21.12.11: Impact of parallel import legalization on consumer markets (Executive summary)

By the order of the Association of Trading Companies and Manufacturers of Consumer Electronic and Computer Equipment (RATEK) and Association of Branded Goods Manufacturers (RusBrand) the research team of the Laboratory for Research in Economic Sociology of the National Research University Higher School of Economy (NRU HSE) has conducted a survey of potential impact of parallel import legalization on consumer markets in Russia in October-December 2012. This analytical report covers basic survey results, integrated expert views, and main conclusions.

Parallel import is defined as import of the goods protected by a brand, introduced into civil turnover in another country without authorization of the brand rightholder. It was banned in 2002 by the Federal Law “On Trade Marks”. This legislative ban was confirmed in the new fourth part of Civil Code of the Russian Federation enacted in 2008. However, the recent years saw a start of the heated debate involving public authorities and experts regarding a possibility to change the existing national principle of entitlement exhaustion for the international entitlement exhaustion which would mean legalization of parallel import of goods. Thus, the aim of the research project was to estimate potential shifts in the level of prices and competition in the consumer markets which may be affected by this change.

Empirical data were collected from price monitoring conducted for four consumer markets, including: perfumery and cosmetics, consumer electronics, auto parts, sport clothes and footwear. Different brands and different types of sellers were observed. They were enriched by data from the detailed analysis of Custom Register of Intellectual Property Objects. Quantitative data were supported by series of in-depth interviews recorded with the members of the companies-rightholders, public officials, and experts in the field of intellectual property rights protection.

Turning to the obtained results, it is pointed out that national entitlement exhaustion with regard to intellectual property objects does not reduce most effective forms of competition among trademarks, the level of which is sufficiently high in the Russian consumer markets. Under the existing conditions, the risks of monopolization of the market by the rightholders are negligible. At the same time, parallel import legalization may lead to deterioration of competitive environment, adverse selection of market sellers, reduction of right-holders’ investment to R&D and promotion of new products in the Russian consumer markets.

Price monitoring demonstrates that despite many peculiarities consumer markets are highly segmented by retail prices on the same commodities. Price variations could be confined to 5-10 percent in consumer electronics, make up 15-30 percent in perfumery and cosmetics, and get up to 60-80 percent and even more in the markets for auto parts, sport clothes and footwear. But all these differences have nothing to do with protection (or non-protection) of trademarks through the Custom Register of Intellectual Property Objects. Frequently, bottom-level prices indirectly indicate noncompliance of market sellers with the standard rules of storage and transportation or use of tax evading schemes.

Given a limited scale of parallel import and sustainable segmentation of retail prices on the same merchandise, adoption of the international principle of entitlement exhaustion is not supposed to result in a significant reduction in retail price level. Keeping in mind relevant studies conducted in the European Union, potential price decrease in the surveyed areas would be limited by 3-5 percent.

At the same time, parallel import legislation may decrease effectiveness of the law enforcement bodies and weaken control of domestic markets. It raises the risks of increasing inflow of counterfeited and fake products hiding beyond parallel import. The state officials would face additional difficulties in tax collection due to the fact that parallel import is often accompanied by the grey business schemes used for tax evasion.

Weakening control over imported goods could seriously damage the business reputation of the rightholders resulted from consumers’ complaints for the poor quality of goods imported by the grey dealers and absence of required services. This damage to major trademarks could be even more painful than loss of the part of the market by the official distributors.

Recommendations to facilitate modernization of domestic production at the expense of protection of intellectual property objects are considered as a crucial mistake for pursuing economic policy. Besides, parallel import legalization would weaken competitive positions of the domestic producers operating predominantly in lower-priced market segments which could be mostly affected by the parallel import proliferation.

Parallel import legalization would not result in a significant increase of sales in the observed consumer markets. If potential decline of domestic production and rightholders’ reservations to invest into production localization in mid-term perspective are taken into account, net effect of the suggested change in entitlement exhaustion principle for investment and employment rates would be negative. One should keep in mind the economic situation in Kazakhstan where principle of international entitlement exhaustion had existed before it’s joining the Single Custom Union together with Russia and Belarus. The level of direct foreign investment to the Kazakhstan domestic industries remained remarkably low.

What is even more important, non-authorized import brings additional risks to the final consumers suffering from lower-quality and defective commodities, goods with expired dates and fake merchandise as well as degradation of guaranteed after-sales service.
At political level, rejection of existing regional entitlement exhaustion of intellectual property rights would damage the international image of Russia because it would mean a noncompliance with the previously announced obligations with regard to the Single Custom Union formation, joining the WTO, and signing bilateral international agreements.

A decrease in the level of protection of intellectual property rights could not be justified by the pure economic arguments. Besides, major economic arguments supporting parallel import legalization remain controversial and are not empirically grounded.
On the whole, potential positive macroeconomic effects of the parallel import legalization would be limited and short-termed while mid-term negative effects for direct foreign investment and localization of rightholders’ production activities would be much more painful. A serious anxiety is also caused by the additional risks for the final consumers appeared with the potential proliferation of fake and low-quality goods and degradation of services. Suggested change of existing regulations may lead to reduction of collected taxes and duties. International image of Russia as a reliable economic partner could be also damaged. Taking all this into account, undesirable effects of parallel import legalization should be estimated as significant.
It is advisable to eliminate controversies from Russian legislation and law enforcement practices with regard to intellectual property rights protection and to pass over to regional entitlement exhaustion by analogy with the European Union.

The NRU HSE general research conclusion is that rejection of existing territorial principle of entitlement exhaustion is not justified from the standpoint of both legal and economic reasoning.