China’s new e-commerce law, which took effect January 1, 2019, threatens to upend the entire daigou business model. As we’ve written previouslydaigou are individual shoppers who purchase goods overseas and then bring them back in their luggage for resale in China. Estimates of the value of goods brought into China this way each year ranges from about $6 billion to upwards of $100 billion.

The new e-commerce law requires anyone who sells products online to (1) register in China and in the country where they purchase goods and (2) pay all required taxes. If the law is strictly implemented and enforced, this would be the end of daigou, because the vast majority of daigou sales are online, and with few exceptions the daigou business model requires tax evasion.

Most of the articles about daigou refer to their wares as grey market goods. This is, at best, misleading. The term “grey market” suggests the existence of a legal loophole or ambiguity. But China’s rules on import tariffs, sales tax, and consumption taxes are quite clear: if you import goods into China, they are subject to tariffs. If you resell goods in China, they are subject to tax. If daigou paid the proper duties and taxes, they would have no business because they could not compete on price with legitimate importers. The major exception would be for goods that were difficult or impossible to buy directly in China.

It’s true that from a trademark standpoint, China has no per se prohibition on parallel imports. See China Trademarks: Counterfeit Goods and Parallel Imports. But this is irrelevant to the question of tax fraud.

As we have noted previously:

China has attempted to crack down on illegal grey market importation through a number of means, including (1) higher taxes on goods brought in by travelers as part of their luggage, (2) lower taxes on goods imported through legitimate channels; and (3) increased penalties for those caught falsifying customs declarations.

Will this new attempt be more successful? Early indications are that it has teeth. Customs officials began cracking down on the import side last fall with enhanced inspections of luggage at airports. Rumors began flying on social media, and then, after LVMH informed investors of such inspections in a conference call last October, luxury goods companies’ stock prices slumped across the board, falling somewhere between 3 and 10 percent later that day.

How and when the e-commerce sites will implement the new law is yet to be seen. Many daigou are already migrating away from “classic” e-commerce and into social media or instant messaging, where they describe their products using code words. You would think this, plus the increased scrutiny at the border, would marginalize daigou as a viable sales option – if you make something difficult enough, only the true believers will remain. But I have learned not to be surprised by the ability of Chinese entrepreneurs (and consumers) to turn on a dime in response to changing market/regulatory conditions – to say nothing of their willingness to ignore tax laws.

It may be more difficult for luxury brands to adapt. I had previously posited that although manufacturers might not be concerned about relying on daigou sales, they should be.

It boggles the mind why any company – let alone a major luxury brand – would have a market entry plan dependent on third parties successfully committing tax evasion. See Grey Market Goods and China, Part Two. But that’s exactly what some brands did, and now they’re scrambling to put together a “real” China strategy. Just for the record, my firm’s China lawyers have always advised against relying on this strategy.

Meanwhile, the trade war lurks as subtext. Right now products brought in by daigou are unofficial in every sense. If they are reported and taxed, then China would reduce its trade imbalance by a significant amount AND increase tax revenues. Easier said than done, even in China. But the trend is clear.

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Photo of Matthew Dresden Matthew Dresden

Matthew advises a wide range of businesses on corporate and transactional matters at Harris Bricken, with an emphasis on media and entertainment, international intellectual property, and cross-border work. Matthew provides finance, development, production, and distribution legal services for filmmakers and other creative artists…

Matthew advises a wide range of businesses on corporate and transactional matters at Harris Bricken, with an emphasis on media and entertainment, international intellectual property, and cross-border work. Matthew provides finance, development, production, and distribution legal services for filmmakers and other creative artists, and has worked on behalf of film studios, cable channels, production companies, video game developers, magazines, restaurants, wineries, international design firms, product manufacturers, outsourcing companies, and computer hardware and software companies. Matthew is widely viewed as an expert in Chinese intellectual property law, and is regularly quoted in publications from the New York Times to The Economist to Variety.

Before attending law school, Matthew worked in Hollywood for eight years as an independent filmmaker, starting as a production executive for Roger Corman’s Concorde-New Horizons Pictures. Before that, he was a computer science graduate student at Stanford University. He has also worked as a journalist, a transportation planner, a food critic, and a website designer. He serves on the board of the Northwest Film Forum, and is currently the immediate past chair of the Washington State Bar Association’s International Practice Section. He is also an adjunct faculty member at Indiana University Maurer School of Law, where he teaches a clinic on legal issues for independent filmmakers.

Matthew was born and raised in the San Francisco Bay Area. He spends his free time watching movies, hiking, cooking spicy food, and relaxing with his wife and daughter.