Closing The Can of Worms: The End of an Era for Crossborder eCommerce in China

The Can of Worms

I've been predicting China to crackdown on the unregulated free-for-all that was China's crossborder ecommerce for quite sometime. I cant blame anyone for making hay while the sun is shining but the reckless abandon some crossborder enterprise have shown by diving head first into these murky regulatory waters, not to mention the overstocking of goods such as infant formula, health foods and cosmetics that don't comply with the basic tenants of China's food safety law was senseless. While China was dotting the i's and crossing the t's of its most stringent food safety law ever, in the background there was a multibillion dollar industry importing pretty much any foods it liked into China, unlabeled, unregistered and ultimately impossible to verify as safe.....the Doctor Jekyll and Mr.Hyde act had to come to an end.

Deregulating CBEC: A Calculated Risk...

Deregulating CBEC was a calculated risk on the part of China's government but could well turn out to be an economic masterstroke. Since the promulgation of its new food safety law and food safety law implementation guidelines there have been no major food safety incidents directly attributable to CBEC (despite some other grave prediction I made about cans of worms). By temporarily deregulating this market China has allowed this sector to grow rapidly, promote consumer acceptance of CBEC, develop infrastructure, logistics and the accompanying IT and mobile systems. More importantly it has channeled energy away from the destabilizing influence of China's grey and black market channels (Haitao) which have threatened to derail China's "new normal" consumption based economic growth goals and the important role China's food sector is to play in realizing these goals. On April 8th China delivered the killer combo with the announcement of both a new tax scheme and a positive list that have in essence removed the two greatest incentives offered to CBEC traders, namely tax benefits and lack of regulatory compliance and food safety requirements.

The Double Whammy

• The Positive List: Basically if a product category is not listed on the positive list it needs to comply with China's Food Safety Law, National Food Safety Standards, product standards, administrative measures and then some.... Beers, dairy, health foods, nutrient supplements, foods for special medical purposes are not on the positive list meaning they can no longer be traded through crossborder ecommerce. Infant formula is conspicuously included on the list with the proviso that it must meet the aforementioned regulatory requirements. The positive list affects only the bonded warehouse model of crossborder ecommerce and is not currently extended to overseas delivery (but it will soon). 
• The Taxation Changes: Most goods are going to cost more with the imposition of the new taxation policy. As a good example infant formula traded through crossborder ecommerce will be subject to a price increase of 12%. For more information on the tax changes please checkout this Chemlinked Food Portal article or an informative PPT prepared by my colleague Mai Fung available here.

The Grace Period for Infant Formula 

China's government has offered an olive branch in kind to infant formula traders using crossborder ecommerce sales channels by instituting a grace period until Jan 1st 2018 to allow traders to comply with the new requirements and to allow the pending infant formula registration rule to be finalized and promulgated. In essence infant formula in compliance with China's most basic infant formula compliance and safety requirements (i.e it must be produced by a manufacturer which has undergone onsite inspection by CNCA and has been issued with a specific registration number and is compliant with most of the provisions of China's infant formula product standards) can continue to be sold on CBEC platforms until Jan 1st 2018.

Trojan Horse Taxation and Giving Face to Food Safety Concerns

A major question will be answered on whether or not China has the conviction to truly regulate its food industry.  It will be extremely telling if in the next several days China extends the grace period to other commodities not included on the positive list particularly what it has designated as high risk food categories in its new food safety law (health foods, nutrient supplements and foods for special medical purposes). If indeed it does extend the grace period to encompass these food categories the only real change to CBEC in the short term will be the addition of increased government taxation of this hugely lucrative market. Given my experience and the huge money involved in trade of these products through CBEC if I was a betting man id be wager that in the following days we will see a couple of more grace periods extended to several equally profitable commodities. 

Further Reading

• China Crossborder eCommerce: Lean Market Access
• China eCommerce : A Crocodile in the Yangtze or a Fish in a Bowl ?