GUEST POST: Cross-Border E-commerce: New Regulation, New Opportunities?

By Federico Sferrazza

Accused of poor regulation and unfair competition by traditional import-export traders, cross-border e-commerce in China has been subject to new regulations since the beginning of April. Over the long term, the new regulation is expected to improve the shopping experience by focusing on the quality of goods.

With over 5,000 cross-border online trading platforms and more than 200,000 enterprises involved, e-commerce has become a major force for foreign trade into and out of China. In 2015, cross-border consumer deals settled online reached $ 40 billion, up 50 percent, representing over 6 percent of the total consumer e-commerce sector. China’s Commerce Ministry estimates the broader cross-border e-commerce market is much larger, growing at an average rate of 30 percent to reach up to $1 trillion by 2018. (analysis report)
Before the new regulations, cross-border activities enjoyed a special taxation regime and few controls, leading to accusations of poor regulation and unfair competition from more heavily regulated traditional importers and exporters. To address those complaints, the government imposed a new taxation system and issued a positive list of over 1,000 articles allowed to be shipped to and from China via online e-commerce.

The country’s major e-commerce site, Alibaba’s (NYSE: BABA) Tmall, has moved into the market with its cross-border site called Tmall Global, which has attracted major foreign retailers such as US-based Costco (Nasdaq: COST) and South Korea’s Lotte Mart. Smaller rivals like JD.com (Nasdaq: JD) and US e-commerce leader Amazon (Nasdaq: AMZN) are also increasingly active in cross-border trade.

No matter how foreign goods enter China, through bonded warehouses or direct shipping, since April 8 consumers purchasing goods online are subject to import taxes, including tariffs and value-added and consumer taxes. Overall, this new taxation represents 70 percent of duties imposed on traditional imports. However, single transactions under 2,000 yuan ($310) and 20,000 yuan per year are still benefiting from a zero percent tariff rate.

Positive List

The regulatory overhaul included the roll-out of a positive list of 1,142 goods that can be imported through e-commerce. Among the goods excluded are some kinds of milk, cereals and most healthcare products. However, most of those products can still be imported using special licences.

Experts are arguing about how the list should be interpreted, stating that excluded products will simply not enjoy the newly imposed preferential tax policy. The main goal of the positive list is to reduce abuses such as importation of raw materials for production in China or goods which are not bringing value in the domestic market, said Thibaud André, a consultant for Daxue Consulting.

As a consequence of this new regulation, price increases are likely to happen. But here again, the effect will be mostly felt by low priced products, consumer products and items lacking a strong branding. Products that require a complex logistic chain will be impacted as well, which could affect some major actors like the platform Ymatou.

Looking at the global cross-border e-commerce market, it appears that most e-retailers will only be partially affected by the new regulation. That’s because even though price is undeniably one of the reasons to buy on cross-border platforms, surveys show that consumers are willing to pay higher prices for imported products as they have more criteria when buying, including quality, safety and prestige.

In this perspective, the new regulation has been welcomed by several players and experts since it should result in an improvement of goods quality and user experience in the coming years. Leading platforms such as Xiaohongshu have already started to communicate on this idea. As a result of the new regulations, we should expect more products to appear in line with consumer expectations, most notably resulting in better safety for imported food.

Federico Sferrazza is a China market consultant at Daxue Consulting. You can reach him at federico@daxueconsulting.com or visit daxueconsulting.com.