurance Framework that are relevant to 
our objectives. The framework requires that we plan and perform the 
engagement to obtain sufficient and appropriate evidence to meet our 
stated objectives and to discuss any limitations to our work. We 
believe that the information and data obtained, and the analysis 
conducted, provide a reasonable basis for any findings and conclusions 
in this product. For additional details regarding our scope and 
methodology, see appendix I. 

Background: 

Importance of Protection for Innovators Has Long Been Recognized in 
the United States: 

The importance of patents and other mechanisms to enable inventors to 
capture some of the benefits of their innovations has long been 
recognized in the United States as a tool to encourage innovation, 
dating back to Article 1 of the U.S. Constitution and the 1790 patent 
law. Ensuring the protection of IP rights encourages the introduction 
of innovative products and creative works to the public. Protection is 
granted by guaranteeing proprietors limited exclusive rights to 
whatever economic reward the market may provide for their creations 
and products. 

Today, eight federal agencies and entities within them undertake the 
primary U.S. government activities in support of IP rights. These 
agencies and entities include Commerce, HHS, DHS, Justice, ITC, State, 
USTR, the Copyright Office, and entities such as Customs and Border 
Protection (CBP), the U.S. Patent and Trademark Office, and the 
Federal Bureau of Investigation (FBI). 

In addition to domestic efforts for protecting IP, the U.S. government 
participated actively in negotiating the World Trade Organization's 
(WTO) Agreement on Trade-Related Aspects of Intellectual Property 
Rights (TRIPS), which came into force in 1995 and broadly governs the 
multilateral protection of IP rights. Under TRIPS, all WTO member 
countries are obligated to establish laws and regulations that meet a 
minimum standard for protecting various areas of IP rights. It also 
provides for enforcement measures for members. One of USTR's 
priorities in recent years has been negotiating free trade agreements. 
Since 2000, USTR has completed negotiations for free trade agreements 
that have entered into force with Australia, Bahrain, Central America, 
[Footnote 4] Chile, Jordan, Morocco, Oman, Peru, and Singapore. 
[Footnote 5] According to officials at USTR, these agreements offer 
protection beyond that required in TRIPS.[Footnote 6] 

Intellectual property is an important component of the U.S. economy, 
and the United States is an acknowledged global leader in the creation 
of intellectual property. According to the USTR, "Americans are the 
world's leading innovators, and our ideas and intellectual property 
are a key ingredient to our competitiveness and prosperity." The 
United States has generally been very active in terms of advocating 
strong IP protection and encouraging other nations to improve these 
systems for two key reasons. First, the U.S. has been the source of a 
large share of technological improvements for many years and, 
therefore, stands to lose if the associated IP rights are not 
respected in other nations. Secondly, a prominent economist noted that 
IP protection appears to be one of the factors that has helped to 
generate the enormous growth in the world economy and in the standard 
of living that has occurred in the last 150 years. This economist 
pointed out that the last two centuries have created an unprecedented 
surge in growth compared to prior periods. Among the factors 
attributed to creating the conditions for this explosion in economic 
growth are the rule of law, including property rights and the 
enforceability of contracts.[Footnote 7] 

While these conditions are clearly important for generating economic 
growth, determining the contributions of innovation to economic growth 
at the level of the overall economy has been a challenging task. 
Economists have used a variety of techniques to better understand the 
role of innovation in growth, and historical evidence shows that 
growth rates have periodically been driven upward by major 
technological improvements, beginning with the industrial revolution 
and the role of electricity, and continuing with the current 
revolution in information technology.[Footnote 8] 

Common Protections Related to IP: 

Generally, individual countries grant and enforce IP rights. IP is any 
innovation, commercial or artistic, or any unique name, symbol, logo, 
or design used commercially. IP rights protect the economic interests 
of the creators of these works by giving them property rights over 
their creations.[Footnote 9] 

* Copyright. A set of exclusive rights subsisting in original works of 
authorship fixed in any tangible medium of expression now known or 
later developed, for a fixed period of time. For example, works may be 
literary, musical, or artistic. 

* Trademark. Any sign or any combination of signs capable of 
distinguishing the source of goods or services is capable of 
constituting a trademark. Such signs--in particular, words (including 
personal names), letters, numerals, figurative elements, and 
combinations of colors, as well as any combination of such signs--are 
eligible for registration as trademarks. 

* Patent. Exclusive rights granted to inventions for a fixed period of 
time, whether products or processes, in all fields of technology, 
provided they are new, not obvious (involve an inventive step), and 
have utility (are capable of industrial application). 

"Pirated copyright goods" refer to any goods that are copies made 
without the consent of the right holder or person duly authorized by 
the right holder. "Counterfeit goods" refer to any goods, including 
packaging or bearing without authorization, a trademark that is 
identical to a trademark validly registered for those goods, or that 
cannot be distinguished in its essential aspects from such a 
trademark, and that, thereby, infringes the rights of the owner of the 
trademark in question. According to the U.S. Food and Drug 
Administration (FDA), "counterfeit drugs" are defined under U.S. law 
as those sold under a product name without proper authorization, where 
the identity of the source drug is knowingly and intentionally 
mislabeled in a way that suggests that it is the authentic and 
approved product.[Footnote 10] 

Counterfeiting and Piracy Cover a Wide Range of Goods: 

CBP data show that between fiscal years 2004 and 2009, the domestic 
value and number of U.S. seizures of counterfeit goods imported from 
other countries have fluctuated.[Footnote 11] These seizures have been 
concentrated among certain types of products. For example, seizures of 
footwear, wearing apparel, and handbags accounted for about 57 percent 
of the aggregate domestic value of goods seized in those 6 years. 
Table 1 shows the percent of total domestic value for different types 
of commodities seized as well as the domestic value of all goods 
seized and total number of seizures. The value of wearing apparel and 
cigarette seizures generally declined, while the value of 
pharmaceutical seizures generally increased. Several factors influence 
trends in seizure values. For example, values of seized goods can vary 
from year to year due to counterfeiters' responses to changes in 
marketplace demand or enforcement actions. For instance, in fiscal 
year 2006, a federal enforcement investigation resulted in the seizure 
of 77 cargo containers of counterfeit Nike Air Jordan shoes and one 
container of counterfeit Abercrombie & Fitch clothing. The estimated 
domestic value of these goods was about $19 million, representing 
about 12 percent of the total domestic seizure value that year. In 
addition, the level of federal border enforcement effort varies across 
ports, resulting in different seizure rates, which is discussed in a 
later section of this report. 

Table 1: DHS Seizures of IP-Infringing Goods, Expressed as a 
Percentage of Total Domestic Value of Goods Seized Annually, Fiscal 
Years 2004-2009: 

Commodity: Footwear; 
2004: 1%; 
2005: 10%; 
2006: 41%; 
2007: 40%; 
2008: 38%; 
2009: 38%; 
Reported percentage of 2004-2009 totals: 32%. 

Commodity: Wearing apparel; 
2004: 37%; 
2005: 17%; 
2006: 16%; 
2007: 14%; 
2008: 9%; 
2009: 8%; 
Reported percentage of 2004-2009 totals: 15%. 

Commodity: Handbags/wallets/backpacks; 
2004: 17%; 
2005: 16%; 
2006: 9%; 
2007: 7%; 
2008: 11%; 
2009: 8%; 
Reported percentage of 2004-2009 totals: 11%. 

Commodity: Consumer electronics; 
2004: 6%; 
2005: 9%; 
2006: 5%; 
2007: 8%; 
2008: 8%; 
2009: 12%; 
Reported percentage of 2004-2009 totals: 9%. 

Commodity: Computers/hardware; 
2004: 1%; 
2005: 5%; 
2006: 9%; 
2007: 5%; 
2008: 3%; 
2009: 5%; 
Reported percentage of 2004-2009 totals: 5.% 

Commodity: Pharmaceuticals; 
2004: [Empty]; 
2005: 2%; 
2006: 1%; 
2007: 6%; 
2008: 10%; 
2009: 4%; 
Reported percentage of 2004-2009 totals: 5%. 

Commodity: Cigarettes; 
2004: 17%; 
2005: 10%; 
2006: [Empty]; 
2007: [Empty]; 
2008: 2%; 
2009: 1%; 
Reported percentage of 2004-2009 totals: 4%. 

Commodity: Media; 
2004: 4%; 
2005: [Empty]; 
2006: 4%; 
2007: 4%; 
2008: 2%; 
2009: 4%; 
Reported percentage of 2004-2009 totals: 3%. 

Commodity: Watches/parts; 
2004: 2%; 
2005: 3%; 
2006: 2%; 
2007: [Empty]; 
2008: [Empty]; 
2009: 6%; 
Reported percentage of 2004-2009 totals: 2%. 

Commodity: Toys/electronic games; 
2004: 3%; 
2005: 9%; 
2006: [Empty]; 
2007: [Empty]; 
2008: [Empty]; 
2009: 2%; 
Reported percentage of 2004-2009 totals: 2v. 

Commodity: Batteries; 
2004: 2%; 
2005: [Empty]; 
2006: [Empty]; 
2007: [Empty]; 
2008: 1%; 
2009: 1%; 
Reported percentage of 2004-2009 totals: 1%. 

