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Guest editorial: Jeff Koenig says parallel import laws can solve the industry's gray market woes

Published November 30, 2018

By Jeff Koenig

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Editor's note: Jeff Koenig is national small business consultant, investor and advocate who splits his time between client work, angel investing, and lobbying for small business sustainability in Washington, D.C. He is a former owner of an IBD and for five years was a member of the board of directors of the National Bicycle Dealers Association. He is currently a trustee of the National Small Business Association, a member of the Kansas Entrepreneurs Policy Network, and has been nominated to the SBA Region 7 Regulatory Fairness Board. He also tries to get a few miles of trail in on his mountain bike on good weather days.

U.S. retailers of all types (small, big box, online) increasingly face competition from foreign sellers of everyday retail goods, with bicycles and bike P&A being no exception. Foreign sellers to U.S. consumers source goods in a variety of ways, some not always legitimate. Illegitimately sourced goods are often defective or did not pass quality inspection, are missing parts and manuals, are not retail packaged, do not enjoy warranty protection, are sold "out the back door" (employee theft) and are even counterfeit. Then they are sold online to U.S. consumers as the "same thing" for a lower price that can even be under a U.S. retailer's wholesale cost. The quantities of illegitimate products being moved are increasing and putting more pressure on already-struggling U.S. retailers to keep their customers.

But retailers aren't the only victims. Consumers, after purchasing these gray channel goods, experience difficult customer service (working with a foreign seller), product failure, lack of warranty support from a U.S.-based company, or discovering they purchased a fake. When the CPSC finds safety issues that leads to notices and product recalls, these consumers have difficulty obtaining repair & replacement.

Government revenues also suffer to the degree that there are appropriate taxes and duties being circumvented as these goods fly beneath the radar. Cross-border goods often ship with improper paperwork in small packages intentionally labeled other than as commercial sales for the actual price paid. This offshore traffic increases in double-digit percentages annually. The U.S. government and its trading authorities have yet to fully understand and count the future cost of global trends toward M2C (manufacturer-to-consumer sales), putting the goods wholesaling and retailing industries that vet the quality of products, protect consumers, and have legal and fiduciary responsibilities to both, at risk of losing more customers.

There is an easy solution that is not new, called parallel import laws. By treaty, all nations can agree to require that all manufacturers of goods anywhere must specifically label every product in its final state and/or packaging with the intended country of retail sale. It should be the law of the land in every nation that the only products which come across its borders for final sale must be labeled by the manufacturer for that country and include manufacturer contact information. The law should prohibit package and label-tampering until final end-consumer display and sale. In the case of products that must be assembled by the retailer, all original labels should be required to be preserved and provided to the end-purchaser along with a written statement of authenticity (on store receipts for example) that the retailer did not deliver product from any gray market source.

ODMs and OEMs that supply nonmanufacturing brands would still be required to provide destination country labeling, but could substitute factory contact information with the contact information of the brands with an in-country office who import and distribute these goods in their own brand name. These nonmanufacturing brands would then accept the liability if the goods they imported to their office in one country wound up in another country (or trading territory like the EU). Brands would be permitted to redistribute overstock in one country to another as long as the stock is no longer being manufactured in the same version (considered old stock) and as long as it was transferred to one of their offices in another country for the same value as it was first imported for. In these instances, an additional label should be required to be added that specifies the units are old stock and what the original destination country was so that there is a clean chain of custody.

This legal framework should apply to products being shipped by any entity to any destination including distributors, retailers and to consumers themselves. To be effective, there must be significant financial penalties and additional remedies available at law to use against repeat offenders for any manufacturer or brand that allows one of its products to arrive in a country other-than-labeled and brand manufacturers should share culpability with offending distributors and retailers. But there can also be a legal remedy available to manufacturers such that if anyone comes into possession of an illegitimately sourced product, and reports it to the manufacturer or brand who buys the product back, then it will avoid penalty. This important feature would reduce the cost of government enforcement as manufacturers who know they will be co-equally responsible with any violation committed by one of its downstream distribution/retail partners will work hard to qualify their channel partners and monitor partner behavior, beginning with strong selling agreements that prohibit illegal redistribution.

A strong system of treaties and trade agreements with this simple legal framework will allow each country's economy and internal market efficiencies to set the retail price of products that is internally competitive for the consumers of each nation without loose protections, laws, and low standards-of-living in some nations becoming levers of unfair price competition, bleeding retailers in more developed economies with higher standards of living like the U.S. In fact, I believe these laws will support the economic development of other nations that will be forced to compete on quality, safety, effectiveness, and customer satisfaction that they have cheated their way out of by being able to sell through unaccountable distribution channels. Responsible manufacturing lifts worker wages with long-term net benefit to their local economies.

The U.S. government is asking small business owners for input, right now, regarding what we think U.S. trade policy should be. IBD's have the opportunity to raise their voices in five minutes by telling trade negotiators that you want stronger parallel import laws and treaties at the webpages below. Click on the Comment Now button in the upper right corner.

There are two pages because one is for the EU and the other for the UK: https://www.regulations.gov/document?D=USTR-2018-0035-0001 | https://www.regulations.gov/document?D=USTR-2018-0036-0001

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