Providing a small amount of stability in a year of significant changes for cross-border ecommerce, the Chinese government recently halted a move to increase regulation — and costs — of foreign goods purchased online by consumers in China. Observers believe the measure is a temporary stopgap as officials work to establish additional procedures for scrutinizing yet unspecified types of imports.

What is cross-border ecommerce?

Cross-border ecommerce differs from domestic ecommerce, where consumers order domestic products through approved Chinese online platforms like Taobao, Tmall, and Jingdong. There are two models of cross-border ecommerce:

  • Direct shipping   A customer orders a product through the foreign website of a foreign retailer. The product is mailed from the country of origin to China, where it is inspected by customs and delivered to the customer. The cost and duration of direct shipping can be greater than a domestic transaction, and Chinese customers sometimes have trouble accessing foreign websites and payment platforms.
  • Bonded warehouse model   Goods are purchased through the international websites of Chinese ecommerce platforms, such as Tmall International, JD Worldwide, and Kuajingtong. Goods are stored at bonded warehouses in select cross-border ecommerce zones throughout China. When ordered, foreign goods are sent from the China-based warehouse to the consumer. This system is both cheaper and faster for the consumer, as there are fewer costs from taxes and shipping.

Regulations

Goods sold through cross-border ecommerce have been considered personal parcels that do not need to be registered in China. This helps smaller foreign producers remain competitive, as product registration can be expensive and time-consuming. For example, one USCBC member law firm estimated a China Food and Drug Administration (CFDA) registration could cost between $50,000 and $80,000, depending on the product category, and take two to three years to complete.

In March 2016, Ministry of Finance, General Administration of Customs, and State Administration of Taxation indicated China would end the treatment of cross-border packages as personal parcels and put caps on the amount of goods that could be purchased  without additional costs. This law was set to take effect April 4, 2016, and was supplemented by two “positive lists” itemizing which goods could be purchased through cross-border ecommerce.

Facing interministerial disagreements about how to treat such packages, as well as complaints from foreign companies, MOFCOM exercised its general authority over ecommerce and temporarily suspended the pending regulation change in March 2017, announcing cross-border ecommerce packages will continue to be treated as personal parcels. It is unclear how these issues will be worked out between the relevant agencies.

What’s next?

Although this suspension addressed some concerns of companies involved in cross-border transactions, the issues of registrations, taxation, and inspection are not settled.

MOFCOM also called for “strict supervision measures” of imports with quality and safety risks. It is unclear what types of products this would include, but China has in recent years imposed tighter regulations on imports of infant formula, health supplements, and cosmetics. In addition, some companies are concerned that customs officials may not have the technical background to make informed judgments about the components or ingredients in imported goods. For example, one ecommerce logistics company reported that a nutritional supplement line it was importing was mistakenly classified as a drug and stopped because of a misread label.

The ecommerce law — a draft of which was released in December — may be where the temporary regulation of cross-border ecommerce packages is settled. While it is unlikely to provide details about taxation and naming what goods can or cannot be imported, it could establish a broad framework for regulation. Although there is no announced timeframe for finalizing the law, the National People’s Congress Standing Committee is due to review a draft in August of this year, which could begin the finalization process.

As the rules for cross-border ecommerce continue to take shape, companies focused on ecommerce issues report they have increased their engagement with MOFCOM, which has been important in formulating regulations and drafting the Ecommerce Law; specific agencies responsible for regulating the classes of products they import; and with government officials at crossborder ecommerce zones in charge of implementing policies.

 

Timeline of cross-border ecommerce regulations

March 24, 2016 Ministry of Finance (MOF), General Administration of Customs (GAC), and State Administration of Taxation (SAT) issued “Circular 18,” which ended the treatment of cross-border packages as personal parcels and put caps on the amount of goods that could be transacted without additional costs. It also required all incoming goods to be certified by the Chinese government. Implementation was set for April 4, 2016.
April 2016 A flurry of announcements emerge from Chinese government agencies imposing additional requirements. MOF issued two “positive lists” restricting what goods can and cannot be sold over the channel. A second list was necessary because of a lack of clarity and the failure to include many popular products in the first list.

The China Food and Drug Administration also issued two clarifications addressing how infant formula, cosmetics, and health foods would be regulated and that they would require product registration. An implementation date of January 2018 was set for formula, and a date of July 2016 was set for health foods.
May 2016 Facing pushback, MOF delays implementation of the rules until May 2017.
November 2016 MOFCOM again delays implementation until the beginning of 2018.
December 2016 The National People’s Congress releases the draft Ecommerce Law, which officially supports cross-border ecommerce. Its definition of ecommerce is broad enough to cover domestic and cross-border transactions.
March 2017 A MOFCOM spokesman announces that goods coming through the cross-border channel will continue to be temporarily regulated as personal parcels. Five new cities will be added as cross-border ecommerce pilot cities: Chengdu, Dalian, Qingdao, Suzhou and Hefei.

 

 

Posted by By Patrick Lozada