Commodity: Sunglasses/parts; 
2004: [Empty]; 
2005: [Empty]; 
2006: [Empty]; 
2007: 2%; 
2008: 3%; 
2009: 1%; 
Reported percentage of 2004-2009 totals: 1%. 

Commodity: Perfumes; 
2004: [Empty]; 
2005: 3%; 
2006: [Empty]; 
2007: 1%; 
2008: 2%; 
2009: 1%; 
Reported percentage of 2004-2009 totals: 1%. 

Commodity: Jewelry; 
2004: [Empty]; 
2005: [Empty]; 
2006: [Empty]; 
2007: [Empty]; 
2008: [Empty]; 
2009: 4%; 
Reported percentage of 2004-2009 totals: 1%. 

Commodity: Headwear; 
2004: [Empty]; 
2005: [Empty]; 
2006: 2%; 
2007: [Empty]; 
2008: [Empty]; 
2009: [Empty]; 
Reported percentage of 2004-2009 totals: [Empty]. 

Commodity: Health care; 
2004: [Empty]; 
2005: [Empty]; 
2006: 2%; 
2007: [Empty]; 
2008: [Empty]; 
2009: [Empty]; 
Reported percentage of 2004-2009 totals: [Empty]. 

Commodity: All other commodities; 
2004: 10%; 
2005: 15%; 
2006: 8%; 
2007: 14%; 
2008: 10%; 
2009: 3%; 
Reported percentage of 2004-2009 totals: 9%. 

Commodity: Total domestic value of all seizures; 
2004: $139 million; 
2005: $93 million; 
2006: $155 million; 
2007: $197 million; 
2008: $273 million; 
2009: $261 million; 
Reported 2004-2009 totals: $1,118 million. 

Commodity: Total number of seizures; 
2004: 7,255; 
2005: 8,022; 
2006: 14,675; 
2007: 13,657; 
2008: 14,992; 
2009: 14,841; 
Reported 2004-2009 totals: 73,442. 

Source: GAO analysis of CBP data. 

Note: Where percentages are not provided, CBP either did not report 
the commodity as a separate category in a given year or the percentage 
seized of the commodity was less than 1 percent of the total domestic 
value of all commodities seized. Seizures of these commodities may be 
included in the "All other commodities" category. The percentage 
values may not add up to 100 percent due to rounding. 

[End of table] 

According to CBP data, seized counterfeit goods are dominated by 
products from China. During fiscal years 2004 through 2009, China 
accounted for about 77 percent of the aggregate value of goods seized 
in the United States. Hong Kong, India, and Taiwan followed China, 
accounting for 7, 2, and 1 percent of the seized value, respectively. 
CBP data indicate certain concentrations of counterfeit production 
among these countries: in 2009, about 58 percent of the seized goods 
from China were footwear and handbags; 69 percent of the seized goods 
from Hong Kong were consumer electronics and watch parts; 91 percent 
of the seized goods from India were pharmaceuticals and perfume; and 
85 percent of seized goods from Taiwan were computers and consumer 
electronics. CBP data show that goods were also seized frequently from 
Russia, Korea, Pakistan, Vietnam, and certain Southeast Asian 
countries. Unlike imported counterfeits, there is little information 
on the extent and sources for domestically produced counterfeits. 
According to the Congressional Research Service, the United States is 
especially concerned with foreign counterfeits of U.S. intellectual 
property. Compared to foreign countries, counterfeits produced in the 
United States are estimated to be relatively low. 

Another significant aspect of IP infringement is the piracy of digital 
copyrighted products, which is not captured by CBP seizure data. The 
development of technologies that enable the unauthorized distribution 
of copyrighted works is widely recognized as leading to an increase in 
piracy. The rapid growth of Internet use, in particular, has 
significantly contributed to the increase. Digital products are not 
physical or tangible, can be reproduced at very low cost, and have the 
potential for immediate delivery through the Internet across virtually 
unlimited geographic markets. Sectors facing threats from digital 
piracy include the music, motion picture, television, publishing, and 
software industries. Piracy of these products over the Internet can 
occur through methods including peer-to-peer networks, streaming 
sites, and one-click hosting services. There is no government agency 
that systematically collects or tracks data on the extent of digital 
copyright piracy. 

These technological developments, along with an increase in the 
sophistication of packaging for counterfeit goods, have changed the 
nature of counterfeiting and piracy substantially in recent years. 
Industry associations with whom we met commented that technological 
changes and increased sophistication among counterfeiters have 
affected their businesses significantly. 

Counterfeiting and Piracy Have a Wide Range of Effects on U.S. 
Consumers, Industry, Government, and the Economy: 

According to experts we spoke with and literature we reviewed, 
counterfeiting and piracy have produced a wide range of effects on 
consumers, industry, government, and the economy as a whole, depending 
on the type of infringements involved and other factors. Most of the 
information and views we obtained from our interviews and literature 
review focused on the significant direct negative effects of 
counterfeiting and piracy on stakeholders, including health and safety 
risks, lost revenues, and increased costs of protecting and enforcing 
IP rights. However, some experts and literature point out that certain 
stakeholders may experience some positive effects from counterfeits 
and piracy, though there is little information available on potential 
positive effects. Table 2 summarizes the positive and negative effects 
by stakeholder, based on our discussions with experts and literature 
we reviewed. 

Table 2: Potential Direct Effects of IP Infringements in the United 
States by Stakeholder: 

Stakeholders: Consumers; 
Potential effects: Negative effects; 
* Damage to health and safety; 
* Costs incurred when product fails due to lower quality of 
counterfeit good. 

Stakeholders: Consumers; 
Potential effects: Positive Effects; 
* Perceived benefits from lower prices of counterfeit and pirated 
goods. 

Stakeholders: Industry; 
Potential effects: Negative effects; 
* Lost sales; 
* Lost brand value or damage to public image; 
* Cost of IP protection; 
* Decreased incentive to invest in research and development. 

Stakeholders: Industry; 
Potential effects: Positive effects; 
* Increased sales of legitimate goods based on consumer "sampling" of 
pirated goods. 

Stakeholders: Government; 
Potential effects: Negative effects; 
* Lost tax revenue due to illegal sales of counterfeit and pirated 
goods; 
* Cost of IP enforcement; 
* Risks of counterfeits entering supply chains with national security 
or civilian safety implications. 

Stakeholders: Economy as a whole; 
Potential effects: Negative effects; 
* Lower economic growth as a result of reduced incentives to innovate; 
* Lost revenue from declining U.S. trade in countries with weak IP 
rights regimes. 

Source: GAO analysis of data collected through interviews with experts 
and literature reviewed. 

Note: These effects may differ greatly in magnitude by industry and 
stakeholder, with specific impacts depending on which product or 
industry is being discussed. 

[End of table] 

Consumer Effects Include Danger to Health and Safety: 

A commonly cited concern about counterfeit trade is that certain types 
of counterfeit goods can have harmful effects on consumers' health and 
safety, causing serious illness or death. Experts we spoke with and 
literature we reviewed identified certain counterfeit products, such 
as pharmaceuticals, automotive parts, electrical components, toys, and 
household goods, as having potentially damaging health and safety 
effects. According to experts we spoke with, a key characteristic of 
these types of counterfeit goods, which distinguishes their effects 
from other types of counterfeiting or piracy, is that U.S. consumers 
are likely to have been deceived about the origin of the product. In 
addition, some studies and an expert reported that counterfeiters have 
increasingly diversified beyond their traditional products, such as 
luxury goods, to more functional products such as baby shampoo and 
household cleaners, and will continue to expand their product 
portfolios since the profit incentives are large. Examples of the 
types of counterfeit products that may have negative health and safety 
effects on consumers are presented below. 

Counterfeit pharmaceuticals may include toxic or nonactive 
ingredients, correct ingredients in incorrect quantities, or other 
mislabeling. These products can be ineffective in treating ailments or 
may lead to adverse: 

reactions, drug resistance, or even death.[Footnote 12] The FDA has 
specifically highlighted and issued warnings to U.S. consumers on the 
dangers of buying prescription drugs over the Internet. 

Counterfeit automotive products may be substandard. A representative 
of a U.S. automotive parts supplier stated that it tested a supply of 
counterfeit timing belts that did not meet industry safety standards 
and could potentially impair the safety of vehicles. 

Counterfeit or pirated software may threaten consumers' computer 
security. The illegitimate software, for example, may contain 
malicious programming code that could interfere with computers' 
operations or violates users' privacy. 

Effects Vary Across Industries and Include Lost Sales and Reduced 
Incentives to Innovate: 

Counterfeit or pirated products that act as substitutes for genuine 
goods can have a wide range of negative effects on industries, 
according to experts we spoke with and literature we reviewed. These 
sources further noted that the economic effects vary widely among 
industries and among companies within an industry. The most commonly 
identified effect cited was lost sales, which leads to decreased 
revenues and/or market share. Many industries lose sales because of 
consumers' purchases of counterfeit and pirated goods, particularly if 
the consumer purchased a counterfeit when intending to purchase a 
genuine product. In such cases, the industry may lose sales in direct 
proportion to the number of counterfeit products that the deceived 
consumers purchased. Industries in which consumers knowingly purchase 
counterfeits as a substitute for the genuine good may also experience 
lost sales. For example, recording companies have lost sales on a wide 
scale as a result of pirated music distributed over the Internet and 
producers of high-end fashion goods have lost sales from purchases of 
counterfeit goods made to look similar to genuine products. 

