China’s New E-Commerce Law and Its Foreign Company Impacts, Part 2

About a week ago, in China’s New E-Commerce Law and Its Foreign Company Impacts, I wrote how China’s new e-commerce law will likely impact foreign companies doing business in China or with China. Because the new law does not offer much practical guidance and has yet to be bolstered by official interpretations or implementation rules, it is difficult to state with precision how exactly it will be applied and implemented. Nonetheless, using what we have read in the official and unofficial press and our discussions with Chinese government officials and also using also what we have learned over the last decade from representing companies involved with China’s e-commerce industry, we below explain some basic aspects of the e-commerce law.

1. What constitutes e-commerce activities under Chinese law? 

Under the new e-commerce law, e-commerce activities encompasses the selling of goods or services via information networks. Goods sold via information networks can be tangible things, such as apparel, electronics, and cosmetics or intangible things like coupons you can redeem at a restaurant. Services via informational networks includes services performed online, such as telemedicine, and services sold online but performed offline, such as online sales of travel packages, rental car booking services, or tutoring. The law governs transactions completed using information networks, whether the actual service or delivery of goods happens online or offline.

2. Are foreign businesses subject to China’s new e-commerce law? 

It depends. The e-commerce law applies only to e-commerce business activities within China. Though “within China” is not clearly defined, a popular (albeit unofficial) view is that if the activity contains any Chinese element, it will be deemed to occur “within China.” Under this view, a China WFOE selling products of its parent company online would be considered a China e-commerce activity, as would the sale of products on a Chinese e-commerce platform by a foreign business without a Chinese entity. Even the sale of products on a foreign website by a foreign entity to a consumer in China will likely also be considered to have occurred within China and therefore subject to the e-commerce law.

Even a foreign business that is not subject to China’s new e-commerce law needs to pay attention to other Chinese laws when selling products to China, such as the laws regarding importing and exporting, customs, publications and cybersecurity.

3. Impact on foreign brands.  

Though the new e-commerce law is not aimed just at cracking down on daigou (See China’s Daigou Shopping Model) and though it will obviously not stop Chinese consumers from seeking other channels from which to buy foreign goods, it will serve to reduce daigou/grey market sales and by doing so it necessarily will bolster legal e-commerce sales by foreign companies.

The daigous most likely to be negatively impacted are the “professional” daigous. These are the people who travel abroad regularly to bring back three (or more) suitcases full of products, or who live abroad and go to an outlet mall every weekend to send products back to their buyers/agents/compatriots in China. They usually have shops on e-commerce platforms such as Tmall or they regularly post pictures on their WeChat or other social media accounts to update their customers and then they communicate with those customers on WeChat and close their transactions via WeChat as well.

Because all e-commerce operators must report taxes and because it is clear China intends to enforce this taxation requirement, “professional” daigous will have a harder time operating. Their profit margins will be significantly reduced. As we previously wrote, defrauding Chinese customs is an essential part of many (most?) daigous’ profit margins because China has historically imposed significant duties on a range of luxury imports. Daigous often (usually?) do not report or pay taxes on the income they derive from their sales. If daigous were to pay their taxes and declare the actual value of the goods they are bringing into China and pay the customs duties on those goods, they would lose all or almost all of the cost/pricing advantages they currently enjoy. The online platforms/portals on which daigous traditionally operate will also play a role in the demise of daigous. Because the various online platforms/portals can be held liable for not taking action against those who operate illegally on their sites, they are incentivized to help the Chinese government crack down on illegally operating daigous. For example, if a daigou is selling Balenciaga purses on Tmall and Tmall receives complaints from Balenciaga that the daigou is an unauthorized reseller and is infringing on Balenciaga’s IP rights, Tmall will no doubt take action to stop the daigou from conducting its unauthorized sales

Thus, the law should greatly benefit foreign brands by bringing China’s online platforms/portals and daigous into compliance.

4. Selling to China’s consumers via cross-border e-commerce 

Finally, rules accompanying the new e-commerce law allow foreign brands to legally sell to China at a retail level. According to a December 2018 notice (“Notice”) from six Chinese government agencies regarding cross-border e-commerce retail imports (the Notice about Market Regulation on Improving the Supervision over Cross-border E-commerce Retail Imports, 六部门关于完善跨境电子商务零售进口监管有关工作的通知, Shang Cai Fa [2018] No.486), products imported at a retail level from cross-border e-commerce companies are regulated as products imported for personal use and they are not subject to many approval, registration, filing or labeling requirements that would normally apply to regular imports for trade or resale.

Under this Notice, a viable method for foreign brands to sell to China’s consumers is to work with Chinese e-commerce platforms, which method we will discuss in our next post in this series.