Chapter 2. Imports of fakes to Sweden
Markets for fakes in Sweden
Before calculating the economic consequences of imports of counterfeit and pirated products in Sweden, the first step consists in quantifying the volume and the scope of these imports into Sweden. This analysis relies on a database of seized counterfeit and pirated products provided by customs (see Box 1.1 in Chapter 1).
Where do these goods come from?
Counterfeit and pirated products imported to Sweden between 2014 and 2016 came mainly from China and Hong Kong (China) representing respectively around 46% and 32% of the total value seized. They were followed by Thailand (12%), Turkey (5%) and Iraq (2%).
In terms of volume, the ranking of top provenance economies remains comparable to that of the value of fakes, with China and Hong Kong (China) ranking first and second.
Initially (i.e. between 2011 and 2013), the top four provenance economies for counterfeit imports in Sweden were already China, Hong Kong (China), Singapore and Turkey. Over time, these economies remained the most prominent provenances of fakes coming into Sweden. However, it is worth noting that Turkey moved back while Hong Kong (China) moved up in the ranking in terms of both seized value and customs seizures.
Which product types are most likely to be counterfeited?
Regarding infringed products categories, one can see that counterfeit products smuggled into Sweden are especially concentrated in a limited number of industries. Relating to both the number of customs seizures and the seized value, these include electrical machinery, footwear, leather goods, clothing and watches (see Figure 2.3).
Looking at specific products, a very wide range of counterfeit goods has been imported to Sweden. For example, for the general category “clothing”, fakes include dress shirts, sweat suits, t-shirts, jackets, jumpers, socks and sport jackets. The electrical machinery and equipment category includes seized goods such as earphones, mobile phone parts, batteries, chargers and TVs. Counterfeit belts, gloves, handbags, jackets and travel trolleys belong to the articles of leather category destined for the Swedish market.
Note: Figures in parenthesis are Harmonized System (HS) codes as defined by the United Nations Trade Statistics (UN Trade Statistics, 2017).
Concerning changes between 2011-13 and 2014-16, the top five product categories of counterfeit goods in Sweden remains composed the same way but changes have to be noted. In terms of seizures, the share of electrical machinery and watches increased in 2014-16 while the share of footwear, leather goods and clothing tended to decrease over this period (Figure 2.4).
Findings relating to seized value are very similar: the share of watches and information and communication technology (ICT) devices increased while the share of leather products and footwear decreased.
What are the conveyance methods used to ship fake Swedish imports?
In terms of their value, in 2014-16, counterfeit goods imported into Sweden were mainly transported by air (82% of the seized value), followed by sea (17%). This also means that 90% of customs actions involving seizures of Swedish fake imports were shipped by air, followed by sea (8%) and road (2%).
Regarding the size of shipments, around 57% of the seizures involved 10 or less items. More than 40% of seized goods were shipped in small packages which counted less than 6 items. These figures are in line with the worldwide trend since a majority (63%) of global customs seizures of counterfeit and pirated goods involved small parcels (OECD/EUIPO, 2018). The increasing use of small shipments is a mean for counterfeiters to reduce losses in the event of customs interception. It also reflects the sharp growth in e-commerce and particularly the increase in items shipped directly to consumers by parcel post or letter packets. (Figure 2.5).
What is the total value of counterfeit products sold in Sweden?
The best estimates, based on the data provided by customs authorities and on the GTRIC methodology, indicate that imports of counterfeit and pirated goods in Sweden accounted for as much as SEK 18.3 billion (USD 2.2 billion), the equivalent of 1.6% of Swedish imports of genuine goods. The term “as much as” is important since it refers to the upper limit of counterfeit and pirated products imported in Sweden. In addition, this amount does not include domestically produced and consumed counterfeit and pirated products and pirated digital products that are distributed via the Internet.
The analysis also shows that the degree of counterfeiting in Sweden varies across product categories. Watches and jewellery as well as toys and games were the most affected categories by counterfeiting. Indeed, 14.3% and 12.2% of goods imported to Sweden in these respective categories were fakes. This was followed by clothing (8.9%) and electronic appliances (5.9%). Categories relating to vehicles (0.2%) and machinery (0.9%) were affected by counterfeiting to a lesser extent.
In absolute terms, ICT devices are by far the most counterfeited types of goods (see Table 2.2 for the top categories). The estimated value of fake ICT devices imported into Sweden amounted SEK 10 billion (USD 1.2 billion) in 2016. This category includes a wide range of products such as phone batteries, chargers and earphones. The clothing category followed, whose value of fake goods imported into Sweden amounted to around SEK 4.6 billion (USD 550 million).
The high estimate value of fake ICT devices reflects the strong and growing demand for this kind of goods. In addition, ICT products are knowledge-intensive and protected with intellectual property, and consequently particularly subject to counterfeiting (see the OECD report on trade in counterfeit ICT goods, 2017).
The primary and secondary markets for counterfeit products sold in Sweden
The distinction between primary and secondary market is crucial for the analysis of the economic impacts of counterfeit products smuggled into Sweden. The primary market refers to the consumers that bought fakes unknowingly. On this primary market, every sale of a fake item represents a direct loss for the Swedish retail and wholesale industry. The secondary market refers to the consumers who buy fakes consciously. On this secondary market, only a share of consumers would have deliberately substituted their purchases of counterfeit products for genuine ones.