Lost revenues can also occur when lower-priced counterfeit and pirated 
goods pressure producers or IP owners to reduce prices of genuine 
goods. In some industries, such as the audiovisual sector, marketing 
strategies must be adjusted to minimize the impact of counterfeiting 
on lost revenues. Movie studios that use time-related marketing 
strategies--introducing different formats of a movie after certain 
periods of time--have reduced the time periods or "windows" for each 
format as a countermeasure, reducing the overall revenue acquired in 
each window. Experts stated that companies may also experience losses 
due to the dilution of brand value or damage to reputation and public 
image, as counterfeiting and piracy may reduce consumers' confidence 
in the brand's quality. Consumers who are unaware that a product is 
counterfeit may blame the manufacturer of the legitimate good for 
negative effects of the fake. Some manufacturers learn of the 
existence of counterfeit versions of their products from returns of 
inferior counterfeit goods. 

Companies are affected in additional ways. For example, to avoid 
losing sales and liability issues, companies may increase spending on 
IP protection efforts. In addition, experts we spoke with stated that 
companies could experience a decline in innovation and production of 
new goods if counterfeiting leads to reductions in corporate 
investments in research and development. Another variation in the 
nature of the effects of counterfeiting and piracy is that some 
effects are experienced immediately, while others are more long-term 
in nature, according to the OECD. The OECD's 2008 report cited loss of 
sales volume and lower prices as short-term effects, while the medium-
and long-term effects include loss of brand value and reputation, lost 
investment, increased costs of countermeasures, potentially reduced 
scope of operations, and reduced innovation. 

Finally, one expert emphasized to us that the loss of the IP rights is 
much more important than the loss of revenue. He stated that the 
danger for the United States is in the accelerated "learning effects"--
companies learn how to produce and will improve upon these goods. They 
will no longer need to illegally copy a given brand--they will be in 
the aftermarket. He suggested that companies should work to ensure 
their competitive advantage in the future by inhibiting undesired 
knowledge transfer. 

U.S. Government Loses Tax Revenue, Incurs Enforcement Expenses, and 
Faces Risks to Supply Chains: 

Many of the experts we interviewed identified lost tax revenue as an 
effect of counterfeiting and piracy on governments. IP owners or 
producers of legitimate goods who lose revenue because of competition 
from counterfeiters pay less in taxes. The U.S. government also incurs 
costs due to IP protection and enforcement efforts. Researchers have 
found anecdotal evidence that organized criminal and terrorist 
organizations are involved in counterfeiting and piracy. A 2009 RAND 
Corporation study, for example, presented case studies showing the 
involvement of organized crime or terrorist groups involved in film 
piracy to generate funding for their activities.[Footnote 13] Because 
criminal networks are involved, government law enforcement priorities 
may be affected since more resources are devoted to combating these 
networks. Researchers have identified economic incentives that have 
contributed to the increase in counterfeiting and piracy in recent 
years. Economic incentives include low barriers to entering the 
counterfeiting and piracy business, potentially high profits, and 
limited legal sanctions if caught. 

The federal government also incurs costs to store and destroy 
counterfeit and pirated goods. Seized goods have to be secured, as 
they have potential value but cannot be allowed to enter U.S. 
commerce. Storage may be prolonged by law enforcement actions, but the 
goods are generally destroyed or otherwise disposed of when they are 
determined to be illegal and are no longer needed. According to CBP 
officials, as seizures have increased, the agency's storage and 
destruction costs have grown and become increasingly burdensome. CBP 
reported that it spent about $41.9 million to destroy seized property 
between fiscal years 2007 and 2009. 

Counterfeits also pose a threat to the reliability of supply chains 
that have national security or civilian safety significance. According 
to a recent Commerce report, counterfeit electronics parts have 
infiltrated U.S. defense and industrial supply chains and almost 40 
percent of companies and organizations--including the Department of 
Defense--surveyed for the report have encountered counterfeit 
electronics.[Footnote 14] Commerce reported that the infiltration of 
counterfeit parts into the supply chain was exacerbated by weaknesses 
in inventory management, procurement procedures, and inspection 
protocols, among other factors. The Federal Aviation Administration 
(FAA) tracks and posts notifications of incidents of counterfeit or 
improperly maintained parts entering airline industry supply chains 
through its Suspected Unapproved Parts Program in an effort to improve 
flight safety. The FAA program has identified instances of counterfeit 
aviation parts, as well as fake data plates and history cards to make 
old parts look new. FAA's program highlights the risks that 
counterfeit parts pose to the safety of commercial aircraft. 

The U.S. Economy May Experience Slower Growth: 

The U.S. economy as a whole may grow at a slower pace than it 
otherwise would because of counterfeiting and piracy's effect on U.S. 
industries, government, and consumers. According to officials we 
interviewed and OECD's 2008 study, to the extent that companies 
experience a loss of revenues or incentives to invest in research and 
development for new products, slower economic growth could occur. IP-
related industries play an important role in the growth of the U.S. 
economy and contribute a significant percentage to the U.S. gross 
domestic product. IP-related industries also pay significantly higher 
wages than other industries and contribute to a higher standard of 
living in the United States. To the extent that counterfeiting and 
piracy reduce investments in research and development, these companies 
may hire fewer workers and may contribute less to U.S. economic 
growth, overall. The U.S. economy may also experience slower growth 
due to a decline in trade with countries where widespread 
counterfeiting hinders the activities of U.S. companies operating 
overseas. 

In addition to the industry effects, the U.S. economy, as a whole, 
also may experience effects of losses by consumers and government. An 
economy's gross domestic product could be measured as either the total 
expenditures by households (consumers), or as the total wages paid by 
the private sector (industry). Hence, the effect of counterfeiting and 
piracy on industry would affect consumers by reducing their wages, 
which could reduce consumption of goods and services and the gross 
domestic product. Finally, the government is also affected by the 
reduction of economic activity, since fewer taxes are collected. 

Certain Stakeholders May Experience Positive Economic Effects of 
Counterfeiting and Piracy: 

Some experts we interviewed and literature we reviewed identified 
potential positive economic effects of counterfeiting and piracy. Some 
consumers may knowingly purchase a counterfeit or pirated product 
because it is less expensive than the genuine good or because the 
genuine good is unavailable, and they may experience positive effects 
from such purchases. For example, consumers in the United States and 
other countries purchase counterfeit copies of high-priced luxury- 
branded fashion goods at low prices, although the products' packaging 
and sales venues make it apparent they are not genuine. Consumers may 
purchase movies that have yet to be released in theaters and are 
unavailable in legitimate form. Lower-priced counterfeit goods may 
exert competitive pressure to lower prices for legitimate goods, which 
may benefit consumers. However, according to the OECD, the longer-term 
impact for consumers of falling prices for legitimate goods is 
unclear, as these changes may affect the speed of innovation. 

There are also certain instances when IP rights holders in some 
industries might experience potentially positive effects from the 
knowing consumption of pirated or counterfeit goods. For example, 
consumers may use pirated goods to "sample" music, movies, software, 
or electronic games before purchasing legitimate copies, which may 
lead to increased sales of legitimate goods. In addition, industries 
with products that are characterized by large "switching costs," may 
also benefit from piracy due to lock-in effects. For example, some 
experts we spoke with and literature we reviewed discussed how 
consumers after being introduced to the pirated version might get 
locked into new legitimate software because of large switching costs, 
such as a steep learning curve, reluctance to switch to new products, 
and search costs incurred by consumers to identify a new product to 
use. 

Some authors have argued that companies that experience revenue losses 
in one line of business--such as movies--may also increase revenues in 
related or complementary businesses due to increased brand awareness. 
For instance, companies may experience increased revenues due to the 
sales of merchandise that are based on movie characters whose 
popularity is enhanced by sales of pirated movies. One expert also 
observed that some industries may experience an increase in demand for 
their products because of piracy in other industries. This expert 
identified Internet infrastructure manufacturers (e.g., companies that 
make routers) as possible beneficiaries of digital piracy, because of 
the bandwidth demands related to the transfer of pirated digital 
content. While competitive pressure to keep one step ahead of 
counterfeiters may spur innovation in some cases, some of this 
innovation may be oriented toward anticounterfeiting and antipiracy 
efforts, rather than enhancing the product for consumers. 

Lack of Data Hinders Efforts to Quantify Impacts of Counterfeiting and 
Piracy: 

According to experts we spoke with and literature we reviewed, 
estimating the economic impact of IP infringements is extremely 
difficult, and assumptions must be used due to the absence of data. 
Assumptions, such as the rate at which consumers would substitute 
counterfeit goods for legitimate products, can have enormous impacts 
on the resulting estimates and heighten the importance of 
transparency. Because of the significant differences in types of 
counterfeit and pirated goods and industries involved, no single 
method can be used to develop estimates, and each method has 
limitations. Nonetheless, research in specific industries suggest that 
the problem is sizeable. Most experts we spoke with and the literature 
we reviewed observed that despite significant efforts, it is 
difficult, if not impossible, to quantify the net effect of 
counterfeiting and piracy on the economy as a whole. 

