Chinese Deputy Proposes Removal of Infant Formula from CBEC Positive List

During this year’s Two Sessions, one NPC deputy, the director of the Quality and Inspection Control Center of Yili tabled some extremely controversial proposals on changes to the rules regarding trade of infant formula through crossborder e-commerce.  The deputy suggested ^[1], “To maintain a fair competition environment, the tariff of CBEC infant formula shall be levied the same as other products imported via general trade. Failing this infant formula products shall be deleted from the CBEC positive list.” 

As expected the proposals have caused a major stir amongst relevant stakeholders and consumers alike with the Yili deputy in the eye of storm of media and public backlash. On May 23, Yili responded ^[2] and explained the director’s expression is mainly a suggestion based on potential food safety issues associated with trade of infant formula on CBEC. Yili stated “in China, CBEC infant formula products are exempt from stringent recipe registration, GAC inspection and the monthly sampling conducted by SAMR. These loopholes pose quality and food safety risks, and also create an unequal market environment".

Is It Possible to Remove Infant Formula From the CBEC List?

Based on China’s determination to further open up its economy (view more analysis at our annual report 2019 ^[3]) it has invested heavily to support CBEC. We do not expect infant formula products to be removed from the CBEC positive list. As revealed in the Report on the Work of the Government ^[4] this year, Premier Li Keqiang also pointed out that China will deepen opening-up reforms, decrease the cost of regulatory compliance during import and export, and accelerate the growth of CBEC. 

Moreover, CBEC has already become one of the most critical channels for infant formula consumption. In 2018, China consumed in excess of 900,000 tons of infant milk powder, 45% of which was domestically produced. Of the over 500,000 tons of infant formula imported, 300,000 tons were imported through general trade and 200,000 tons were imported through cross-border e-commerce. (View more at China Infant Formula Sector: 2019 Market Movement & Growth Strategy ^[5]) The massive demand and market for infant formula products on CBEC helps explain the extreme negative reaction to the proposals to remove infant formula from CBEC.  

Will Tariffs on Infant Formula Traded Through CBEC be Raised?

China has raised the tax on CBEC before. In 2016, it canceled the tax-free policy ^[6] (tax-free if the tax calculated was less than 50 RMB) and announced a new import tax on CBEC commodities ^[7]. The new tax was designed to level the playing and foster fairer market competition. In 2018, the government finally settled on an administrative and supervisory strategy for CBEC. The basic principle guiding this strategy is that all products imported through CBEC will be supervised, taxed and levied with duties in the same way as products for personal use. 

Ever after the establishment of this new CBEC policy, China released detailed implementation methods and quickened the pace of CBEC development. In March 2019, Premier Li Keqiang also announced tax cuts to reduce the value-added tax (VAT) rate from 16% to 13% ^[8]. The scope of these significant changes encompassed the food and beverage industry (also applied to products imported through CBEC). We feel that CBEC of infant formula will not be changed in the short term. 

Future Supervision Trend of CBEC Infant Formula

As for the safety of CBEC infant formula, the senior dairy analyst expounded, “In terms of the sector of infant formula, there were quite a number of problems at the early stages of CBEC such as counterfeit products, etc. However, after years of development, the overall quality and safety of CBEC products has been improved.”

Currently, to enterprises that want to export infant formula via CBEC, the exporting country shall be listed in the Catalogue of Food Exported to China from Countries or Regions which Comply with Assessment and Review Requirements or Have Traditional Trading Relationships with China. And GAC will conduct the quarantine checks on CBEC infant formula. As revealed by a responsible person from Tmall Global, CBEC platforms like Tmall will also conduct sampling inspections of CBEC products and will select products to retail on their platform according to their own standards. We assume that China won’t make a major policy U-turn and require all infant formula traded through CBEC to require product registration.