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China’s 2015 total trade volume decreased by seven percent from the previous year – its first drop since 2010, according to China’s customs authorities. Imports to the country fell 13.2 percent to RMB 10.45 trillion. Boosting foreign trade has therefore become a top priority for the Chinese government in 2016. However, the Middle Kingdom also has its trump card – e-commerce. Exporters trying to sell to the lucrative Chinese market, with or without a physical presence in the country, will inevitably have heard of its booming cross-border e-commerce industry, which grew over 30 percent in 2015 despite the slowing international trade. It is predicted that trade via cross-border e-commerce alone will exceed RMB 6.5 trillion in 2016, accounting for 20 percent of total trade volume.
So how does the cross-border e-commerce model work, and what makes it different from imports under general trade? In this article, we take a closer look at China’s cross-border e-commerce industry and compare two of the most common sales approaches used by foreign merchants engaged in the industry.
Cross-Border E-Commerce Comprehensive Pilot Zones
On January 15, the State Council decided to set up a new batch of cross-border e-commerce zones in 12 Chinese cities: Shanghai, Guangzhou, Tianjin, Chongqing, Hefei, Zhengzhou, Chengdu, Dalian, Ningbo, Qingdao, Shenzhen and Suzhou. The first comprehensive e-commerce pilot zone of its kind was established in Hangzhou, home to the e-commerce giant Alibaba. These zones are designated exclusively for the development of cross-border e-commerce industry, featuring a slew of preferential tax policies and streamlined customs clearance procedures. Each of these zones has an online e-commerce platform operated by state-backed or licensed companies, where Chinese customers can view and purchase foreign goods (e.g., kuajingtong in the Shanghai Free Trade Zone).
Goods sold via the online trading platforms launched by these e-commerce zones are subject to the so-called “parcel tax,” which is much lower than the normal custom duties (i.e., import tariffs, value-added tax and consumption tax if applicable). Foreign merchants operating businesses with/in the zones may choose one of the following two approaches when selling directly to Chinese consumers:
Direct Shipping Model
Under the direct sale model, foreign manufacturers maintain warehouses in their home countries and send goods to customers after they have made orders online. Under this model, it becomes easier for the manufacturers to oversee the storage process and provide customers with a variety of products. However, it usually takes longer before the customers receive the goods as it involves a relatively more complicated customs clearance procedure.
Bonded Warehouse Model
Under the bonded warehouse model, investors may set up a warehouse within their respective E-commerce zone. Goods will then be transported and stored temporarily within the warehouse under the Customs supervision before they are delivered to domestic customers. In this case, exporters need to determine if the quantity of their products sent to China is reasonable and can be sold within a given period.
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