What are counterfeiting and piracy?
Counterfeiting and piracy are terms used to describe a range of illicit activities linked to intellectual property rights (IPR) infringement. Those are longstanding problems which are growing in scope and magnitude.

Quantitative analysis carried out by the OECD indicates that the volume of tangible counterfeit and pirated products in international trade could be up to USD 200 billion.
With a figure like this, sales of counterfeit goods world-wide exceed the GDP of approximately 150 States on the planet. This figure does not, however, include counterfeit and pirated products that are produced and consumed domestically, nor does it include the significant volume of pirated digital products that are being distributed via the Internet. If these items were added, the total magnitude of counterfeiting and piracy worldwide could well be several hundred billion dollars more.

In spite of all the efforts made up to now, counterfeiting and piracy are a plague that affects practically every economy on the planet and, what is more, they are expanding rapidly via various distribution channels that obviously include the Internet.

In 2006, all the records were smashed with more than 250 million counterfeit articles intercepted at European borders, compared with 75 million the previous year. The number of seizures also exploded, increasing from 26,000 to 37,000 from one financial year to the next.
Some see the rise in counterfeiting of goods as an inevitable product of globalization. As more and more companies, in an effort to increase profits, move manufacturing to the cheaper labor markets of the third world, areas with weaker labor laws or environmental regulations, they give the means of production to foreign workers. These new managers of production have little or no loyalty to the original corporation. They see that profits are being made by the global brand for doing little (other than advertising) and see the possibilities of removing the middle men (i.e. the parent corporation) and marketing directly to the consumer.
Most counterfeit goods are produced in China, making it the counterfeit capital of the world. Joining China is Korea and Taiwan. Some counterfeits are produced in the same factory that produces the original, authentic product, using the same materials.
Indeed, the threat has become so great that the United States and European Union partnered to seize more than 360,000 fake ICs and components in a joint operation at the end of 2007. The ICs and components included more than 40 trademarks from the likes of Intel and Philips and were worth more than $1.3 billion. The US Patent and Trademark Office estimates that counterfeiting and piracy drain about $250 billion out of the US economy each year along with some 750,000 jobs.
“There are two ways to fight piracy in China. The first is the Coca-Cola method: "You make your product so well and you distribute it so cheaply that there's no money left for the counterfeiters. The second is the Budweiser approach. Budweiser beer cans in China have fluted edges that are difficult to manufacture. Chinese companies can brew beer and call it Budweiser, but they can't yet put it in a can that looks real. "If you don't have an intellectual property rights plan as part of your business plan, you're in trouble”.

“SHANGHAI — What is there to say about a country where something masquerading as the newest Harry Potter book comes out on the market 10 days before the genuine item?”
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The markets for counterfeit and pirated products
There are two principal markets for trademark- and copyright-infringing products. In the first (the primary market), counterfeiters and pirates infiltrate distribution channels with products that are often substandard. Consumers unwittingly purchase these products, thinking that they are genuine. In fact, they have been deceived.

The secondary market involves consumers who, under certain conditions, are willing to purchase counterfeit or pirated products that they know are not genuine. Consumers who knowingly purchase such products are also aware that they are supporting the parties producing and supplying them.

The size of the secondary market depends in large part on the difference in the price of the counterfeit or pirated article from the genuine item. There is likely to be virtually no secondary market demand for counterfeit and pirated products if they are priced at the same level as genuine items, but demand could be significant if the counterfeit or pirated product is sold at a substantial discount. The size of the secondary market also depends on the characteristics of the product involved. For example, the willingness to knowingly buy a low-priced counterfeit pharmaceutical product is likely to be far less than the willingness to purchase a low-priced pirated CD.

Supply and demand of counterfeit products are driven by a number of factors.

On the supply side, the products counterfeiters and pirates choose to exploit depend on (i) the nature of the market for the product concerned, (ii) the technological and distribution challenges associated with an undertaking and (iii) the risks involved. On the demand side, consumers who knowingly buy counterfeit or pirated products are influenced by (i) the characteristics of the products concerned, (ii) personal values and beliefs, and (iii) risks and logistical factors.

Products of counterfeiting and piracy

The scope of products has broadened from luxury watches and designer clothing to include items which impact directly on personal health and safety -- including food, pharmaceutical products and automotive replacement parts. The infringing products are being produced and consumed in virtually all economies, with Asia emerging as the single largest producing region.

The difficulty in breaking into established supply chains has helped to limit counterfeiting and piracy, but there are signs that counterfeiters and pirates are successfully expanding operations. The Internet has provided an important new platform for increasing sales.

List of products subject to IP infringement:

1. Apparel, footwear and designer clothing

2. Audio-visual, literary and related copyrighted work

3. Automotive

4. Chemicals/pesticides

5. Consumer electronics

6. Electrical components

7. Food, drink and agricultural products

8. Personal accessories

9. Pharmaceuticals

10. Tobacco

11. Toiletry and other household products

12. Other

Counterfeiting and piracy are taking place in virtually all economies.
Information provided by government authorities and industry worldwide suggests that counterfeiting and piracy are taking place in virtually all economies. Data provided by customs officials indicated that products had been intercepted from close to 150 source economies. The sources mentioned include those economies where the counterfeiting and piracy are taking place, as well as economies that serve as intermediate shipping points. Covering the top 20 source economies, Asia emerges as the largest source for counterfeit and pirated products, with China as the single largest source economy.

Effects of Counterfeiting and piracy

Economy-wide effects: (i) innovation is undermined, (ii) criminal networks gain financially, (iii) the environment is negatively affected, (iv) workers are worse off. Moreover, in countries where counterfeiting and piracy is widespread, (v) foreign direct investment may be lower and (vi) the structure of trade may be affected

Rights holders experience: (i) lower sales volume and prices; (ii) damaged brand value and firm reputation; (iii) lower royalties, (iv) less incentive to invest in new products and processes, (v) higher costs, because of spending on efforts to combat counterfeiting and piracy, and (vi) potential reduction in the scope of their operations.

Consumers acquiring counterfeit or pirated products, whether knowingly or unknowingly, (i) may be exposed to elevated health and safety risks, and (ii) could experience lower consumer utility due to generally lower quality of infringing products. The consumer utility situation is nuanced for consumers who knowingly purchase infringing products; some will gain, others will lose

Effects of counterfeiting and piracy on government come in the form of (i) lower tax revenues, (ii) the cost of anti-counterfeiting activities, including responding to public health and safety consequences and (iii) corruption.

At the national level, two of the principal challenges in combating counterfeiting and piracy are to (i) find ways to enhance enforcement and (ii) raise awareness of counterfeiting and piracy issues. More may need to be done to undermine counterfeiting and piracy at the point where infringement originates; once goods enter domestic or international trade, the task becomes far more difficult.

References:
OECD: Organisation for economic co-operation And development (http://www.oecd.org/dataoecd/13/12/38707619.pdf )

Counterfeiting, a world-wide plague, Christophe Roulet
(http://journal.hautehorlogerie.org/en/echoes/the-fight-against-fakes/counterfeiting-world-wide-plague.html)

The Counterfeit Economy, Robyn Meredith (http://www.forbes.com/forbes/2003/0217/078sidebar.html)

Wikipedia: (http://en.wikipedia.org/wiki/Counterfeit)

China's economic revival is minted in counterfeit, Howard W. French (http://www.nytimes.com/2007/08/03/world/asia/03iht-letter.1.6970880.html)