Breaking down borders: SMEs’ e-commerce business through free trade zones

trolley-and-blurred-manThe digital economy has become a crucial driver for China’s economic development, and its market is now a global leader, opening new opportunities for foreign business.

Many European SMEs, aware that China’s middle-class is increasingly demanding food safety and higher product quality, feel that they could hold a competitive advantage by expanding their business in China via the Internet. Andrew Zhang, Partner, and Mireia Paulo, Business Development Manager, A&Z Law Firm, analyse China’s model of Cross-Border E-commerce Comprehensive Pilot Areas (CBECPAs) outlining the policies that can benefit European SMEs looking to step into the ring.

Fast-growing e-commerce market forces to look at

The Chinese online community continues to expand and has now become the largest in the world: data provided by the China Internet Network Information Centre showed that by December 2015, there were about 688 million Internet users in China. In addition, the number of online shoppers in China increased by 125 per cent in 2014, to 361.4 million, compared with 2010. The Internet and the ongoing digitalisation of people’s habits have affected a dramatic shift in Chinese consumers’ behaviour.

Internet users now need just spend a few minutes to look for all kind of products, select what they want, press a few buttons to pay online and then receive the goods at home within a short time—often the same day—and all without having to leave the comfort of their own sofas. Companies such as Alibaba, Jingdong and Suning are cashing in on this trend by innovating, expanding and riding the wave as China develops and improves its own digital systems. According to a report about CBEC published by the Ali Research Institute in 2016,[1] CBEC business size had reached CNY 4.8 trillion in 2015, up 28 per cent from the previous year. While still in its infancy, the total size of this market for import and exports represented 19.5 per cent of China’s total in 2015. The report forecasts that China’s CBEC business will reach CNY 12 trillion by 2020, accounting for 37.6 per cent of China’s total import and export trading volume. Based on the Ministry of Commerce’s data released in September 2015, the number of CBEC business platforms in China had already exceeded 5,000.

Two common CBEC business models

The proliferation and enhanced integration of the Internet of Things, social media and e-commerce in daily life have impelled European SMEs to look at this new sales channel. However, despite the promising future of CBEC in China, a lack of understanding of the local context and certain policies pose some constraints to European companies. The difference of tax and inspection standards between conventional trade and CBEC, for example, generates a great deal of confusion as to whether or not policies applied to China’s CBEC market are actually favourable.

Based on prevailing Chinese regulations and policies, companies working in CBEC commonly apply one of the following two business models:

  • Direct Purchase Import (B2C) via international express courier Under this model, companies establish an overseas CEBC platform, such as AMAZON.COM, and sell products directly to consumers in China. The online platform will submit particulars of the order, including payment and logistics details, to customs in real time, while at the same time products will be delivered from an overseas warehouse via an international express courier, such as UPS or DHL, to the consumer in China. The international express courier will undertake the responsibility for China customs declaration. Upon completing customs clearance, inspection and quarantine procedures, the product will be delivered to the Mainland consumer.
  • Bonded Import mode (B2B2C) via a free trade zone This mode requires the establishment of a company in China for importing goods in batches into a free trade zone (FTZ) to be stored in bonded warehouses. When a consumer places an order with such a CBEC platform, the platform makes a real-time customs declaration, transferring the goods from the bonded warehouse to China’s customs. At that time, order, payment and logistics details are checked and confirmed, before the goods are cleared through customs at the bonded zone and express couriered to the consumer.

When comparing both models, the second one offers some advantages in terms of speed of delivery and a reduction in transportation risk. Also, there is a greater number of products authorised for sale via this method, as long as the products are included in the List of Products Authorised for Retail Import via China’s Cross Border E-commerce.[2] For instance, if you want to import liquid milk you will only be allowed to do so via a FTZ. Consequently, this business model is becoming more popular.

e-commerce-in-a-basketOn the regulatory level, both models have favourable policies governing cross-border B2C e-commerce. Products are sold at a lower price, as most imported products brought into the FTZ are subject to a blended tariff rate—the so-called Cross-Border E-commerce Retail Import Tax—rather than normal import tariffs imposed on goods that are conventionally imported. For example, if an order transaction amount is lower than CNY 2,000 (roughly EUR 267) and an individual purchases products up to the value of CNY 20,000 (roughly EUR 2,671) annually, import duties will be levied for the imported goods. There is another favourable tax rate in this case: import VAT and consumption tax will be reduced by 70 per cent. These policies do not apply if the cost of products exceed the amount previously indicated.

Attention should be paid by SMEs to the most suitable business model according to their specific needs by selecting an FTZ that has a special preferential policy focus most applicable to its own CBEC business. For instance, areas known as Cross-Border E-commerce Comprehensive Pilot Areas (CBECPAs) and Pilot Free Trade Zones would be most recommendable for European SMEs. However, it should be kept in mind that FTZs differ in function, policies and names, which can initially cause confusion.

CBEC Pilot Areas

The State Council has approved the establishment of 13 CBECPAs in Hangzhou, Tianjin, Shanghai, Chongqing, Hefei, Zhengzhou, Guangzhou, Chengdu, Dalian, Ningbo, Qingdao, Shenzhen and Suzhou. The plans for these areas are implemented at the provincial level, with the pilot programmes varying between each area in terms of technical standards and regulatory models. These areas are considered more suitable for CBEC business because local governments actively implement programmes that aim to solve existing problems with customs clearance, settlement of exchange and tax rebates.

Some of the preferential policies associated with CBECPAs include, but are not limited to, the following:

  • Special customs clearance models:
  • CBEC enterprises can make batch declarations to customs, and do not need to make a declaration for each individual order.
  • CBEC enterprises can pay duty, import VAT and consumption tax once per month, and do not need to pay such duty and tax for each declaration.
  • CBEC enterprises can withhold and remit duty and tax, which is paid by the consumer, helping the CBEC enterprise to improve the consumer experience.
  • Establishment of ‘one-stop window’ systems, allowing CBEC businesses to make only one customs declaration – customs then deal with the entry-exit inspection and quarantine bureau (CIQ) to examine all documentation and products. This system improves the average customs clearance time and efficiency, and reduces costs.
  • Permission for CBEC enterprises to open a personal foreign exchange bank settlement account without the USD 50,000 per year limit.
  • Providing improved conditions for logistics companies in order to attract them to provide suitable services for CBEC business.
  • Strengthened IPR protection and an established credit system for CBEC enterprises, providing more fair competition in China for foreign CBEC business.

Taking into consideration that European SMEs do not have the same pool of resources that the Chinese e-commerce giants do, it is highly recommendable that they spend time identifying the most suitable business model and the location for their specific company. China’s FTZs, including CBECPAs and its pilot FTZs, could provide the most convenient platforms that will enable them to compete and prosper.

A&Z is a leading Chinese law firm, which employs over 55 experts consisting of attorneys, legal practitioners and business analysts across 11 jurisdictions. The Shanghai, Beijing, Dalian, Wuhan and Tokyo offices provide a full range of services covering Foreign Investment, Overseas Investment, Competition and Antitrust, Intellectual Property, M&A and Corporate Restructuring, Labour and Social Security, Dispute Resolution, Compliance and Corporate Social Responsibility, Finance and Capital Markets, Customs Logistics and Maritime Commerce, and Environment, Health and Safety (EHS).

[1] Originally translated from阿里研究院:《2016中国跨境电商发展报告》全文,

[2] “List of the Cross-border E-commerce Retail Imports” First Batch, 6 April 2016,; Second Batch, 15 April 2016. Accessed November 3, 2016.