Illicit global trade of counterfeit goods is national security threat

There is quite literally an army of pirates overseas that is plundering the intellectual property of American and European citizens and businesses. Last week, President Trump issued an executive memorandum about combating pirated goods that calls for a detailed study of counterfeit trafficking and how the United States can better defend its intellectual property. The White House order is one of many initiatives by the United States and European Union to secure our democracies and free markets from the onslaught of authoritarian corruption, kleptomania, and crime.

Who are the victims of this systematic thievery? A recent report by the Organisation for Cooperation and Economic Development showed that innovators in the United States bear the brunt of the costs, as almost 25 percent of all seized goods have American intellectual property rights. France, Italy, Switzerland, Germany, and Japan are under assault as well. Their total losses represent more than 50 percent of the total seizures of counterfeit goods. In many cases, foreign trade zones are key facilitators. The tidal wave of counterfeit and pirated goods, accounting for more than 3 percent of global trade in 2018 according to the report, comes from, you guessed it, China. In fact, China accounts for over half of total fake goods in the world and more than 75 percent if you include Hong Kong.

{mosads}Who cares if that designer bag is fake? A healthy academic debate over market economics could be had, but what many do not realize is that it is no longer just luxury items that are being counterfeited. It is now virtually everything, and that is dangerous. Medicines, electrical machinery, and ball bearings are now a large portion of the more than $500 billion a year estimate of trade in fakes. This is where trademarks surely matter. If a counterfeit drug or machine fails, not only can it kill people, it can do irreparable harm to brands built upon patent law.

It is not just big corporations that are suffering. Next time you have a great idea for a new product and want to raise funds on a popular crowdfunding site to pursue a patent, know that Chinese manufacturing giants monitor this and will often patent your idea the very day you post it. By the time you are ready to begin operations, your idea may already be selling like hotcakes on vendors like Alibaba or Amazon. There is no better way to destroy the innovative spirit of the free world than to crush the dreams of entrepreneurs than by this. The Chinese model of state capitalism, or whatever one wants to call this Orwellian nightmare, is not sustainable.

In the international context of escalating trade tensions, great power competition, and “strongman pushback,” illicit trade is now a national security threat. Counterfeits and fakes are but one symptom of larger national security issues the United States faces, along with trade based money laundering, human trafficking, animal trafficking, drug trafficking, nuclear proliferation, and even terrorism. The very things that make our economies strong, such as patent law, financial institutions, and foreign trade zones, are the tools that authoritarians are using in a “death by a thousand paper cuts” strategy of attack. How to mitigate such risk while maintaining economic growth is one of the greatest puzzles of our time.

Defending intellectual property rights and identifying the ways in which foreign trade zones are used as hubs for introducing illicit goods into established supply chains is a national security issue. Mapping out the ways in which modern authoritarian states use and abuse free markets at the expense of free citizens is critical to defending the rule of law systems that still stand as a beacon of liberty to people around the world. If the United States fails to address this issue systematically, it will continue to cede the high ground to authoritarian competitors and leave its flanks open for pirates, opportunists, and adversaries to take cheap shots.

Clay Fuller is a research fellow at the American Enterprise Institute.