Death to Daigou: Analyzing China's E-Commerce Law

For the sake of brevity I will analyze China's ecommerce law only as it pertains to impact on market access requirements for international stakeholders. I do realize there are details about intellectual property protection that will interest international stakeholders but for the most part these provisions within the new law do not impact market access requirements.
Most importantly the law defines the different roles of stakeholders engaging in ecommerce in Chinas specifically:

• Ecommerce operators (you) - Individuals using Chinese ecommerce platforms to sell goods online. This would include any international stakeholders using Alibaba's Taobao, Tmall or Tencent Wechat 3rd party plugin shops like Weidian etc.

• Ecommerce Platforms - Providers like Alibaba's Taobao/Tmall, Wechat 3rd Party Shop Plugins, etc.

• Crossborder ecommerce operators and platforms

Importantly the law specifies the legal liabilities for each stakeholder. However a significant distinction should be noted in the emphasis placed on the punitive measures for individual operators and the punishments for ecommerce platforms.

This distinction is possibly the most important part in the overall goal of the law which is to shift legal liability away from individual operators and make platforms chiefly responsible for oversight and enforcement of all China's laws, rules, regs and standards and ensure the compliance of individual operators and the products they sell on ecommerce platforms.

There are scant provisions on the specific punishments imposable on individual operators. In stark contrast the new ecommerce law explicitly specifies the hefty financial sanctions which can be imposed on ecommerce platforms if they are found to have either accidently or deliberately facilitated illegal activities on their platforms. Lets take a look at the most important articles for each stakeholder.

Important ecommerce law articles impacting market access for individual operators (i.e you)

• Article 5: E-commerce operators shall abide by China's laws ..

• Article 10: E-commerce operators need to register as a legal business entity

• Article 11: Pay your taxes

• Article 12: Abide by administrative license requirements (for example if an operator deals in prepackaged foods they need relevant license)

• Article 13: You products need to comply with relevant laws, regulations, product standards etc. (e.g if you sell infant formula it needs to follow broad requirements of food safety law, administrative rules requiring registration, national standards for prepackaged foods, product GB standards etc.)

• Article 15: You need to display your business license to conduct ecommerce business activities

• Article 18: Don't break China's advertisement law - if you sell foods no claims about rapid weight loss, increased muscle mass etc, if you sell cosmetics no claims about whitening etc.

• Article 26: E-commerce operators engaged in cross-border e-commerce shall abide by the laws, administrative regulations and relevant state regulations of import and export supervision and administration – controversy related to this one but rest at ease. 37 pilot zones are exempt from this requirement as per a State council ratified joint circular released on November 30th by MOFCOM, MOF, SAT, GAC, SAMR, NDRC

Ecommerce Platforms: Key Shift in Legal Liability from Individuals to Platforms

Guns dont kill people, people kill people

I've been a longtime vocal opponent of Daigou. In my capacity as regulatory and policy analyst I've always understood that Daigou has been illegal, I think smuggling was the wording I used in previous articles. However it is still tough to argue with the amount of money that this illegal industry was and still is generating. One of the key goals of the government in this ecommerce law is to use policy and legislation to manipulate the market and foster an environment where Daigou is simply outcompeted.

The law is groundbreaking in that it now places full responsibility on ecommerce platforms like Alibaba for the compliance of products sold on their platforms.

In the past Alibaba has been able to hide behind the ecommerce equivalent of the "guns dont kill people, people kill people" argument by stating that it could not be held accountable for the activities of individual operators using its platform or for the quality, authenticity or safety of the products sold.

The new e-commerce law is a game changer and extremely significant given the amount of money Alibaba makes from Daigou operators using their Taobao platform. In a similar fashion the law spells the end for Wechat shops, Tmall shops and similar enterprise operating using the Daigou model. Lets look at the important articles in the new e-commerce law.

• Article 27: Platforms need operators to provide real identity (ID card/passport, proof of address etc), platforms also need to obtain and verify relevant administrative license

• Article 28: Platforms will send real identity information to Taxation Ministry (SAT) as per article 11 and to market regulator (e.g SAMR for food, cosmetics) as per article 12.

• Article 29: If platforms discover operators violating Articles 12 (no license) and Article 13 (selling non- compliant goods) it shall take necessary rectification measures (seizure of products, disposal) according to law and report to the relevant competent department.

• Article 38: Specifies joint responsibility of the ecommerce platform for the activities of operators using their platform

Ecommerce law on Crossborder ecommerce (CBEC)

The ecommerce law explicitly mentions crossborder ecommerce in 4 articles (26, 71, 72, 73). Importantly it specifies that it is the state and by extension the State council that is responsible for CBEC and developing the sector and the industry. Ill cover CBEC in a following article so sit tight.
Legal Liability - The Killing Blow for Daigou

• Article 75: Specifies that individual operators (you) will be dealt with according to the laws they break e.g break the food safety law and you will be punished according to relevant provisions (10x to 30x the value of the product for compliance violations and criminal case for more serious violations), break the advertising law and you will be punished according to those provisions. No license as per article 12 or retailing illegal or non-compliant goods as per article 13 are specifically mentioned.

• Article 80: Platforms will be subject to fines of up to 500,000 yuan if they fail to:

(1) Failing to perform the verification and registration obligations stipulated in Article 27 (ascertain and verify legal identity of operator, relevant license etc.)
(2) Failing to submit relevant information to the market supervision and administration department or the taxation department in accordance with the provisions of Article 28
(3) Failing to take necessary measures for the violation of the law in accordance with the provisions of Article 29 of this Law, or failing to report to the relevant competent department

Daigou is Dead...Long Live CBEC

Taobao is to Daigou as Tmall is to? Did you say CBEC? Well done. As I've mentioned in a previous article I think people underestimate the economic significance of Daigou and its disruptive influence on China's economic development plans. China is certainly facing inward trade pressures and an influx of imported consumer products due to its inability to domestically manufacture the high quality and safe products demanded by its consumers. Best case scenario is China makes the best of an unappetizing situation ala CBEC. Worst case is Daigou continues.Daigou trade accounts for a very large proportion of sale of imported consumer goods which are most often not subject to taxation, tariffs, TBTs etc. This is a big no-no for China's government. That’s billions of dollars in taxes going astray every year.

The ecommerce law will do a couple of things. First of all it will empower the citizen watchdog groups to actively hunt for non-compliant products and operators on China's ecommerce platforms. These guys are more than happy to buy these products for the sole purpose of notifying local authorities and getting 10x or 30x settlement on the purchase value of their product. Secondly it forces ecommerce platforms to actively police their platforms for operators and products that violate Chinese laws, administrative rules, national standards etc. Thirdly it will force ecommerce platforms to reduce the cost of operating on their crossborder ecommerce platforms. Alibaba still generates huge amounts of revenue from its Taobao platform, i doubt its happy for this business to disappear overnight. The only really viable solution is to simply make their CBEC offering more enticing for former Daigou operators. I dont think the large setup costs on Tmall are a major stumbling block and i expect this to change. Ive seen alot of people predicting the death of Taobao but maybe we are more likely to see rebirth. I doubt Jack Ma hasnt got a soft spot for the platform which made Alibaba what it is today. Maybe we will see Tmall as the premium CBEC offering and Taobao for a cheaper option. Let's wait and see....