It's hardly a happy new year for Alibaba Group Holding Ltd. Just before Christmas, the U.S. Trade Representative added Alibaba's Taobao e-commerce site to a list of "notorious markets" that traffic in counterfeits. That's an unseemly place for a publicly held company: Other members include a Chinese shopping mall that specializes in counterfeit leather goods and a Paraguayan border market rife with organized crime that hawks everything from fake Ray-Bans to knockoff DVDs.

Alibaba isn't keen to be associated with this motley group. But like Inc., EBay Inc. and other online marketplaces dependent on Chinese manufacturers, it has struggled to maintain its integrity against an onslaught of counterfeiters. Without an aggressive crackdown by China's government, these marketplaces won't stand much of a chance against the fakes.

By many measures, counterfeiting is one of China's leading industrial sectors. A study by the U.S. Chamber of Commerce found that it brings in about $396 billion annually, representing some 12 percent of China's total exports and 1.5 percent of its gross domestic product. Last year, when just one Chinese province decided to crack down, it shut 417 "manufacturing and sales locations" with stock worth more than $200 million.