Lack of Data Is the Primary Challenge for Quantifying Economic Impacts 
of Counterfeiting and Piracy: 

Quantifying the economic impact of counterfeit and pirated goods on 
the U.S. economy is challenging primarily because of the lack of 
available data on the extent and value of counterfeit trade. 
Counterfeiting and piracy are illicit activities, which makes data on 
them inherently difficult to obtain. In discussing their own effort to 
develop a global estimate on the scale of counterfeit trade, OECD 
officials told us that obtaining reliable data is the most important 
and difficult part of any attempt to quantify the economic impact of 
counterfeiting and piracy. OECD's 2008 report, The Economic Impact of 
Counterfeiting and Piracy, further states that available information 
on the scope and magnitude of counterfeiting and piracy provides only 
a crude indication of how widespread they may be, and that neither 
governments nor industry were able to provide solid assessments of 
their respective situations. The report stated that one of the key 
problems is that data have not been systematically collected or 
evaluated and, in many cases, assessments "rely excessively on 
fragmentary and anecdotal information; where data are lacking, 
unsubstantiated opinions are often treated as facts." 

In cases in which data on counterfeits are collected by federal 
agencies, such as CBP or FAA, it is difficult to know how complete the 
data are. For example, it is difficult to determine whether CBP's 
annual seizure data in table 1 reflect the extent and types of 
counterfeits entering the United States in any given year, the 
counterfeit products that were detected, or the level of federal 
border enforcement effort expended. FAA's notifications on counterfeit 
parts through its Suspect Unapproved Parts Program rely, in part, on 
reported incidents or complaints from members of the aviation 
community. 

Commerce and FBI officials told us they rely on industry statistics on 
counterfeit and pirated goods and do not conduct any original data 
gathering to assess the economic impact of counterfeit and pirated 
goods on the U.S. economy or domestic industries. However, according 
to experts and government officials, industry associations do not 
always disclose their proprietary data sources and methods, making it 
difficult to verify their estimates. Industries collect this 
information to address counterfeiting problems associated with their 
products and may be reluctant to discuss instances of counterfeiting 
because consumers might lose confidence. OECD officials, for example, 
told us that one reason some industry representatives were hesitant to 
participate in their study was that they did not want information to 
be widely released about the scale of the counterfeiting problem in 
their sectors. 

Assumptions Are Used to Compensate for the Lack of Data: 

Because of the lack of data on illicit trade, methods for calculating 
estimates of economic losses must involve certain assumptions, and the 
resulting economic loss estimates are highly sensitive to the 
assumptions used. Two experts told us that the selection and weighting 
of these assumptions and variables are critical to the results of 
counterfeit estimates, and the assumptions should, therefore, be 
identified and evaluated. Transparency in how these estimates are 
developed is essential for assessing the usefulness of an estimate. 
Two key assumptions that typically are required in calculating a loss 
estimate from counterfeit goods include the substitution rate used by 
consumers and the value of counterfeit goods. 

* Substitution rate. The assumed rate at which a consumer is willing 
to switch from purchasing a fake good to the genuine product is a key 
assumption that can have a critical impact on the results of an 
economic loss estimate. For example, if a consumer pays the full 
retail price for a fake movie thinking that it is the genuine good, an 
assumption can be made that a legitimate copy would have been bought 
in the absence of the fake product, representing a one-to-one 
substitution rate. However, this one-to-one substitution rate requires 
three important conditions: (1) the fake good is almost identical in 
quality to the genuine one; (2) the consumer is paying full retail 
price for the fake product; and (3) the consumer is not aware he is 
purchasing a counterfeit product. When some of these conditions are 
not met (e.g., the consumer paid a significantly lower price for the 
counterfeit), the likelihood that the consumer would have purchased 
the genuine product at full price is not clear. Substitution rates 
also vary by industry, since factors such as product quality, 
distribution channels, and information available about the product can 
differ significantly. 

* Value of fake goods. Valuation of the fake goods constitutes another 
set of assumptions that has a significant impact. There are several 
measures of value that can be used, such as the production cost, the 
domestic value, or the manufacturer's suggested retail price. For 
example, CBP announced in a January 2010 press release that it had 
seized 252,968 DVDs with counterfeit trademarks. The agency reported 
that the manufacturer's suggested retail price of the shipment was 
estimated to be more than $7.1 million and the domestic value was 
estimated at $204,904. Officials from the International Trade 
Commission stated that counterfeits are very difficult to price and 
estimates of economic impact would benefit from including a range of 
prices, from the spot price of the fake on the street corner at the 
bottom to the manufacturer's suggested retail price at the top. 

The level or extent of deception that consumers face is also an 
important factor to consider when developing assumptions for the 
substitution rate and value of the fake goods. If a consumer is 
completely deceived, it could be reasonable to assume a one-to-one 
substitution rate (i.e., the purchase of a legitimate good in lieu of 
the counterfeit one) and a full retail price (i.e., the manufacturer's 
suggested retail sales price). Price, packaging, and location of the 
transaction are the most important signs to the consumer indicating 
the legitimacy of a good. Many of the experts we interviewed said that 
a one-to-one substitution rate is not likely to exist in most 
circumstances where counterfeit goods are significantly cheaper than 
the legitimate goods. Some experts also noted that the level of 
consumer deception varies across industries. For example, consumers 
who purchase counterfeit pharmaceuticals are more likely to be 
deceived, particularly when the counterfeit good is sold through the 
same distribution channel as the genuine product. Some experts 
observed that few, if any, consumers would willingly purchase a 
pharmaceutical product they knew might be counterfeit.[Footnote 15] 
However, the extent of deception among consumers of audiovisual 
products is likely lower because sales venues for counterfeit 
audiovisual goods tend to be separate from the legitimate ones. Unless 
the assumptions about substitution rates and valuations of counterfeit 
goods are transparently explained, experts observed that it is 
difficult, if not impossible, to assess the reasonableness of the 
resulting estimate. 

Three Widely Cited Estimates Sourced to U.S. Agencies Cannot Be 
Substantiated: 

Three commonly cited estimates of U.S. industry losses due to 
counterfeiting have been sourced to U.S. agencies, but cannot be 
substantiated or traced back to an underlying data source or 
methodology. First, a number of industry, media, and government 
publications have cited an FBI estimate that U.S. businesses lose $200-
$250 billion to counterfeiting on an annual basis. This estimate was 
contained in a 2002 FBI press release, but FBI officials told us that 
it has no record of source data or methodology for generating the 
estimate and that it cannot be corroborated. Second, a 2002 CBP press 
release contained an estimate that U.S. businesses and industries lose 
$200 billion a year in revenue and 750,000 jobs due to counterfeits of 
merchandise. However, a CBP official stated that these figures are of 
uncertain origin, have been discredited, and are no longer used by 
CBP. A March 2009 CBP internal memo was circulated to inform staff not 
to use the figures. However, another entity within DHS continues to 
use them. Third, the Motor and Equipment Manufacturers Association 
reported an estimate that the U.S. automotive parts industry has lost 
$3 billion in sales due to counterfeit goods and attributed the figure 
to the Federal Trade Commission (FTC). The OECD has also referenced 
this estimate in its report on counterfeiting and piracy, citing the 
association report that is sourced to the FTC. However, when we 
contacted FTC officials to substantiate the estimate, they were unable 
to locate any record or source of this estimate within its reports or 
archives, and officials could not recall the agency ever developing or 
using this estimate. These estimates attributed to FBI, CBP, and FTC 
continue to be referenced by various industry and government sources 
as evidence of the significance of the counterfeiting and piracy 
problem to the U.S. economy. 

No Single Approach for Quantifying Impacts of Counterfeiting and 
Piracy Can Be Used, but Different Studies Indicate Problem Is Sizeable: 

There is no single methodology to collect and analyze data that can be 
applied across industries to estimate the effects of counterfeiting 
and piracy on the U.S. economy or industry sectors. The nature of data 
collection, the substitution rate, value of goods, and level of 
deception are not the same across industries. Due to these challenges 
and the lack of data, researchers have developed different 
methodologies. In addition, some experts we interviewed noted the 
methodological and data challenges they face when the nature of the 
problem has changed substantially over time. Some commented that they 
have not updated earlier estimates or were required to change 
methodologies for these reasons. Nonetheless, the studies and experts 
we spoke with suggested that counterfeiting and piracy is a sizeable 
problem, which affects consumer behavior and firms' incentives to 
innovate. The most commonly used methods to collect and analyze data, 
based on our literature review and interviews with experts, are 
presented below. 

Extrapolation of Enforcement Seizure Data: 

Seizure data from CBP is one of the few types of hard data sources 
available and is often used to extrapolate the level of counterfeit 
and pirated trade. This approach provides hard evidence of the minimum 
quantity of counterfeit goods, but a major limitation is that levels 
of border enforcement efforts can vary. For example, in our study of 
seizures made by the CBP field offices, we calculated "seizure rates" 
for the top 25 U.S. ports, based on the dollar value of IP seizures at 
each port compared to the dollar value of IP-related imports there. 
These ports accounted for over 75 percent of the value of all IP- 
related imports into the United States in fiscal year 2005.[Footnote 
16] We found that the top 3 ports seized over 100 times more IP 
counterfeits than the lowest 5 of these ports per dollar of IP-related 
imports. As a result, it appears that the importance of IP enforcement 
and the skill of the personnel at the ports have significant impact on 
the level of seizures. This suggests that seizure data might be useful 
as a floor, but are not indicative of the actual level of U.S. imports 
of counterfeit goods. 

