What do China’s new cross-border ecommerce laws mean for foreign brands?

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Foreign brands and Chinese ecommerce platforms were left scrambling this week after new cross-border ecommerce taxes came into effect on April 8. 

Goods entering China via online cross-border channels are now subject to import tariffs, VAT and consumption tax.

A last minute “positive” list was also released outlining 1,142 commodities which could continue to be exported into China through cross-border channels. Products not listed were being held up in bonded warehouses. Baby formula and health supplement products, which require regulatory approval when sold through traditional Chinese domestic channels, are among products also being held in limbo pending clarity around licensing.

Prior to the introduction of the new rules, China’s Ministry of Commerce estimated the country’s cross-border ecommerce sector to be worth RMB 6.5 trillion (US$1 trillion) this year, predicting the channel would account for 20 percent of China’s foreign trade.

The booming channel has in the past, allowed goods passing through China’s free trade zones to enjoy minimal tax. They could also take advantage of a loophole bypassing regulatory, labeling and licensing rules, which applied to goods being sold in the domestic market. As a result, cross-border purchases gave Chinese consumers access to cheaper goods and more variety of products.

The changes implemented this month put a stop to that, and are a deliberate move by the Chinese government to level the playing field and encourage consumer spending on domestic products.

Mark Tanner, managing director, China Skinny, says ‘supply-side reform’ has been a buzz word in Beijing this year as part of a strategy to encourage Chinese consumers to buy more local products.

Chinese brand perception is an issue he says, and cites recent media attention around the craze of buying Japanese toilet seats when Chinese versions are just as good.

Cross-Border Tax Reform_Japanese Toliet seats_SCMP_600

Who is affected?

Alberto Vettoretti, managing partner, Dezan Shira & Associates, says the new tax rates will certainly have a negative impact on foreign manufacturers, especially for those who don’t have a physical presence or a manufacturing base in China.

In particular, luxury goods including expensive watches, bags, and any single good priced over RMB 2,000 (US$309) are now subject to normal tariff rates, import VAT and consumer tax. These are the same tax rates imposed on goods imported under the general trade model.

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Chinese domestic manufacturers will benefit as the price of foreign goods increases, giving Chinese made goods a price-competitive advantage.

The previous environment also encouraged a flourishing “daigou” market – overseas Chinese buying products for friends and families and reselling them over cross-border channels.

The Chinese government has been actively introducing new policies to discourage daigous, and the new taxes will make them less competitive, if implemented efficiently, says Tanner. However, he expects they will remain present in big numbers in the short term.

“Although daigou often undercut a brand’s genuine channels, they can still build brand awareness, usually in a positive way, and grow sales in overseas markets,” says Tanner.

What does this mean for foreign brands?

Cross-border ecommerce is not dead yet. The sector is backed by some of China’s biggest ecommerce players, including Alibaba and JD.com who have invested heavily into their cross-border platforms Tmall Global and JD Worldwide. They are among an estimated 5,000 cross-border ecommerce platforms facilitating this channel into China.

Vettoretti says cross-border is still an effective channel to reach Chinese consumers as tax rates levied on consumer goods are still favorable compared to the general trade model. However, marketers need to be clever when pricing goods to avoid additional tax burdens.

Exporters should also note that some goods can no longer be sold via cross-border channels. Vettoretti advises brands to consult with third-party service providers before entering the Chinese market.

Authentic, trusted and quality products are the main reason consumers buy products via cross-border commerce, and while scandals continue in China, demand for foreign goods will continue to grow, says Tanner.

As an example, earlier this month, 17,000 cans of infant milk formula sold in several provinces across China were found to be made from cheap milk powder and repackaged and resold under popular brand names.

Price however, is the second most popular consideration for Chinese cross-border consumers, and only time will tell the impact the new taxes have on this sector.

Tanner says cross-border commerce should remain an important component of a brand’s channel mix in China for many categories.

“But brands should hedge their bets and utilize other channels as part of their strategy to reach the customer,” he adds.

Here’s a graphic from China Skinny, outlining some of the new reforms.

Cross-Border_China_Skinny_tax overview_600

To see the graphic in full, click here.

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