The Chinese Ministry of Commerce has redefined imported cross-border products as items for personal use. The cancellation of some regulations that were to be implemented will make the entry procedure easier for brands and retailers.

During their recent March 2017 exchange on cross-border e-commerce regulations, Chinese policymakers concluded that cross-border importation would now be categorized as "personal use items", paving the way for further discussions on future policy in this emerging sector and assuming that customs duties and import policies would not be the same as for the traditional bulk import model in China.

 

On April 8, 2016, Chinese customs announced that cross-border imports should be taxed as general import goods, triggering a violent market response. Currently, orders declared in free trade zones are subject to a tax ranging from 11.9% to 26.35%, while validation, registration and application for import permits are postponed to 2018. If cross-border trade is categorized as personal use items, all of this may well be facilitated or even eliminated. Because unlike bulk trade, personal cross-border purchases represent low volumes, small orders and a wide variety. If customs treats all cross-border imports in the same way as traditional imports, the complex procedures will act as a daunting barrier to entry, risking plunging China back into the chaotic Daigou era* (*A daigou is a local middleman who resells products purchased abroad and, through taxes, offers advantageous tariffs). This is why the "positive list" could be transformed into a "negative list", to let more products through, while continuing to check quality and certificates in a reasonable manner.

 

From confrontation to adaptation

 

Over the past three years, as China's middle class began to take advantage of its growing purchasing power, cross-border trade in China has grown at an accelerated pace, thanks in part to the simplification of logistics and international payments and the approval of cross-border import regulations. Chinese consumers are buying quality products from around the world that were not previously available in Chinese storefronts. But local authorities have also sounded the alarm about the boom in cross-border shopping: every order placed through a personal purchasing agent ("Daigou") can cost the government tax revenue on import, transportation and sales. Other problems, such as the lack of quality inspections and the impact on traditional distribution and import networks, also irritate decision-makers.

 

In June 2014, Chinese Customs officially announced a new model for individual express customs clearance, better known as the "business commercial clearance model" (BC). That same year, in December, customs officially approved the customs clearance model for imports in bonded warehouses (BBC). Since then, the cross-border clearance model has been complete. On April 8, the authorities adopted a new taxation policy and new regulations on import permits. These were particularly devastating for the sector, as the "positive list" blocked a large number of qualified products. Fortunately, the import permit has been suspended until 2018 and is likely to be revoked.

 

Judging by the policy, it seems that policy makers in China are satisfied with the current rate of cross-border e-commerce and its ability to curb the activity of personal purchasing agents.

In the future, this policy will have to balance cross-border e-commerce with traditional import channels, while leaving less and less room for personal purchasing agents. In its 2015 study, ContactLab noted that in China, luxury goods were much more often purchased abroad than domestically, due to heavy tariffs and lack of domestic inventory. Thousands of buyers from China were queuing abroad in front of branded stores to acquire the new products. "When you see someone in a boutique, you don't know whether they are buying handbags for their own account or to resell them on the Chinese market," said the LVMH Group's Chief Financial Officer in an interview in 2015 with BOF.com.

 

Cross-border e-commerce allows brands and retailers to sell directly in China at a more competitive price thanks to reduced taxes, as buyers are looking for quality products that are available at an affordable price and are authentic. Researchers at the China Internet Watch blog have estimated that the number of buyers will reach 740 million by 2018. Even if the annual limit for each Chinese citizen does not exceed 20,000 RMB on average, the volume of cross-border e-commerce could be in the billions of US dollars.

 

As Chinese citizens increasingly buy more and more via their smartphones, the consumer market has become very lucrative. These are two aspects that foreign resellers can look forward to, as they have the opportunity to enter the cross-border e-commerce market with modest investments. And even though Daigou are still distribution channels, many brands are worried about their image, which could be tarnished by these agents. When Bellamy, an Australian brand specializing in infant milk, decided to abandon Daigou's distribution channels and sell directly to Chinese consumers, it was surprised to discover that its customers remained loyal to its products.

 

For resellers and brands alike, digital transformation could be the future: more and more brands and resellers are entering the Chinese market without having a physical entity in China. Accurate localization services, coupled with a good e-commerce strategy, will help overcome differences in cultures and business environments so that global companies can still benefit from exporting to China.