For all the ballyhooing about Asian economic growth and shifting global influence, it turns out China is about to pull out of its most consistent and, some would say, most influential export market. After decades of singular domination, the Chinese authorities are making an effort to shut down this rich source of valuable goods. I’m of course referring to the world market for counterfeits and China’s natural ubiquity within it. From clothing to prescription drugs to large-ticket musical equipment, China is THE source for all things copied, a fact that may be changing in the near future.

According to this Supply Chain Digest article, there is to be a sharpening of swords in the country’s pursuit of intellectual property rights (IPR). In an effort to keep pace with the influx of multinationals, the government is attempting to safeguard foreign patents against rampant counterfeit, thereby opening the door to companies that are interested in the Chinese market, but wary of IP pirating. Although this is, by its nature, a very long and impossibly incomplete process, a source claimed that, “China has managed to accomplish in 30 years what took Western-developed countries more than 100 years” to develop in terms of intellectual property rights (IPR) protection. And while this might not strike terror into the hearts of knock-off street vendors, it does present at least present a shade of protection for more sophisticated products, the likes of which will no doubt increase the flood of new, foreign entrants into China’s economy. 

Assuming the Chinese actually beef up the IPR laws to a ‘Western’ level (this is a horrible assumption, by the way), the game theory behind this move is actually quite interesting. For ‘low-priced luxury’ goods such as textiles or DVDs, the only real impact will be the removal of low-priced competitors, allowing prices to rise, at least marginally. However, for ‘complex luxury’ goods, such as appliances or prescription drugs, the result might actually be a decrease in prices. This is because many companies, such as drug manufacturers, have never really been in competition with their forged counterparts.

If you have a drug with astronomical R&D costs and incredibly low variable costs, you will have no way to make money unless you can extract very high margins (in many cases, many multiples of the production cost). And even though the development costs are ‘sunk’ and aren’t necessarily relevant to the price of a good once it’s on the assembly line, most companies would rather avoid competing at cost with knock-offs in markets such as China than risk the chance that some of their own product gets shipped back and cuts market share away from their ‘Western’ sales base. Now that they aren’t under-cut by forgeries, they will be able to reach much of the developing world, increasing their market size and thereby lowering the profit-maximizing price. Assuming they are still wary of dividing their markets, this will be inherited by the rest of the world as well. 

Will this actually transpire? Probably not, and even if did, it would probably be impossible to really measure. However, we can always hope, at least in theory.