By Alistair Nicholas*
Many small manufacturing and exporting businesses the world over were taken by surprise on 8 April when China implemented its new e-commerce laws. They shouldn’t have been. Nor should anyone else have been surprised. China’s ecommerce market has been growing at a phenomenal rate in recent years and creating corresponding problems for the country’s Central Government.
China’s ecommerce market is expected to close out the year at around $US800 billion, a 40 per cent increase on last year. The online magazine emarketer.com estimates it will pass the US$1 trillion mark in 2017 and be worth more than US$1.5 trillion by 2018. This figure will represent 30 per cent of total retail spending in China, according to the magazine.
It is astonishing growth. Chinese malls that were filled with locals and tourists just a few years ago nowadays seem deserted. To me the concept of an empty shopping mall in China is mindboggling.
But what’s mindboggling for me is a real headache for the Communist Party. As more Chinese consumers choose to shop online for everything from computers and office equipment to fashion goods and even their groceries, traditional stores have been doing it hard. Profit margins have been squeezed and small business owners have started going under. Retail service employees are being let go. A Kantar Retail report of 2014 concluded that “yesterday’s rules no longer apply [and retailers] must reconfigure their retail strategy to adapt to 2020 retailing.” The report went on to say “Only those retailers and suppliers who reengage shoppers, redefine value, rethink store, and retool commerce will thrive.”
But the Central Government couldn’t wait for that to happen, for the market to readjust.
As one of the major disrupters for traditional retailers in China are foreign manufacturers and exporters, China implemented a new tax regime on 1,142 categories of direct retail imports on 8 April. According to a report by China Policy, a firm that monitors and analyses Chinese government policy, the new tax regime merely formalised “ecommerce trade under the import tax system”. China Policy said the new regime was meant to address imports that were overwhelming the postal and parcel delivery systems, circumventing quality controls and slipping through “inadequate quarantine supervision for milk powder, food and nutritional supplements entering China.”
China Policy pointed out that “Foreign exporters previously used the postal service to trade goods under the parcel-tax system; exemptions allowed most goods to pass duty-free.”
That will no longer be the case.
But why didn’t foreign exporters availing themselves of online retailing platforms to sell their wares into China see the changes coming? Why didn’t they have a finger on the pulse?
Indeed, a sign of what was coming down the policy pipeline was visible at the end of March when the Central Government gazetted the ecommerce tax changes to come into effect on 8 April. Yet the world was screaming “no fair” on 9 April when western media started reporting the “surprise” change to ecommerce laws.
With agencies like China Policy, numerous international law firms and foreign public affairs agencies watching these developments in China, it is bewildering that this issue fell through the cracks. Perhaps the online exporters had blinked or not opened the emails telling them what was in the offing. Or, perhaps, they were just complacent.
A more troubling challenge has been the publication of a “Positive List” of cross-border ecommerce goods that have been given Central Government approval for import. These include a broad range of fashion, footwear, toys, cosmetics, and home appliances, as well as more sensitive items such as infant formula.
Positive or Negative?
At this stage it is not clear what the “Positive List” means for items not included. Is there a “Negative List”? Or a “Black List”? Indeed, dairy exporters are confused by the fact that while many dairy categories were included on the Positive List, “fluid” milks have been excluded. This has caused many to wonder whether the measure is protectionist in nature. For example, is this a clear case of China introducing a non-tariff measure to protect its nascent dairy industry?
Foreign companies exporting to China need to be raising questions about the implications for products that have been left off the Positive List. More importantly they need to be lobbying Beijing hard to have their products placed back on the list.
I recently wrote in Australian business newspaper the Financial Review that “Business must front-foot China’s new e-commerce laws” (a subscription is required to read the article). I argued that lobbying can be successful in China – something I know from personal experience as one who worked what we in the game call “government advocacy” in a nation where lobbying technically does not exist.
It should be said that I am not talking about brown paper bags stashed with cash and other forms of corruption. Ethics aside, bribery and corruption have always been dangerous games in China, and all the more so during the current anti-corruption drive of President Xi Jinpeng. Regardless, I would never recommend corruption as a government influencing strategy.
Advocacy – professional and strategic
Rather I am talking about strategic and professional lobbying, the type of government advocacy that seeks to engage government in a frank and constructive discussion about rational policy, potential options and possible outcomes. It is the kind of lobbying that seeks to build a broad coalition of supporters from such areas as economic and policy think tanks, academia, the media, and local interest groups.
Consider this for a moment: China’s new ecommerce tax regime is the result of lobbying in China. Traditional retailers saw their businesses being threatened by the forces of disruption and they screamed loudly for the Government to intervene. The Central Government responded and helped protect those local businesses.
Therein lies the answer for foreign exporters dependent on ecommerce platforms in China. They should engage the Chinese owners of the platforms and Chinese consumers to influence their own government. As I said in my Financial Review article, successful lobbying can be achieved if a foreign company’s problem can be redefined as a China problem.
That is what foreign exporters of the products omitted from the Positive List need to do now. They need to build a broad coalition of shared interests, a coalition that includes Chinese interests, to press for a change to the policy. In other words they need to do exactly what they would do in their home countries.
China is different, but it isn’t really all that different.
* Alistair Nicholas is Executive Vice President – Director Special Projects at Powell Tate Australia. He previously headed up Powell Tate China, where he was based from 2000-2013. This article originally appeared as a feature article entitled “China’s Retail Revolution Hots Up” on the Public Affairs Asia website.