Impacts of U.S. - China Trade War on Anti-Counterfeiting and IP Protection

On August 24, 2018, the U.S. imposed 25% tariffs on another $16 billion of Chinese goods. Among the 279 Chinese products affected, most are industrial products. The rationale for the sanctions is based on the conclusion that China is engaged in unfair trade practices harming the United States, especially through intellectual property theft.

Over 86% of counterfeits sold worldwide are purportedly from China, a fact well-documented prior to the imposition of tariffs. It remains to be seen whether tariffs will lead to any significant improvement in this statistic, and if so, when.

What we do know is that tariffs have an impact on anti-counterfeiting strategies and therefore may also have an indirect impact on business of U.S. companies.

• For many U.S. companies who source products from China, the sanctions have resulted in a lost partnership with a trusted ally. Despite what you may hear, there are a great number of Chinese manufacturers helping U.S. companies succeed. By allowing for greater margins while helping the U.S. business protect its valuable intellectual property and know-how, Chinese suppliers enjoy the benefit of repeat and consistent demand. A win-win relationship is established. However, the trade war changes that dynamic and disrupts those relationships. Without a U.S. buyer for the goods a Chinese manufacturer is tooled up to supply, they will resort to other means in order to survive. With the experience and maybe even blueprints for manufacturing, these Chinese companies can venture into their own brands at best, or counterfeits at worst.

• U.S. brand owners may receive less support from Chinese law enforcement bodies and local government when pursuing enforcement actions in China. Local enforcement authorities in China have a wide range of power and discretion to decide whether, when and how to conduct raids or market sweeping actions. We venture to guess that given the sentiment among the Chinese towards the United States right now, discretion is likely to work against rather than for U.S. companies. Moreover, customs detention and seizure efforts play a vital role in any counterfeit enforcement strategy. According to China's General Administration of Customs, in 2017, China Customs detained 22,500 shipments of goods and over 25% of seized counterfeits were machinery and automotive products. This too might change if the Chinese government implements a simplified customs clearance procedure to boost exports, something it has done in the past.

• Finally, with the increased cost to replace suppliers, genuine products and authorized products of brand owners will be forced to increase prices. Going back to basic economic principles, this will increase the demand for less costly alternatives, and will result in a demand spike for counterfeit and grey market goods.

Quarles & Brady has been monitoring the U.S.-China trade war, and we are happy to advise your business on appropriate strategies and action plans to head off adverse impacts on your business and valuable intellectual property assets.

• Lori S. Meddings: (608) 283-2653 / lori.meddings@quarles.com
• Li Zhu: (414) 277-5143 / li.zhu@quarles.com