A study conducted by the Los Angeles County Economic Development 
Corporation, A False Bargain: The Los Angeles County Economic 
Consequences of Counterfeit Products,[Footnote 17] used extrapolation 
of seizure data as one of its three approaches to estimate the 
economic impact of counterfeits.[Footnote 18] he authors noted that 
the key variable in extrapolating seizure data from CBP was to 
determine CBP's success rate in interdicting illegal goods, which they 
acknowledged was "unknowable." One of the study's estimates that used 
CBP seizures to extrapolate the value of counterfeit and pirated goods 
in Los Angeles County calculated a range between $1 billion and $4.6 
billion in 2005. This range was based on different assumptions used 
for seizure rates and other variables. 

Another challenge when extrapolating seizure data is determining the 
dollar value to assign to the seized good, which can have a 
significant impact on the magnitude of the estimates. For example, in 
2009, CBP seized a shipment of counterfeit sunglasses from China and 
reported an estimated total domestic value at $12,146 and a 
manufacturer's suggested retail price at $7.9 million. 

Surveys of Supply and Demand: 

Researchers have conducted surveys to gather data on the consumption 
or sales patterns of counterfeit or pirated goods. The main advantage 
of this method is that it can also show consumers' behavior in terms 
of their preferences. For example, a survey could collect information 
on the consumer's willingness to pay for a counterfeit good; the 
number of counterfeit units purchased in a determined period of time; 
the minimum expected quality; the necessary price reduction of the 
legitimate good to avoid the consumer's purchase of the counterfeit 
good; the knowledge of sanctions if caught purchasing the counterfeit 
good; and the knowledge of potential "side effects" due to the 
purchase of fake goods. However, a survey can be a labor-intensive 
project and can cost in the millions of dollars. Moreover, one expert 
stated that the bias in surveys is hard to identify. For example, he 
commented that students, who are often the subjects in surveys of 
illegal file sharing, may either not admit that they are engaging in 
illegal activity, or may admit to such behavior because it may be 
popular for this demographic. 

The Business Software Alliance publishes piracy estimates based on a 
set of annual surveys it conducts in different countries.[Footnote 19] 
Based on its survey results, the industry association estimated the 
U.S. piracy rate at 20 percent for business software, carrying a loss 
of $9 billion in 2008. This study defined piracy as the difference 
between total installed software and legitimate software sold, and its 
scope involved only packaged physical software. While this study has 
an enviable data set on industries and consumers located around the 
world from its country surveys, it uses assumptions that have raised 
concerns among experts we interviewed, including the assumption of a 
one-to-one rate of substitution and questions on how the results from 
the surveyed countries are extrapolated to nonsurveyed countries. 

Another example of the use of surveys is the study by the Motion 
Picture Association, which relied on a consumer survey conducted in 
several countries.[Footnote 20] This study found that U.S. motion 
picture studios lost $6.1 billion to piracy in 2005. It is difficult, 
based on the information provided in the study, to determine how the 
authors handled key assumptions such as substitution rates and 
extrapolation from the survey sample to the broader population. 

In a smaller-scale example of a survey method, Rob and Waldfogel 
[Footnote 21] surveyed students in American universities during parts 
of 2003 and 2004, asking not only about the amount of music albums 
they purchased and illegally downloaded, but also the titles and their 
valuation for the albums they purchased and illegally downloaded. 
Their main findings are: (1) downloading reduces legitimate purchases 
by individuals by 20 percent in the sample, that is, every five music 
downloads substitute one legitimate purchase; (2) on average, 
respondents downloaded music that they valued one-third to one-half 
less than their legitimately purchased music, suggesting that some of 
the music that was downloaded would never have been purchased as an 
album; and (3) while downloading reduces per capita expenditures by 
$25, it raises per capita consumers' surplus by $70. The study 
indicated that downloading illegal music can have a positive effect on 
total consumer welfare. However, as explained by the authors, this 
experiment cannot be generalized; the data consist of a snapshot of 
undergraduate students' responses, which is not representative of the 
general population. 

As previously discussed, Commerce recently conducted a survey of 387 
companies and organizations participating in U.S. defense and 
industrial supply chains and reported that almost 40 percent of them 
encountered counterfeit products between 2005 and 2008.[Footnote 22] 
The report focused on basic electronic parts and components, including 
microcircuits and circuit boards, throughout the entire electronics 
industrial base in the United States. The report noted that these 
parts are key elements of electronic systems that support national 
security missions and control essential commercial and industrial 
operations. Information provided by these companies and organizations 
also demonstrated an increase in the number of reported counterfeit 
incidents from 3,868 in 2005 to 9,356 in 2008. Some of these 
counterfeit incidents could include DOD-qualified parts and components. 

Use of Economic Multipliers to Estimate Effects on the U.S. Economy: 

Economic multipliers show how capital changes in one industry affect 
output and employment of associated industries. Commerce's Bureau of 
Economic Analysis guidelines make regional multipliers available 
through its Regional Input-Output Modeling System (RIMS II). These 
multipliers estimate the extent to which a one-time or sustained 
change in economic activity will be attributed to specific industries 
in a region[Footnote 23]. Multipliers can provide an illustration of 
the possible "induced" effects from a one-time change in final demand. 
For example, if a new facility is to be created with a determined 
investment amount, one can estimate how many new jobs can be created, 
as well as the benefit to the region in terms of output (e.g., extra 
construction, manufacturing, supplies, and other products needed). It 
must be noted that RIMS II multipliers assume no job immigration or 
substitution effect. That is, if new jobs are created as a result of 
investing more capital, those jobs would not be filled by the labor 
force from another industry. 

In the case of estimating the effect of counterfeiting and piracy, 
RIMS II economic multipliers are applied to U.S. industry loss 
figures, which have been derived from other studies, and used to 
calculate the harm on employment and output due to reduced 
investments. Using the RIMS II multipliers in this setting does not 
take into account the two-fold effect: (1) in the case that the 
counterfeit good has similar quality to the original, consumers have 
extra disposable income from purchasing a less expensive good, and (2) 
the extra disposable income goes back to the U.S. economy, as 
consumers can spend it on other goods and services. 

Most of the experts we interviewed were reluctant to use economic 
multipliers to calculate losses from counterfeiting because this 
methodology was developed to look at a one-time change in output and 
employment. Nonetheless, the use of this methodology corroborates that 
the effect of counterfeiting and piracy goes beyond the infringed 
industry. For example, when pirated movies are sold, it damages not 
only the motion picture industry, but all other industries linked to 
those sales. 

The Institute of Policy Innovation has commissioned three studies in 
the audiovisual industries using economic multipliers; the most 
expansive of the studies covers motion pictures, sound recordings, 
business and entertainment software, and video games for the year 
2005. Footnote 24] This study found that losses in the U.S. economy 
due to piracy accounted for $58 billion in output, over 370,000 jobs, 
and $2.6 billion in tax revenue. It was calculated by taking industry 
estimates of loss revenue and applying the RIMS II multipliers to 
these figures.[Footnote 25] 

Other Data Collection and Modeling Methods: 

Several additional studies that we reviewed provided alternative data 
collection and modeling techniques to quantify the effect of 
counterfeiting on a specific industry or, in the case of the OECD, on 
world trade. The OECD, for example, adopted an approach of combining 
different methodologies to develop a single estimate. The OECD 
triangulated a combination of data sets: extrapolating seizure data 
provided by national customs authorities, comparing the seizure data 
to international trade data, and using these data in an econometric 
model. The seizure data were used to develop a model that would 
measure the magnitude of global counterfeit trade. 

The OECD estimated that the magnitude of counterfeit and pirated goods 
in international trade could have accounted for up to $200 billion in 
2005, and later updated this estimate to $250 billion based on 2005- 
2007 world trade data.[Footnote 26],[Footnote 27] As noted by the 
OECD, most of the international trade data were supplied by national 
governments and relevant industries, and the OECD did not 
independently assess the reliability of the figures. Its methodology 
is based on matching, to the best of its knowledge, the industry data 
with customs seizure data from the OECD members, acknowledging the 
limitations of working with customs seizure data. OECD heavily 
qualified this estimate, however, reporting that "the overall degree 
to which products are being counterfeited and pirated is unknown and 
there do not appear to be any methodologies that could be employed to 
develop an acceptable overall estimate." A second phase of the OECD 
project covered digital piracy, but did not attempt to quantify the 
effects. 

In a more narrowly focused study on downloads of music, Oberholzer-Gee 
and Strumpf[Footnote 28] used modeling to determine that illegal 
downloads have no effect on record sales. They concluded that, in 
contrast with industry estimates, declining sales over the period of 
2000-2002 were not primarily caused by illegal downloads. The results 
were found after compiling a data set of illegal downloads from a 
prominent server and testing the variation between illegal downloads 
and legal sales in the United States of specific albums on a weekly 
basis for 17 weeks in the second half of 2002. This was done by 
modeling album sales as a function of the quantity of album downloads 
and other album specific characteristics. While this is an enviable 
data set of actual illegal downloads, the study has two main 
limitations: first, the study uses a static model which does not 
reflect the effect of downloads apart from the week the download 
occurred. Second, the study only observed the supply side of music. 
Thus, it is not clear if consumers who are illegally downloading music 
would have purchased the genuine albums. 

