Demystifying China e-commerce, Crossborder e-commerce and Daigou: Laws, Rules, Regs and Implications for International Stakeholders

Takehomes:

• As a basic jump-off point in this foray into all things e-commerce in China i'm going to clearup the terminological problems alot of people seem to have. Definitions really matter here guys. Daigou has and always will refer to illegal activities, specifically the use of unofficial import channels to illegally sell imported goods (large parcels, suitcases illegal consignments etc). Standard ecommerce has been heavily used by enterprise operating using the Daigou model. Usually Daigou traders are Chinese diaspora living in places like Australia, New Zealand, Europe and the US, personal shoppers and more recently legitimate enterprise in partnership with mainland based sellers operating on various ecommerce channels.
• Crossborder ecommerce (CBEC) is a completely seperate official and state sanctioned trade channel for imported goods. The similarities between CBEC and Daigou are that both channels have been used to import goods which dont comply with Chinese laws, administrative rules, national product standards etc, thats pretty much where the similiarities end. The differences are that in CBEC the government has full oversight/control on the entire supply chain and levies taxes on all products sold whereas in Daigou the supply chain is extremely varied , and operators generally avoid paying taxes etc.
• A Wechat shop, Taobao shop or similar is not "crossborder" (CBEC) because it is run by an overseas company and sells imported products (I see alot of companies pitching these crossborder ecommerce (CBEC) shops that are really Daigou's in disguise). In fact according to new specifications crossborder platforms and standard ecommerce platforms will need to be seperated and obviously distinguishable from each other.
• In a recent circular jointly issued on November 30th by MOFCOM, NDRC, MOF, SAMR, GAC and SAT and ratified by the State Council, China officially extended the preferential policies offered to international enterprise importing goods to China through crossborder ecommerce channels (CBEC), making good on earlier State Council promises made on November 21st to promote continued openness and foster multilateral trade through crossborder ecommerce.
• This means that in the short to medium term goods which appear on a positive list and are traded through bonded warehouses in one of the 37 designated CBEC pilot zones (or sent directly from county of origin via parcel postage) and retailed through specific ecommerce platforms (e.g. Tmall) will be essentially exempt from general trade regulatory compliance obligations (no product registration, no filing, no labeling*, no requirement to comply with national standards)
• Earlier in August 2018, China promulgated its first e-commerce law which enters into force on January 1st 2018 which has significant negative implications for Daigou Traders (read Death to Daigou)
• Questions....What does all this mean for international interests accessing China’s markets via Daigou ? What does is mean for Crossborder ecommerce, how does it impact market access for international stakeholders and how will it reshape China’s ecommerce sector?
• Answers…Daigou is in its death throes, international stakeholders can look to CBEC in the short term but should still be looking towards developing products compliant with Chinese national standards in the long term... (trust me the squeeze will come)
• Crossborder ecommerce in its current iteration will remain stable in the short to medium term....But for how long and what metric can we use to determine when China’s government will regulate CBEC ?
• Despite all the hype surrounding crossborder ecommerce in China it still represents just a fraction of China’s total ecommerce trade in both volume and value terms and Daigou trade via standard ecommerce is still a huge problem for government. The solution to the problem is the strict requirements for all standard ecommerce articulated within the pending e-commerce law (Read this article for details) which will make it impossible for Daigou traders to continue operating on ecommerce platforms in China. New requirements for operator identification, taxation, requirements to obtain a relevant business license, compliance with administrative rules, national standards etc. and a clear shift of legal liability onto e-commerce platforms and the threat of hefty fines impose a prohibitively costly barrier on non-compliance with the new law.
• Take for example China’s poster boy e-commerce behemoth Alibaba which operates a number of different platforms. Daigou operators rely on its hugely successful Taobao platform and CBEC operators use its Tmall platform. Under the new law all operators selling goods on Taobao will be required to provide Alibaba with their national identity card information/passport and Alibaba will be required to present this information to both the Ministry of Taxation and The State Administration for Market Regulation.
• Taobao operators will also be expected to pay tax, ensure they have relevant administrative licenses, ensure the products they sell meet national standards etc. The key factor here is that there are scant punitive measures for individual operators mentioned in the law other than referencing subordinate rules and standards to determine individual punishments. The law however clearly stipulates the hefty financial punishments which will be imposed on ecommerce platforms if they are found to be harboring operators violating these provisions. This massive shift in legal liability is a masterstroke by China’s government which will force Alibaba and similar to become the industry's watchdog.
• In a similar way to the example listed above traders operating on newer retail channels like Wechat shops will also be liable but more importantly Tencent or companies that offer 3rd party shop plugins like Weidian and similar will also fall under the new e-commerce law.
• Alibaba and enterprise with a similar business model are stuck between a rock and a hard place. Regulating Daigou operators on their Taobao platform (serious financial significance to this part of their business) will significantly impact their bottom line and really leaves them only one option which is to increase the benefits of setting up CBEC on their Tmall platform and make it a more appealing option for former Daigou traders. Right now Tmall setup costs are pretty hefty and shops seem to have a pretty high failure rate despite the considerable investment required. Taobao shops have gotten by due to the competitive price they can offer on their products (no tax markup, minimal costs to setup a Taobao shop, low running costs).

