Crossing the Line: Will cross-border regulations trip up China?

Penetrating the e-commerce market

To understand the impact of these coming e-commerce changes in China, one must understand the rise of the two main cross-border shipping options: the bonded warehouse model and the direct-shipping model.

Bonded warehouses grew in popularity beginning in 2012, when the Chinese government, motivated by its desire to boost domestic consumption, established pilot zones in five Chinese cities to facilitate expedited cross-border delivery. In September 2014, the program was expanded into seven additional cities. Under the model, goods are imported in-bond and registered electronically with Chinese customs. Applicable taxes are determined and customs cleared on-site after the goods are sold.

Shippers and retailers also often pursued the direct-shipping model. Packages traveling along this route either go through a formal business-to-consumer (B2C) import channel, or are shipped by an express delivery service. Direct imports require the shipper to upload order, shipment and payment data to Chinese customs at the time of purchase so that duties and taxes can be assessed prior to the parcel’s release. Alternatively, an express delivery courier may be used to import the parcels from overseas warehouses and deliver them directly to Chinese consumers. In this case, as long as the purchase was valued at less than 1,000 renminbi (RMB) – roughly US$150 – the customer paid only parcel tax, and if under RMB50, no tax at all. Goods valued at more than RMB1,000 were treated as general trade items and assessed customs duties, including import tariffs, value-added tax (VAT) and, in some cases, a consumption tax.

From a cost perspective, this has meant that – at least prior to April 2016 – retailers importing products through a direct-import model would be assessed a higher tax rate than products moving through the cross-border channels, and that online purchases were highly competitive with domestic retail purchases.

For example, a PC imported from the United States retailing for RMB999 and shipping from Hong Kong to China under the general trade model (non-e-commerce channel) would be subject to an import tariff of 0 percent and a VAT of 17 percent:

Tax payable = RMB999 + VAT (RMB170) = RMB170
Total: RMB1,169

Under the direct-shipping or bonded-warehouse model, the parcel would be subject only to a parcel tax, which, for electronics, is 10 percent:

Tax payable = RMB999 + parcel tax (RMB100) = RMB 100
Total: RMB1,099

Clearly, this provided a strong financial incentive, at the time, t0 purchase goods via e-commerce. Forwarders actively participating in Chinese CBeC business said that the bonded warehouse model, and e-commerce in general, have pushed their business models in new directions – usually toward integrated services and away from simple, point-to-point transportation.

Beyond just the “replenishment of fulfillment and distribution centers,” with traditional airfreight forwarding, some forwarders now offer a full suite of services said Peter Szabados, Panalpina’s global head of transit. “Our e-commerce platform comes in as an enabler, because we can offer much more than our core logistics and transportation services,” Szabados said, including anything from “setting up and running the web shop, order management, payment and call center services.”

Taiwan-based Dimerco, which launched bonded warehouse operations in 2013, and has warehouses in ten pilot cities, works with China’s mega-players, Alibaba and JD.com, to deliver goods to warehouses. “Dimerco helps Alibaba pick up shipments from its global suppliers and transports them to airfreight terminals, handles customs brokerage, and delivers to five bonded warehouses located in Shanghai, Hangzhou, Guangzhou, Zhengzhou and Ningbo,” said Dimerco vice president Andy Hsu.