Hui and Png's[Footnote 29] study provided another example that used 
modeling. This study estimated that piracy in the music industry 
caused revenue losses of 6.6 percent in 1998. The authors stated that 
their estimate is significantly less than the industry loss estimate. 
In particular, for the year 1998 in the United States, legitimate 
sales of CDs were 3.73 CDs per capita, and the average loss in sales 
per capita due to piracy was 0.044 CDs. The data set included CD 
prices, music CD demand, piracy level and country-specific 
characteristics for 28 countries, mostly provided by the International 
Federation of the Phonographic Industry.[Footnote 30] The main 
limitation for this study was that it only covered physical piracy. 
While digital piracy was not a major concern during the time period 
sampled, it has become so for at least the last decade due to the 
Internet. Another limitation is that the study used piracy rates that 
assumed a one-to-one substitution rate, including those used by the 
Business Software Alliance. 

Many experts we interviewed also agreed that general or partial 
equilibrium models would offer useful insights if the input data 
existed. These involve modeling the supply and demand of a good and 
simulating the effect of how counterfeiting affects the market for 
that good (in the case of a partial model) and the economy as a whole 
(for a general equilibrium model). The approach allows a systematic 
analysis of the problem, but depends on the quality of the data used 
to develop the models. The benefit of an equilibrium model is that 
assumptions can be tested based on the results obtained and modified 
if the results fall outside of established parameters. Experts agreed 
on the potential benefits of this approach, but recognized that data 
limitations make it currently close to impossible to implement. 
Officials from the International Trade Commission and other industry 
experts said that this would be their preferred approach to think of 
the problem in question, but they also acknowledged that data 
reliability is a major concern, as with the other methodologies. 

"Rule of Thumb" for Measuring Counterfeit Trade as a Proportion of 
World Trade: 

According to experts we interviewed and the literature we reviewed, 
there is no evidence to support a "rule of thumb" that measures 
counterfeit trade as a proportion of world trade to estimate the 
amount of counterfeit trade that occurs in a local economy. The 
advantage of finding a so-called "rule of thumb" for counterfeit trade 
is that it can be applied generally and does not try to take into 
consideration the different rates of counterfeiting and piracy for 
each of the different industry sectors. However, as noted earlier, 
piracy rates differ enormously across industries, so it is not 
possible to generalize findings. Moreover, not all goods from world 
trade can be counterfeited or pirated. 

The most commonly cited "rule of thumb" is that counterfeit trade 
accounts for 5 to 7 percent of world trade, which has been attributed 
to the International Chamber of Commerce. The Office of the 
Comptroller of the City of New York used this rule of thumb in its 
2004 study to estimate the total dollar exchange of counterfeit goods 
in the United States and in New York State.[Footnote 31] This study 
first applied a 6 percent rule (an average of 5 to 7 percent "rule of 
thumb") to the total value of world trade in 2003 ($7.6 trillion) to 
calculate the value of world trade that is made up of counterfeit 
goods, arriving at $456 billion.[Footnote 32] 

This rule of thumb was widely spread by a 1998 OECD report, although 
OECD and experts cautioned that this estimate was not verifiable and 
the source data were not independently calculated. In its 2008 report, 
The Economic Impact of Counterfeiting and Piracy, the OECD commented 
that the "metrics underlying the International Chamber of Commerce's 
estimates are not clear," nor is it clear what types of IP 
infringements are included in the estimate. In a 2009 update to the 
report, the OECD estimated the share of counterfeit and pirated goods 
in world trade as 1.95 percent in 2007, increasing from 1.85 percent 
in 2000. Many of the experts we interviewed also expressed skepticism 
over the estimate that counterfeit trade represents 5 to 7 percent of 
world trade. 

Economy-Wide Impact of Counterfeiting and Piracy Is Unknown: 

While experts and literature we reviewed provided different examples 
of effects on the U.S. economy, most observed that despite significant 
efforts, it is difficult, if not impossible, to quantify the net 
effect of counterfeiting and piracy on the economy as a whole. For 
example, as previously discussed, OECD attempted to develop an 
estimate of the economic impact of counterfeiting and concluded that 
an acceptable overall estimate of counterfeit goods could not be 
developed. OECD further stated that information that can be obtained, 
such as data on enforcement and information developed through surveys, 
"has significant limitations, however, and falls far short of what is 
needed to develop a robust overall estimate." One expert characterized 
the attempt to quantify the overall economic impact of counterfeiting 
as "fruitless," while another stated that any estimate is highly 
suspect since this is covert trade and the numbers are all 
"guesstimates." 

To determine the net effect, any positive effects of counterfeiting 
and piracy on the economy should be considered, as well as the 
negative effects. Experts held different views on the nature of 
potentially offsetting effects. While one expert we interviewed stated 
that he did not believe there were any positive effects on the economy 
due to counterfeiting and piracy, other experts stated that there were 
positive effects and they should be assessed as well. Few studies have 
been conducted on positive effects, and little is known about their 
impact on the economy. Although some literature and experts suggest 
that negative effects may be overstated, in general, literature and 
experts indicate the negative effects of counterfeiting and piracy on 
the U.S. economy outweigh the positive effects. Since there is an 
absence of data concerning these potential effects, the net effect 
cannot be determined with any certainty. 

The experts we interviewed also differed regarding the extent to which 
net effects of counterfeiting and piracy could be measured in certain 
parts of the economy. For example, one expert we spoke with has 
conducted research that found that employment numbers may be lost to 
the U.S. economy when copyright industries lose business due to 
piracy. Other experts we interviewed stated that, in their view, 
employment effects are unclear, because employment may decline in 
certain industries or rise in other industries as workers are hired to 
produce counterfeits. Another expert told us that effects of piracy 
within the United States are mainly redistributions within the economy 
for other purposes and that they should not be considered as a loss to 
the overall economy. He stated that "the money does not just vanish; 
it is used for other purposes." Other experts we spoke with focused 
more on the difficulties of aggregating the wide variety of effects on 
industries into a single assessment. 

We are sending copies of this report to interested congressional 
committees; the Secretaries of Commerce, Health and Human Services, 
and Homeland Security; the Attorney General; the Chairman of the 
International Trade Commission; the U.S. Trade Representative, and the 
Intellectual Property Enforcement Coordinator. This report will also 
be available at no charge on GAO's Web site at [hyperlink, 
http://www.gao.gov]. 

If you or your staffs have any questions about this report, please 
contact me at (202) 512-4347 or yagerl@gao.gov. Contact points for our 
Offices of Congressional Relations and Public Affairs may be found on 
the last page of this report. 

Signed by: 

Loren Yager: 
Director, International Affairs and Trade: 

[End of section] 

Appendix I: Objectives, Scope, and Methodology: 

The Prioritizing Resources and Organization for Intellectual Property 
Act of 2008 (PRO-IP Act) directed GAO to conduct a study on the 
quantification of the impacts of imported and domestic counterfeits on 
the U.S. manufacturing industry and the overall economy of the United 
States. After conducting initial research, we determined that the U.S. 
government did not systematically collect data and perform analysis on 
the impacts of counterfeiting and piracy on the U.S. economy, and 
concluded that it was not feasible to generate our own data or attempt 
to quantify the economic impact of counterfeiting or piracy on the 
U.S. economy based on the review of existing literature and interviews 
with experts. In addition, we noted that many of the existing studies 
and literature on economic effects address both counterfeiting and 
piracy. Based on discussions with staff from the House and Senate 
Judiciary Committees, we agreed that we would (1) examine existing 
research on the effects of counterfeiting and piracy on consumers, 
industries, government, and the U.S. economy; and (2) identify 
insights gained from efforts to quantify the effects of counterfeiting 
and piracy on the U.S. economy. To address both of these objectives, 
we interviewed officials and representatives from industry 
associations, nongovernmental organizations, academic institutions, 
and U.S. government agencies and the multilateral Organization for 
Economic Cooperation and Development (OECD). We also reviewed 
documents and studies quantifying or discussing the impacts of 
counterfeiting and piracy on the U.S. economy, industry, government, 
and consumers. 

Specifically, we reviewed quantitative and qualitative studies 
published since 1999 of the economic impact of intellectual property 
(IP) infringements to examine the range of impacts of counterfeiting 
and piracy on various stakeholders (both positive and negative) and to 
identify other insights about the nature of counterfeit markets, 
approaches to developing estimates, and the role IP plays in the U.S. 
economy. We identified these reports and studies through a literature 
search and discussions with representatives from industry 
associations, nongovernmental organizations, academic institutions, 
U.S. government agencies, and the OECD to obtain their views on the 
most relevant studies to review. Our literature review also included 
the OECD studies that examined the economic impact of counterfeiting 
and piracy. Although the OECD studies are global in scope rather than 
focused on the U.S. economy, their unique nature and prominence as the 
most comprehensive attempt to quantify the impacts of counterfeiting 
and piracy warranted their inclusion within our scope. See the 
bibliography for a partial list of references we consulted. We did not 
assess or evaluate the accuracy of quantitative estimates or other 
data found in these studies. We reviewed the studies primarily to 
obtain information on the range of effects from counterfeiting and 
piracy, different methods and assumptions used in determining effects, 
and insights gained from these efforts. In selecting studies for 
review, we sought to include a range of industries and methodologies. 
In some cases, we interviewed the authors of these reports to obtain 
additional information. 