CBEC: The Masterstroke or maybe not....

Ive always wondered if CBEC is an economic and strategic masterstroke on the part of the Chinese government and ecommerce industry or just the result of the type of fortuitous synchronicity that seems to be a hallmark of many great developments where several seemingly disparate forces seem to coincide and coalesce at just the right time and in just the right way and give birth to something really awesome but throughly unintended. Given the trends i have seen over the last several years in the development of CBEC and more recently China’s new ecommerce law I am strongly inclined to believe that CBEC is indeed a masterstroke of supreme strategic importance in China realizing its economic development plans.

CBEC: The Lesser of Two Evils

 To understand China’s efforts to control and profit from the flow of imported goods into the country you need to understand the basic forces driving development of CBEC, the ecommerce law, the ecommerce sector and Daigou. Ive talked at length about the topic but overtime my thesis has become refined and come into better focus. We can see China juggling inward trade pressures, technical capacity shortcomings in multiple domestic industries in tandem with an overhaul of its economic growth drivers towards domestic consumption. Its important to understand that at heart China's trade policy is protectionist. Its just unfortunate that its domestic industries lack the technical capacity to manufacture the high quality and safe goods demanded by its consumers. CBEC is basically the lesser of two evils in a choice between a completly unregulated, untaxed influx of goods via Daigou, or an inward supply chain for imported goods controlled by the government which can be taxed. Importantly it also buys the government time to allow its domestic interests to develop or buy key technical capacities and to develop optimized general trade channels.

CBEC: Outcompeting Daigou

In many ways the development of CBEC in the context of the concomitant and planned demise of Daigou, the development of new ecommerce laws, extensions in preferential CBEC policies together represent China’s attempt to find a cohesive, one size fits all policy to address these multiple pressures. A central assertion which I have stuck to for a long time is that China’s central goal with CBEC was to develop a system that would simply outcompete Daigou by manipulating market forces through policy reform and legislation (a fact made easier by leveraging China’s existing advanced supply chain and the unsurpassed convenience of its retail environment - convenience).

Shifting the Mantle of Responsibility

An analysis of the articles of the new e-commerce law strongly supports this contention, particularly the shift of legal responsibility away from government onto the shoulders of ecommerce platforms. While not explicitly outlined in the law, one of the key goals is to address the current undesirable disparity in profits between the unregulated, untaxed trade of imported goods on standard ecommerce channels operating via the Daigou model, compared to that of taxed trade of imported goods via CBEC. At present the estimated value and volume of imported goods circulating through largely unregulated standard ecommerce channels is far greater than that of CBEC, which is not ideal from a taxation purpose, market regulation purpose and especially bad for the growth of domestic industries which can compete with international enterprise.

Forcing Reform and Optimization of CBEC Supply Chain Through Regulation

The new law will essentially force e-commerce platforms to optimize their crossborder ecommerce offerings and entice former Daigou operators to fall in line. The new ecommerce law means that companies like Alibaba and its Taobao platform face losing significant profits associated with the activities of its Daigou operators.

Regulatory Selective Pressures

I feel the initial development of CBEC, continuous optimization of the supply chain towards convenience and the subsequent development of the e-commerce law cannot be seen as anything but a coordinated effort on the part of the government to channel growth away from Daigou towards CBEC. Any regulation of CBEC in the short term would be counterproductive to the realization of this goal and conversely we must assume that tightening the screws on Daigou would have a similar impact of channeling growth towards CBEC.

Now the big question is when China will pull the plug on the openness which has characterized the early years of crossborder ecommerce and implement general trade compliance requirements?

Regulation of CBEC: A Question of When...Not If

I have stated in the past that regulation of crossborder ecommerce is not a question of if, but a question of when. At some stage in the future trade of products through crossborder ecommerce will be subject to the same rules as general trade (administrative licensing, registration, filing, national standards etc.) Ive talked about the Dr.Jekyll and Mr. Hyde attitude to its requirements for goods imported through general trade channels (depending on the product category can be extremely stringent market access requirements) and the lax requirements for CBEC. 

Metrics We Can Use to Ascertain When CBEC Will Be Regulated

Overtime we are seeing more of a middle ground being taken by Chinese regulators in terms of their market access requirements. In the past several regulators have developed facilitated market access mechanisms for general trade for which we can find multiple examples in numerous consumer goods sectors. But still we should have some good metrics that allow us to make an informed speculation on when China will change tact on CBEC… Key checkpoints will need to be reached before CBEC is regulated including when:

1.      The vast majority of non-compliant imported consumer goods are sold via crossborder ecommerce i.e. CBEC has finally outcompeted Daigou
2.      China has built or bought the technical capacity in key sectors to domestically manufacture or supply the high quality/safe goods demanded by its consumers 
3. Maturation of facilitated general trade market access mechanisms, regulations etc.
4. Alignment of technical barriers to trade with global best practices for sectors of the economy with trivial socioeconomic importance i.e cosmetics, sports nutrition etc. Deviation from global harmonization in TBTs for industries with a strong domestic industry and significant socioeconomic importance (infant formula). - China uses an economic risk assessment model when developing its policy for controlling inward trade..(ill talk about this in a following article)