Four Possible Pathways to Steer China CBEC Regulatory Reform

One of the hotly debated issues in this China’s 2017 national consumer rights day was the revelation that banned food products allegedly produced in irradiated areas of Japan were being sold in China. While the products in question have had sales suspended, this incident has underscored concerns related to the safety of goods traded through crossborder ecommerce, a trade mode that have seen staggering growth in recent years.

In an interview Li Yuanping, deputy director of AQSIQ, presented data on 26273 batches of food and cosmetics traded through CBEC in 2016. Of this 26273, 1210 batches were unqualified by relevant standards, representing a failure rate of 4.6%, five times the failure rate of regular trade.

“There are some regulatory loopholes in oversea direct mail, bonded zone procedures and online retailing, with issues in bonded zones particularly pronounced.” Said Liu Peng, associate professor in administration and management at Renmin University of China. “That may add to public uncertainty on the quality and safety of imported food as domestic consumption of imported food mainly occurs on e-commerce platforms, with the majority of these foods arriving through bonded zones”, according to Zhao Ping, director of international trade research division of CCPIT Academy. Recent regulatory reform, industry movement, consumer feedback and market activity help predict four major possible pathways for regulatory of CBEC trade over the next several years.

Formation of a regulatory institution dedicated to CBEC

From 2013, China’s cross-border e-commerce has grown by over 30 % each year and reached a whopping 2000 billion Yuan in the first half of 2015, accounting for 17.3% of China’s total import value already. This tremendous feat is achieved by over 5000 cross-border e-commerce platforms managing an army of over 200,000 companies.

Since April 2016, China has levied tax on cross-border e-commerce as a first step in regulating this emerging form of trade. In the same month the General Administration of Customs announced another major change relating to “inventory management”, narrowing down the scope of goods which could be traded through the bonded zone.

A number of trade facilitation measures were released shortly after by the AQSIQ, the department working closely with General Administration of Custom, as a way to accelerate inspection and quarantine work necessary to ensure food safety. These measures were formulated and implemented in response to widespread opposition from consumers, oversea buying agents and e-commerce platforms which saw the publication of a positive inventory as the first step in further regulation that would ultimately result in increased price and delayed logistics.

The compromise garnered little support, leading the Ministry of Finance to propose a one-year transition period, putting all regulatory reforms on hold in China’s ten CBEC pilot cities. Based on the standard legislative process preceding regulatory developments in China it is likely that when the grace period ends on Dec 31^st 2017, new legal approaches to answer the unique challenges posed by CBEC will be developed. Given the staggering value and attractive forecasts for this sector it is highly likely that a specific regulatory framework tailored for CBEC will be rolled out in 1 or 2 of the cities and will be used to iron out the wrinkles in China’s current CBEC regulatory framework and fine tune administrative procedures.

A breakthrough in intercommunication

Challenges related to regulation of CBEC stem from a lack of experience on the part of both government and industry. In China, there are at least eleven government departments responsible for CBEC affairs, the best known of which include AQSIQ, General Administration of Custom, Ministry of Commerce, CFDA and NHFPC. “There is however no definitive government authority   ultimately responsible for regulatory work related to CBEC”, said Zhou Qingjie, professor in economics at Beijing Technology and Business University, rendering the main actor of food and drug administration unable to fully and effectively exercise its duty in this area.

Professor Liu Peng shared similar opinions. “Back in October 2015, AQSIQ had already published detailed rules on safety inspection, supervision and management over imported food from CBEC, which have yet to enter into force, leaving safety inspection and supervision works in the bonded zone short of any legal foundation.”

A recent development in Shanghai hints at a potential solution to the problem. In Shanghai, local government will implement a system in which the intercommunication of imported food safety information between all regulatory bodies will soon become a mandatory responsibility governed by a newly established information notification institution. As an economic powerhouse in China, every move in Shanghai could be indicative of the course the whole country might soon take.

Emphasizing public education

Regulatory issues aside, China’s demand for imported food attracts numerous less scrupulous traders looking to exploit lax regulation and make quick returns. This issue is compounded by a lack of “knowledge on imported foods, quality and safety”, said Ning Hua, a frontline inspector from a local CIQ bureau in west China. The situation is also exacerbated by the aggressive marketing of e-commerce platforms which use the terms “oversea purchase”, “direct purchase from abroad” and “global direct supply”.

The reality of the lax regulation and expedited market access afforded to CBEC traders is far murkier than most consumers would have reckoned. Ning also outlined how “one of her colleagues witnessed many high risk food safety activities in common practice in Southeast Asia. Despite these dodgy practices, goods from these regions feature heavily on many of China’s top CBEC platforms.  

China’s growing middle class demands safer and higher quality products. At present the terms “safe” and “higher quality” are basically synonyms for “imported”, making it imperative for the government to ramp up public education for imported foods. This year’s “3.15” event could serve as a prelude to a widening voluntary campaign to scour the markets for problematic food nationwide and offset the negative impact during the current standoff between different regulatory bodies, and the absence of a cohesive legislative system.  

Data Sharing

Improving the regulatory system will involve protracted negotiation, multiple drafts and public consultation periods. In the meantime inspection and quarantine forces are already facing problems sourcing reliable information to help guide and carry out examination and review duties, which are vital for monitoring foods without a history of safe consumption or foods circulated in China’s markets. In line with this professor Liu Peng, highlighted the importance of “information transparency” which would greatly facilitate compliance, traceability and help assign accountability through each link in the product life cycle and chain of custody.

An ideal solution in this case is to establish a seamless information sharing mechanism between regulatory bodies and e-commerce platforms, allowing inspectors to have a full picture of all products in real-time, suggested Liu. The e-commerce giant Alibaba was the first to make such a stride. In December 2015, it integrated its database with that of China’s CCC credibility certification database as part of a joint effort named “Cloud Bridge”, which shares monitoring data with relevant government departments to ensure the safety of products.

With such a mechanism in place, the accuracy of the investigative work of authorities in pinpointing fake, unsafe or suspect products and assigning accountability for violations would be greatly augmented. The system would also greatly facilitate the creation of a new regulatory system with the flexibility to protect consumers while allowing the sector space to grow.