We conducted structured interviews with subject matter experts to 
obtain their views on efforts to quantify the economic impacts of 
counterfeiting and piracy and methodological approaches, the range of 
impacts of counterfeits and piracy, and insights on counterfeiting 
activities and markets. We identified experts through a literature 
review and discussions with relevant government officials, industry 
and consumer representatives, academics, and other stakeholders. These 
subject matter experts were selected from a population of individuals 
from government, academia, industry, and professional organizations. 
More specifically, our criteria for selecting experts to interview 
included: 

* type and depth of experience, for instance, whether the expert had 
authored a widely referenced study or article on the topic, and 
whether the expert was referred to us by at least one other 
interviewee as someone knowledgeable about the topic; 

* relevance of published work to this engagement; 

* representation of a range of perspectives; 

* representation of relevant organizations and sectors including, 
where applicable, representatives from government, academia, industry, 
and professional organizations; and: 

* other subject matter experts' recommendations. 

[End of section] 

We developed a common list of structured interview questions that we 
asked of each of the experts. We pretested our questions with two of 
our initial respondents and refined our questions based on their 
input. The structured interviews included questions on definitions of 
counterfeit and pirated goods; effects of counterfeiting and piracy; 
and their views on methodologies and studies that quantify the effects 
of counterfeiting and piracy, as well as assumptions used. Individuals 
or organizations that we met with for these structured interviews are 
listed below: 

* Business Software Alliance (BSA): 

* Peggy Chaudhry, Villanova University: 

* International Trade Commission: 

* Joe Karaganis, Social Science Research Council: 

* Keith Maskus, University of Colorado: 

* OECD: 

* Felix Olberholzer-Gee, Harvard University: 

* Stephen Siwek, Economists Inc. 

* John Spink, Michigan State University: 

* Thorsten Staake, ETH Zurich, Department of Management, Technology, 
and Economics: 

[End of section] 

* Office of the U.S. Trade Representative: 

* Alan Zimmerman, City University of New York: 

We also met with representatives from other industry associations and 
other organizations outside of the structured interview process in 
order to gain more in-depth information and additional perspectives on 
both of our objectives. In addition, we interviewed U.S. agency 
officials and reviewed documents from the Departments of Justice, 
Homeland Security, Commerce, and Health and Human Services, the Office 
of the U.S. Trade Representative, and the International Trade 
Commission. U.S. agency documents that we reviewed included 
counterfeiting and piracy studies, press releases, and other 
documents. For background purposes, we updated CBP data on counterfeit 
seizures and costs to store and destroy seized counterfeit goods from 
our 2007 report, Intellectual Property: Better Data Analysis and 
Integration Could Help U.S. Customs and Border Protection Improve 
Border Enforcement Efforts (GAO-07-735). To assess the reliability of 
the seizure data, we reviewed our prior work that reported on seizure 
data, examined them for internal consistency, and discussed with CBP 
how the data are collected and reviewed. We found the data to be 
sufficiently reliable for background purposes of reporting trends in 
law enforcement seizures. We shared a copy of the draft report with 
officials from the Departments of Commerce, Justice, Homeland 
Security, Health and Human Services, the Office of the U.S. Trade 
Representative, the International Trade Commission, and the Office of 
the U.S. Intellectual Property Enforcement Coordinator to obtain 
technical comments. We received comments from the Departments of 
Homeland Security and Justice, and the Office of the U.S. Intellectual 
Property Enforcement Coordinator and made changes as appropriate. 

The PRO-IP Act also directed us to report on the nature and scope of 
IP statutory and case laws and the extent that they are being used to 
investigate and prosecute acts of trafficking and counterfeits. As 
agreed with Congressional committees, this part of the mandate was 
addressed by our 2008 report, Intellectual Property: Federal 
Enforcement Has Generally Increased, but Assessing Performance Could 
Strengthen Law Enforcement Efforts (GAO-08-157). 

We conducted our work from April 2009 to April 2010 in accordance with 
all sections of GAO's Quality Assurance Framework that are relevant to 
our objectives. The framework requires that we plan and perform the 
engagement to obtain sufficient and appropriate evidence to meet our 
stated objectives and to discuss any limitations to our work. We 
believe that the information and data obtained, and the analysis 
conducted, provide a reasonable basis for any findings and conclusions 
in this product. 

[End of section] 

Appendix II: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Loren Yager, (202) 512-4347 or yagerl@gao.gov: 

Staff Acknowledgments: 

In addition to the contact named above, Christine Broderick, Assistant 
Director; Jeremy Latimer; Catherine Gelb; Pedro Almoguera; Shirley 
Brothwell; Karen Deans; Matthew Jones; and Diahanna Post made key 
contributions to this report. In addition Virginia Chanley and Ernie 
Jackson provided technical assistance. 

[End of section] 

Bibliography: 

Studies and Literature on the Nature of Counterfeiting and Piracy and 
Their Economic Effects: 

Studies and Government Estimates We Reviewed that Quantify Economic 
Impacts on the U.S. Economy or Industry Sectors: 

Business Software Alliance (BSA), Sixth Annual BSA-IDC Global Software 
08 Piracy Study, Washington, D.C.: BSA, May 2009. 

Customs and Border Protection. Press Release, May 29, 2002, 
Washington, D.C.: May 2002, [hyperlink, 
http://www.cbp.gov/xp/cgov/newsroom/news_releases/archives/legacy/2002/5
2002/05292002.xml] (accessed April 4, 2009). 

Federal Bureau of Investigation. Press Release, July 17, 2002, 
Washington, D.C.: July 2002, [hyperlink, 
http://www.fbi.gov/pressrel/pressrel02/outreach071702.htm] (accessed 
March 30, 2010). 

Freeman, Gregory, Nancy D. Sidhu, and Michael Montoya, A False 
Bargain: The Los Angeles County Economic Consequences of Counterfeit 
Products. Los Angeles, Calif.: Los Angeles County Economic Development 
Corporation, February 2007. 

Hui, Kai-Lung and Ivan Png, "Piracy and the Legitimate Demand for 
Recorded Music," Contributions to Economic Analysis & Policy, vol. 2, 
issue 1, article 11 (2003). 

International Chamber of Commerce, Counterfeiting Intelligence Bureau, 
London: 2010. [hyperlink, http://www.icc-
ccs.org/index.php?option=com_content&view=article&id=29&Itemid=39] 
(accessed March 30, 2010). 

L.E.K. Consulting, The Cost of Movie Piracy, sponsored by the Motion 
Picture Association, 2006. 

Motor & Equipment Manufacturers Association (MEMA), Stop 
Counterfeiting of Automotive and Truck Parts. MEMA, 2005. 

Oberholzer-Gee, Felix and Koleman Strumpf, "The Effect of File Sharing 
on Record Sales: An Empirical Analysis," Journal of Political Economy, 
vol. 115, no. 1, 2007. 

Organisation for Economic Cooperation and Development (OECD), The 
Economic Impact of Counterfeiting and Piracy. Paris: OECD, 2008. 

OECD, Magnitude of Counterfeiting and Piracy of Tangible Products: An 
Update, Paris: OECD, November 2009. 

OECD, Piracy of Digital Content. Paris: OECD, 2009. 

Rob, Rafael and Joel Waldfogel, "Piracy on the High C's: Music 
Downloading, Sales Displacement, and Social welfare in a Sample of 
College Students," Journal of Law and Economics, vol. XLIX, (April 
2006). 

Siwek, Stephen E., The True Cost of Copyright Industry Piracy to the 
U.S. Economy, Institute for Policy Innovation (IPI), IPI Center for 
Technology Freedom, Policy Report 189, (October 2007). 

Thompson, William C. Jr., Bootleg Billions: The Impact of the 
Counterfeit Goods Trade on New York City, City of New York, Office of 
the Comptroller, November 2004. 

Other Literature We Reviewed: 

Baumol, William J. The Free Market Innovation Machine: Analyzing the 
Growth Miracle of Capitalism. Princeton and Oxford: Princeton 
University Press, 2002. 

Chaudhry, Peggy and Alan Zimmerman, The Economics of Counterfeit 
Trade: Governments, Consumers, Pirates, and Intellectual Property 
Rights. Berlin: Springer, 2009. 

Fink, Carsten and Carlos M. Correa, The Global Debate on the 
Enforcement of Intellectual Property Rights and Developing Countries. 
International Centre for Trade and Sustainable Development. Issue 
Paper No. 22, February 2009. 

Forzley, Michele, Counterfeit Goods and the Public's Health and 
Safety. International Intellectual Property Institute, 2003. 

Horan, Amanda, Christopher Johnson, and Heather Sykes, Foreign 
Infringement of Intellectual Property Rights: Implications for 
Selected U.S. Industries. No. ID-14, U.S. International Trade 
Commission, Office of Industries Working Paper, October 2005. 

Mansfield, Edwin, Industrial Research and Technological Innovation. 
New York, N.Y.: W.W. Norton, 1968. 

RAND Corporation, Film Piracy, Organized Crime, and Terrorism, RAND 
Safety and Justice Program and the Global Risk and Security Center, 
(Santa Monica, Calif., 2009). 

Rosenberg, Nathan, Exploring the Black Box: Technology, Economics, and 
History, Cambridge, United Kingdom: Cambridge University Press, 1994. 