Table 2.3 identifies the share of secondary and consequently primary markets for counterfeit products sold in Sweden by sector. This shows that 49.8% of imported counterfeit and pirated products sold in Sweden in 2014-16 were sold to consumers who actually knew they were buying fake products while the remaining share purchased unwittingly. The share of fakes destined for secondary markets varies significantly by sector, ranging from 20% for vehicles to 57.8% for toys and games. Logically, consumers tend to buy fakes unknowingly for product categories with a potential high-security issue (i.e. vehicles and machinery).
Once the share of primary and secondary markets is identified, the next step is to calculate the consumer’s substitution rate on the secondary market, i.e. the extent to which every illegal purchase replaces a legal sale. Academic research on consumers’ socio-economic behaviour and consumers themselves are the two different sources to obtain information on substitution rates.
There are several studies that report estimates on consumers’ substitutions rates. The first one is the Anti-Counterfeiting Group’s (2007) consumer survey that looked at various product categories. It assessed a 39% substitution rate for clothing and footwear, meaning that every UDS 2.5 spent on fake clothes, accessories or footwear in secondary markets translates into USD 1 in lost sales for the retail and wholesale industry. The same survey determined the 49% substitution rate for products related to the perfumery and cosmetics sector and 27% for products belonging to the watch and jewellery industries. Another study on substitution rates was a survey by Tom et al. (1998) that determined the rate of 32% for all other fake products sold on secondary markets. All these substitution rates are displayed in Table 1.1.
To what extent are Swedish consumers overpaying for fake products?
For deceived Swedish consumers who purchased fakes on primary markets, counterfeit product smuggling may reduce the value or satisfaction they derive from the products concerned. This is based in large measure on differences from similarly priced products in terms of quality and/or performance. Such differences are likely to be noticed, for instance when a consumer buys a low-quality fake product on the primary market believing it to be a high-quality genuine article.
Of course, counterfeit products dramatically increase the potential for negative effects on the health and safety of consumers. However, the regulatory control of supply chains in Sweden is efficient and there were no major reported instances of fakes posing a potential threat to the supply chain of genuine goods. In addition, even if such damages occur, they cannot be simply quantified and so fall outside the scope of this report.
In 2016, the total detriment due to consumer deception amounted to almost SEK 4.5 billion (USD 540 million). The highest detriment was recorded for electrical appliances, electronic equipment (SEK 2.3 billion or USD 271 million) followed by clothing (SEK 1.3 billion or USD 159 million).
The effect of fake goods on sales in the Swedish retail and wholesale sector
Overall, the total volume of foregone sales in the Swedish wholesale and retail sector due to counterfeit imports in 2016 was SEK 4.3 billion (USD 521 million) equivalent to 1.5% of the total sales of the wholesale and retail sectors affected by counterfeiting.
In absolute terms, the highest sales losses to the Swedish wholesale and retail industries were for electrical household appliances, electronic and telecommunications equipment (SEK 2.3 billion or USD 275.4 million), followed by clothing, footwear, leather and related products (SEK 1.1 billion or USD 136.8 million), and machinery, industrial equipment, computers and peripheral equipment, ships and aircrafts (SEK 361.7 million or USD 43.4 million).
In relative terms, the sector of electrical household appliances, electronic and telecommunications equipment experienced the highest losses (6% of sales), followed by the sector of watches and jewellery (3.5%) and that of clothing, footwear, leather and related products (1.5%).
The effect of the counterfeiting market on jobs in the Swedish retail and wholesale industry
Total job losses in the wholesale and retail sector due to counterfeit imports into Sweden amounted to around 2 500 in 2016, equivalent to 1% of all people employed in the sectors affected by counterfeiting.
In absolute terms, the highest job losses due to counterfeiting were found in the electrical household appliances, electronic and telecommunications equipment sector (1 190 people). This was followed by the clothing and toys and games industries where job losses were experienced by 726 people and 245 people respectively.
In relative terms, the ICT devices industry experienced the highest job losses (around 4% of employees). It was followed by the watches and jewellery, and clothing industries where job losses represented 2.1% and 1.1% of their employees respectively.
The effect of the counterfeiting market on Swedish government revenues
Lower sales in the wholesale and retail sector due to counterfeit and pirated imports in Sweden mean lower tax revenues for the Swedish government from value-added tax (VAT), corporate income tax (CIT), personal income tax (PIT) and social security contributions.
Table 2.7 presents this foregone revenue by type of taxes, which amounted to SEK 1.8 billion (USD 222 million) in 2016. Within this overall figure, the largest component was foregone value-added taxes, amounting to around SEK 1 billion (USD 130 million).
References
Anti-Counterfeiting Group (2007), Consumer Survey, Commissioned from independent survey specialists, http://www.wipo.int/ip-outreach/en/tools/research/details.jsp?id=691.
OECD (2017), Trade in Counterfeit ICT Goods, OECD Publishing, Paris, http://oe.cd/fakeICTs.
OECD/EUIPO (2018), Misuse of Small Parcels for Trade in Counterfeit Goods: Facts and Trends, Illicit Trade, OECD Publishing, Paris, https://doi.org/10.1787/9789264307858-en.
Tom, G. et al. (1998), “Consumer demand for counterfeit goods”, Psychology & Marketing, Vol. 15/5, pp. 405-421.
UN Trade Statistics (2017), Harmonized Commodity Description and Coding Systems (HS), United Nations, Geneva, https://unstats.un.org/unsd/tradekb/Knowledgebase/50018/Harmonized-Commodity-Description-and-Coding-Systems-HS.