China cross-border e-commerce: Posturing and a policy of appeasement

By Paul O'Brien

- Last updated on GMT

© iStock
© iStock

Related tags: Infant formula, Food safety, Food, China

China will allow cross-border e-commerce (CBEC) trade to continue, after Beijing recently announced the extension of a grace period for the sale of foodstuffs through this channel that don’t comply with food-safety law and product standards.

I predicted this back in May when I said that health foods, supplements, infant formula and other key commodities would continue to sell on China's CBEC platforms for the foreseeable future, given the extreme importance of this sector to China's economy, and the role its food industry will play in future economic development plans 

The current uncertainty on regulatory requirements in the cross-border segment stems from the ambiguous necessity for the customs department to provide clearance certification, as well as State Council discussions on grace periods and the release of. and amendments to, the two batches of CBEC “positive lists​”, which set out the scope of products to which tax rules will apply

This regulatory posturing may appease groups that have raised concerns relating to the development of an anti-competitive marketplace with one food safety law for traditional sales and another one for CBEC. 

It will also help to address food safety concerns centring on the lack of testing and basic compliance requirements for CBEC food products, and justify the billions spent on food safety administrative restructuring and capacity building, new legislation and regulation.

At the end of the day it is likely to be business as usual with green lights given for international products without Chinese labels, with functional claims and ingredients outside the regulated scope and everything else in between. 

There is a loud and strong lobby from bricks and mortar sales channels that have suffered great financial losses due to the growth in CBEC. However their influence pales in comparison to the importance of CBEC as a tool to realise China's economic development plans as it transitions to its new normal growth.

New normal growth to the rescue

Similar to the Mayan calendar’s 2012 doomsday pronouncements, the grave forecasts made on China's economic outlook in 2016 by many high-level economists have so far proved largely unfounded. 

While “preppers​” gathered cans of beans and other non-perishables to make ready for 2012, with a similar logic many economists warned investors to make provisions for the upcoming collapse of China under the weight of clandestine deals undertaken in the murky world of China's shadow banking system. 

Sure there's been a “slowdown​", but as an Irishman I reckon I can recognise a collapsed economy when I see one, and the signs of economic strife just aren't present here. 

While 6-7% growth overall will have to do, other sectors of China's economy are thriving as it transitions into its “new normal​” growth phase, to paraphrase President Xi’s often-quoted words. 

One of these is the imported food sector as it witnesses 15% growth. China has earmarked imported foods for special attention, especially following a massive increase in CBEC, making it a perfect economic development tool for China to transition away from a reliance on primary and secondary industries, and to channel energy towards the growth of a consumer-driven economy. 

China's food industry and CBEC

I've written extensively on the reasons for China's food-safety issues, the strategy the government is adopting to rectify its biggest problems and the overall impact new reforms, laws and regulations have had and will continue to have on international trade. 

The food industry's relationship with CBEC is a match made in heaven. China can boast one of the most digitally integrated consumer shopping environments in the world. It is a world of ultra-efficient logistics, QR codes, online and mobile payments, Wechat Hongbao, Taobao, Tmall, YHD and—and roughly 600m consumers using mobiles to shop, pay, track, collect, return, follow and engage. 

Its hard to do it justice but I've not seen close to this level of integration anywhere else in the world.

The development of China's unmatched digital sales environment, combined with food scandals, precipitated the current unrelenting demand for imported foods such as infant formula and health products. 

With strong technical barriers to trade in place, international health foods and infant formula became extremely hot commodities in China. This has paved the way for the organic development of a huge online network of individual sellers using China's vast and powerful social media networks to sell illegal goods imported through black- and grey-market channels. 

The development of CBEC is really just the Chinese government harnessing what was already happening in the food market, applying a modicum of administration and most importantly a nice markup in the form of tax. 

Dr Jekyll and Mr Hyde: Traditional sales and CBEC

CBEC will be ultimately regulated but not until the ink has dried on contracts and mergers, and acquisition deals between Chinese enterprise and relevant multinational companies in the health food and infant formula sector. 

Until that time regulation will just divert imports to black market channels and refuel growth in this sector, potentially derailing China's economic development plans. 

At the end of all this upheaval, the non-compliant health foods/supplements, infant formula and some other important products will still be on sale and China's Dr Jekyll-Mr Hyde regulatory requirements for traditional sales and CBEC channels will continue. 

The current posturing is just an appeasement strategy aimed at a strong lobby from traditional sales channels, and a justification for billions spent on food safety legislative reforms and administrative restructuring in China's food sector. 

  • Paul O'Brien is a specialist in Chinese food regulation and head editor at Chemlinked.

Related topics: Policy, Supply chain, East Asia, China

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1 comment

China Business Advisor

Posted by Mike,

Thanks for the well reasoned article.

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