Schumpeter, J.A. Business Cycles: A Theoretical, Historical and 
Statistical Analysis of the Capitalist Process, New York: McGraw-Hill, 
1939. 

Siwek, Stephen E., Engines of Economic Growth: Economic Contributions 
of the US Intellectual Property Industries. Washington, D.C.: 
Economists Incorporated, 2005. 

Staake, Thorsten, Frederic Thiesse and Elgar Fleisch, "The Emergence 
of Counterfeit Trade: A Literature Review," European Journal of 
Marketing, Vol. 43 No. 3/4, (2009). 

Staake, Thorsten and Elgar Fleisch, Countering Counterfeit Trade: 
Illicit Market Insights, Best-Practice Strategies, and Management 
Toolbox. Berlin: Springer, 2008. 

U.S. Department of Commerce, Bureau of Industry and Security, Office 
of Technology Evaluation. Defense Industrial Base Assessment: 
Counterfeit Electronics. Washington, D.C., January 2010. 

U.S. Department of Commerce, Bureau of Economic Analysis and Economics 
and Statistics Administration, Regional Multipliers. A User Handbook 
for the Regional Input-Output Modeling System (RIMS II) 3rd ed., 
Washington, D.C.: 1997. 

[End of section] 

Footnotes: 

[1] The PRO-IP Act also directed GAO to report on the nature and scope 
of IP statutory and case laws and the extent that they are being used 
to investigate and prosecute acts of trafficking and counterfeits. As 
agreed with congressional committees, this part of the mandate was 
addressed by GAO's report, Intellectual Property: Federal Enforcement 
Has Generally Increased, but Assessing Performance Could Strengthen 
Law Enforcement Efforts, [hyperlink, 
http://www.gao.gov/products/GAO-08-157] (Washington, D.C.: Mar. 11, 
2008). 

[2] See the Bibliography for a list of studies and estimates that we 
reviewed. 

[3] Organisation for Economic Cooperation and Development (OECD), The 
Economic Impact of Counterfeiting and Piracy. Paris: OECD, 2008. 

[4] Participants in the Central America Free Trade Agreement are Costa 
Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, 
Nicaragua, and the United States. 

[5] The United States also has signed free trade agreements with 
Colombia, Korea, and Panama, but Congress must enact legislation to 
approve and implement each individual agreement in order for them to 
go into effect. Prior to 2000, two other free trade agreements had 
entered into force: the U.S.-Israel Free Trade Agreement (entered into 
force in 1985) and the North American Free Trade Agreement between 
Canada, Mexico, and the United States (entered into force in 1994). 

[6] For example, these protections include adherence to new World 
Intellectual Property Organization Internet treaties, a longer minimum 
time period for copyright protection, additional penalties for 
circumventing technological measures controlling access to copyrighted 
materials, transparent procedures for protection of trademarks, 
stronger protection for well-known marks, patent protection for plants 
and animals, protection against arbitrary revocation of patents, new 
provisions dealing with domain name disputes, and increased 
enforcement measures. 

[7] William J. Baumol, The Free-Market Innovation Machine: Analyzing 
the Growth Miracle of Capitalism. (Princeton, N.J.: Princeton 
University Press, 2002). 

[8] Edwin Mansfield, Industrial Research and Technological Innovation. 
(New York, N.Y.: W.W. Norton, 1968); Nathan Rosenberg, Exploring the 
Black Box: Technology, Economics, and History. (Cambridge, United 
Kingdom: Cambridge University Press, 1994); J. Schumpeter, Business 
Cycles, A Theoretical and Statistical Analysis of the Capitalist 
Process. (New York, N.Y.: McGraw-Hill, 1939). 

[9] In addition to copyrights, trademarks, and patents, two other IP 
protections are trade secrets and geographical indications. Trade 
secrets are defined as any type of valuable information, including a 
formula, pattern, compilation, program device, method, technique, or 
process that gains commercial value from not being generally known or 
readily obtainable; and for which the owner has made reasonable 
efforts to keep secret. Geographical indications are defined as 
indications that identify a good as originating in a country, region, 
or locality, where a given quality, reputation, or other 
characteristic of the good is essentially attributable to its 
geographic origin. Definitions used in this report for the various 
types of IP are provided by the U.S. Patent and Trademark Office. 

[10] Counterfeit drugs under this definition may include products 
without the active ingredient, with an insufficient quantity of the 
active ingredient, with the wrong active ingredient, or with packaging 
that falsely suggests the drug was manufactured by an FDA-approved 
manufacturer. 

[11] CBP data represent seizures made by CBP or Immigration and 
Customs Enforcement. CBP measures IP activity two ways: number of 
seizure actions and estimated domestic value of goods seized. The 
number of goods in one seizure action can range from a few items 
shipped via international mail to hundreds of boxes in an ocean-going 
cargo container. Domestic value is calculated as the landed cost plus 
profit (the cost of the merchandise when last purchased, plus all 
duties, fees, broker's charges, profit, unlading charges, and U.S. 
freight charges to bring the good to the importer's premises), a value 
generally lower than the price at which the goods might sell to the 
final consumer. 

[12] For example, the FDA in recent years has found cases of a 
counterfeit HIV/AIDS drug that contained nonsterile tap water instead 
of an active ingredient; a fake schizophrenia medication that 
contained aspirin; a counterfeit influenza vaccine; and a misbranded 
cough suppressant that caused the death of five consumers. 

[13] RAND Corporation, Film Piracy, Organized Crime, and Terrorism, 
RAND Safety and Justice Program and the Global Risk and Security 
Center, (Santa Monica, Calif., 2009). 

[14] Commerce, Bureau of Industry and Security, Office of Technology 
Evaluation, Defense Industrial Base Assessment: Counterfeit 
Electronics (Washington, D.C., January 2010). 

[15] A FDA official told us that most of the fake pharmaceutical 
purchases were made through the Internet, where consumers were seeking 
drugs without prescription. 

[16] This method enabled us to perform a better comparison across 
ports by reducing the influence of non-IP-related imports, as well as 
eliminating the impact of the fact that some ports handle many times 
the volume of imports compared to other ports. For a more detailed 
explanation of U.S. custom seizure data and our analysis see GAO, 
Intellectual Property: Better Data Analysis and Integration Could Help 
U.S. Customs and Border Protection Improve Border Enforcement Efforts, 
[hyperlink, http://www.gao.gov/products/GAO-07-735] (Washington, D.C.: 
Apr. 26, 2007). 

[17] Gregory Freeman, Nancy D. Sidhu, and Michael Montoya, A False 
Bargain: The Los Angeles County Economic Consequences of Counterfeit 
Products. (Los Angeles, Calif.: Los Angeles County Economic 
Development Corporation, February 2007). 

[18] The authors used the extrapolation method in combination with two 
other methods as tests of reasonableness. 

[19] Business Software Alliance (BSA), Sixth Annual BSA-IDC Global 
Software 08 Piracy Study. (Washington, D.C.: BSA, May 2009). 

[20] L.E.K. Consulting, The Cost of Movie Piracy, sponsored by the 
Motion Picture Association, 2006. 

[21] Rafael Rob and Joel Waldfogel, Piracy on the High C's: Music 
Downloading, Sales Displacement, and Social Welfare in a Sample of 
College Students. Journal of Law and Economics, vol. XLIX, April 2006. 

[22] Commerce, Bureau of Industry and Security, Office of Technology 
Evaluation, Defense Industrial Base Assessment: Counterfeit 
Electronics (Washington, D.C., January 2010). 

[23] Commerce, Bureau of Economic Analysis and Economics and 
Statistics Administration, Regional Multipliers. A User Handbook for 
the Regional Input-Output Modeling System (RIMS II) 3rd ed., 
Washington, D.C.: 1997. 

[24] Stephen E. Siwek, The True Cost of Copyright Industry Piracy to 
the U.S. Economy, Institute for Policy Innovation (IPI), IPI Center 
for Technology Freedom, Policy Report 189, (October 2007). 

[25] In some cases, the author adjusted the industry estimates of loss 
revenue in order to make them comparable across industries. 

[26] The OECD estimate was limited to internationally traded hard 
goods and did not include digital piracy or counterfeit goods produced 
and consumed within the same country. 

[27] OECD, Magnitude of Counterfeiting and Piracy of Tangible 
Products: An Update, Paris: OECD, November 2009. 

[28] Felix Oberholzer-Gee and Koleman Strumpf, The Effect of File 
Sharing on Record Sales: An Empirical Analysis. Journal of Political 
Economy, vol. 115, no. 1, 2007. 

[29] Kai-Lung Hui and Ivan Png, Piracy and the Legitimate Demand for 
Recorded Music, Contributions to Economic Analysis & Policy, Volume 2 
Issue 1, Article 11, 2003. 

[30] The piracy rates used in the study were provided by the 
International Federation of the Phonographic Industry and Business 
Software Alliance for music cassettes and business computer software, 
respectively. 

[31] William C. Thompson, Jr., Bootleg Billions: The Impact of the 
Counterfeit Goods Trade on New York City, (New York City Office of the 
Comptroller, November 2004). 

[32] This study does not specify which industries are covered or 
whether it includes piracy, and does not explain the linear proportion 
between trade and counterfeiting for the world or the United States. 

[End of section] 

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