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Addressing the Counterfeit Goods Crisis
Addressing the Counterfeit Goods Crisis
A new report titled The Economic Impacts of Counterfeiting, estimates that by 2022, the global economic value of counterfeiting could reach US$2.8 trillion.
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Transcript
A new report titled The Economic Impacts of Counterfeiting and Piracy, estimates that by 2022, the global economic value of counterfeiting and piracy could reach US$2.8 trillion. The report from Frontier Economics also provides estimates of the wider social and economic impact this activity will have in terms of displaced economic activity and investment, as well as tax losses and criminal enforcement implications. It concludes that those additional costs could reach an estimated $1.9 trillion by 2022.

Taken together, the negative impacts of counterfeiting and piracy are projected to drain up to $4.7 trillion a year from the global economy and put 5.4 million legitimate jobs at risk by 2022.

"This new study shows that the magnitude of counterfeiting and piracy is huge, and growing," said Amar Breckenridge, senior associate at Frontier Economics. "Our objective is to as accurately as possible characterize the magnitude and growth of this illegal underground economy and its impacts on governments and consumers. The results show once again that in an interconnected economy, consumers and governments suffer alongside legitimate businesses from the trade in counterfeit and pirated goods."

Frontier's analysis builds on a 2016 report published by the Organization for Economic Cooperation and Development (or OECD) and the European Union Intellectual Property Office. That report focused on the value of the international trade in counterfeit and pirated products. That study indicated an increase of more than 80% over the level found in the OECD's ground-breaking 2008 report on the subject.

The scope of the new 2017 study was far larger. Frontier attempted to estimate the direct and indirect impact of all production and trade in counterfeit goods worldwide. Assuming nothing changes, the four broad categories and their yearly estimated economic impact in 2022, are as follows:
  1. Internationally traded counterfeit and pirated goods. Up to $991 billion
  2. Domestically produced and consumed counterfeit and pirated goods. Up to $959 billion
  3. Digital piracy of movies, music, and software. Up to $856 billion
  4. Wider economic and social costs. Up to $1.88 trillion consisting the following:
    • Displacement of legitimate economic activity. Up to $1.25 trillion
    • Reduction in foreign direct investment. Up to $231 billion
    • Government fiscal losses (e. g., taxes). Up to $271 billion
    • Cost of crime. Up to $125 billion
That represents a grand total of up to $4.7 trillion a year due to a global criminal enterprise. That amounts to nearly $700 for each of the 7 billion people on this planet. Practically speaking, counterfeiting and piracy distorts the economy in many ways.

First, it denies those who innovate their just rewards. Over the long haul, this leads to less innovation. That may not be so critical in the case of fashion accessories or entertainment, but in fields like software and pharmaceuticals it can make the difference between developing or not developing the next big solution.  

Second, it endangers public safety when counterfeit goods lack the quality controls built into the production of genuine goods. In the case of aircraft parts, automobile parts or pharmaceuticals this can be a matter of life or death.

Third, government is deprived of the tax revenue it's due. As with so many aspects of the underground economy, the counterfeit goods create a short-fall that must be made up by other tax payers.

Fourth, the clandestine nature of counterfeiting and smuggling ensure that highly unsavory criminal elements are inevitably involved. Bribery, coercion and violence are a necessary part of trafficking counterfeit goods, especially in OECD countries. And law enforcement resources needed to impede counterfeiting is another significant expense that must be borne by society.

Finally, with over 50 % of counterfeit goods in the U. S. being produced in China, this further exacerbates already tense trade relations between the two countries. In all likelihood, most of 5.4 million jobs displaced by counterfeiting are in the U. S. or EU. 

Today, regulators and law enforcement across the OECD and elsewhere are working with scientists and engineers to develop solutions to the problems of counterfeiting and piracy. Only time will tell whether we're able to eliminate this threat to our economy and safety.

Given this trend, we offer the following forecasts for your consideration.

First, by 2018, wider adoption of new technologies will make it easier to detect counterfeit manufactured a goods.

A team of researchers has developed a new system that uses machine-learning algorithms to distinguish between genuine and counterfeit versions of the same product. The underlying principle of this system stems from the idea that microscopic characteristics in a genuine product exhibit inherent similarities that can be used to distinguish these products from their corresponding counterfeit versions.

The system is being commercialized by a startup called Entrupy Inc.  While other counterfeit-detection methods exist, these have been not been widely adopted because they are invasive and run the risk of damaging the products under examination. 

The Entrupy method provides a non-intrusive solution to easily distinguish authentic versions of the product produced by the original manufacturer and fake versions of the product produced by counterfeiters. It does so by deploying a dataset of three million images across various objects and materials such as fabrics, leather, pills, electronics, toys and shoes. The classification accuracy is more than 98 percent. (A demo of the Entrupy technology may be viewed at https://www.youtube.com/watch?v=DsdsY8-gljg.)

Second, by 2025, unclonable security tags will be printed on virtually every high-value, name-brand physical product to enable identification of counterfeits. 

It turns out that 2D materials like graphene possess random defects at the molecular level. By incorporating the 2D material into a security tag, the manufacturer creates an unclonable identifier that can be read with a smartphone camera. The tag containing the graphene is designed to luminesce when exposed to the smartphone's flash. The unique pattern seen by the camera cannot be counterfeited and this enables a buyer, merchant or law enforcement officer to instantly determine whether the product is genuine. Best of all, this tag is so thin that it can even be printed onto individual pharmaceutical tablets and capsules, with no harmful effects.  We don't yet know whether pharmaceutical firms will adopt that idea.

But in other areas the transition to things that cannot be faked could be swift. A British company called Quantum Base, holds the rights. It recently struck a deal with OpSec, one of the world's largest makers of holograms. The firm will start incorporating the atomic scale tags into their holograms next year. The first application will involve auto parts, such as airbags. 

Third, digital piracy will be reduced as companies move increasingly toward Software As A Service, or SAAS. 

While major companies in OECD countries have long enforced policies against software piracy, it's still a major problem worldwide, especially among consumers. However, the shift to subscription software like Microsoft Office 365 and Adobe Creative Cloud is making it harder for consumers to pirate software.  Obviously, this is a problem that won't go away in the foreseeable future, but the Trends editors expect it to become a smaller and smaller issue going forward. 

Fourth, while piracy of digital entertainment will remain an enormous problem technology will help reduce the bleeding.

One approach is embedding a "digital watermark" into a price of music or video that notifies the playing system or application if the work is licensed or not.  This can be linked to the playing system in such a way that the playing system will only play content when the watermark identifies them as genuine. An extension of this is to identify who the licensed user is and check if the playing device is licensed to that user or that document region. The challenge is to get this feature integrated into the dominant technologies like Android and iOS.  
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