By many measures China is now the world’s largest market for luxury goods. At the same time, however, the Middle Kingdom remains the Knockoff Kingdom. The Chinese are great producers and consumers of counterfeit and copied goods, and efforts to curtail counterfeiting are a central focus of many Western firms and Western governments.
How did China become the world’s leader in luxury goods sales — a category that relies heavily on IP rights for its market value — while at the same time achieving unchallenged global dominance in “IP theft”? How can authentic luxury products, with their often-stratospheric prices, have such astonishing market success in China when knockoff versions are so easily produced and so widely available?
In this chapter we explore this paradox. We begin by describing China’s approach to IP and its thriving luxury goods market. We then examine China’s equally robust knockoff economy, and explore how copying and counterfeiting occur in China. Finally, we speculate about how the success in China of both legitimate branded luxury goods and counterfeits can be reconciled. In particular, we analyze the critical role played by brands and the complex chemistry that exists between genuine trademarked luxury goods and the fakes that imitate them. We argue that much of the harm assumed to flow from counterfeits is difficult to demonstrate empirically in the luxury goods sector, and there are good theoretical reasons to doubt its magnitude. Indeed, the conventional wisdom about the harm caused by counterfeits is more a matter of logical inference than empirical evidence. And there is some evidence, including evidence from China itself, that counterfeits can strengthen brands as well as undercut them. One inference to draw from all this is that copies and originals can coexist in China because they are not as intrinsically antagonistic as conventional wisdom suggests.
To be clear, we do not argue that counterfeits are harmless — only that the standard case against them is surprisingly weak. As a result, the case for public enforcement of trademark law to stem the tide of luxury goods counterfeits is also weak, and especially so in China. It is no surprise that the Chinese government’s anti-counterfeiting enforcement efforts have been relatively ineffective, and that piracy consequently thrives even as luxury goods sell in great numbers to China’s burgeoning wealthy classes. Regardless of whether (or how much) Chinese counterfeits harm luxury goods makers, from a Chinese perspective counterfeits have many virtues. China is a country where both the economy and income inequality are expanding rapidly, and where the growing gap between rich and poor contributes to social unrest that troubles the country’s leadership. In this context, a tolerance for counterfeits can serve important social and political goals, goals that may outweigh whatever harms may stem from counterfeits — especially considering that most of that harm, at present and for the foreseeable future, falls on foreign manufacturers.