False alarm

Stratfor.com

Police raided a factory March 27 in Guangzhou that produced, of all things, fake guns.

Counterfeit products, including fake guns, have always been an issue for China, and a quick trip to any market illustrates the scope of the problem. Even large markets mentioned in tourist guides are filled almost exclusively with counterfeit products. The government does little to stop production despite continued pressure and many security initiatives trumpeted as clamping down on the issue. In some instances, the problem has been exacerbated by the global financial crisis, which has forced people to scramble just to get by.

Counterfeiting is one of the main activities for organized crime in China. There are several prominent trafficking routes for exporting counterfeit goods in China, depending on the destination of the products. Counterfeit goods are transported to Central Asia via an overland route through Xinjiang, which follows the historic Silk Road.

Kazakhstan, one of the more robust economies in the region, sees much of this export traffic. The products either remain in the region for sale, or continue on to Russia. They then either remain in Russia or are moved to Central Europe or the former Soviet states, both of which are popular markets. Central Europe, notably Bulgaria and Romania, is a favourite destination due to the region's notoriously porous border and tendency for corruption. When a shipment clears customs in any EU country, it can then move freely about the union.

Land routes have the disadvantage of being slow and vulnerable to interdiction at checkpoints, however. By contrast, maritime routes out of China can send products worldwide more cheaply. Many of the counterfeit goods destined for the United States come from factories in Guangdong province later transported to Hong Kong for maritime shipment. Hong Kong offers an ideal lax legal system for such products: Easy company registration allows many counterfeit operations to set up fronts, or "shadow companies” able to register in Hong Kong to duplicate trademarked names – supporting the trade. Moreover, Hong Kong's status as a free port facilitates international shipping and makes it much more attractive than mainland ports.

According to sources, Alaska is becoming a favourite US destination. Counterfeit seizures have been on the rise there as shippers of such goods seek to avoid more seasoned customs officials on the California coast. Dubai is also a popular trans-shipment point for Chinese counterfeit goods, as it is known for its "don't ask, don't tell” policies that facilitate the movement of counterfeits. Products shipped through Dubai are usually destined for other Middle Eastern countries or to Africa, Central Europe and sometimes Latin America. In Latin America, they usually end up in Mexico and the Tri-Border Region, the border region between Argentina, Brazil and Paraguay that is a hot spot for international criminal activities.

Lax regulations and corrupt officials are key to China's counterfeiting logistics for both import and export. Loose restrictions in Dubai, Southeastern Europe and Hong Kong are essential to the import and export of counterfeit goods globally. The similarly porous Chinese-Vietnamese border facilitates the smuggling of both counterfeit and genuine products there, too. In many cases, especially along the Chinese-Vietnamese border, even elements of security and customs agencies are involved in the smuggling of goods.

The participation of foreigners in the trade worsens China's counterfeiting problem. Not only are counterfeit products moved via domestic networks into international markets, foreign businesses – fully aware of the false branding and counterfeit operations – enter directly into wholesale contracts with counterfeiters to export the products to the foreign business' home market.

The wholesale districts of Guangzhou are populated by large numbers of Africans, Middle Easterners and Russians who send cheap counterfeit goods back home. Middle Easterners are so common in Yiwu, Zhejiang province, one of the largest counterfeiting hubs in China, that many local shops and eateries cater to Middle Eastern tastes. Such operations are not limited to Africans, Middle Easterners or Russians; foreigners from all over the globe come to China to knowingly participate in this profitable venture.

Westerners often envision Chinese counterfeit goods as fake luxury goods, such as Prada and Gucci. While the counterfeiting of luxury goods destined for overseas shipment is in fact common, this is only a fraction of the country's counterfeiting operations. The most lucrative counterfeit product on the Chinese market is Viagra; its profits far exceed those of any other counterfeit goods. Viagra is one of the more benign counterfeit pharmaceuticals on the market; Africa is flooded with counterfeit anti-retroviral drugs for treating AIDS and anti-malaria pills from China, among other fakes pharmaceuticals. Some of these counterfeit drugs are merely sugar pills, while others actually have active ingredients (but are different from the authentic product). Other counterfeit products potentially posing health and safety hazards included auto and plane parts.

There are seemingly as many routes, illegal or fake companies, crime networks and corrupt officials supporting the counterfeit goods industry as there are counterfeit products. And in an economy where the price of authentic goods is becoming increasingly daunting, this is one industry that has found the global economic downturn far from depressing.

Stratfor provides intelligence services for individuals, global corporations, and divisions of the US and foreign governments around the world.