The End of E-commerce Freedom?

How a new law will affect IPR and online commerce in China

The electronic commerce (e-commerce) market in China has been growing at an astonishing rate, however this market expansion has come at the expense of meaningful regulation. With an ever-increasing number of intellectual property infringements taking place, China is making an attempt to step up and reign in this industry. In this article, Helen Gao, legal analyst at China Policy, clarifies if this new law portends the end of ‘freewheeling days’ for e-commerce in China.

China’s e-commerce market, totalling United States dollar (USD) 1.1 trillion in sales in 2017, is the world’s largest. However, this market is improperly regulated with counterfeit goods, purchased positive reviews and inflated sales numbers found on retail platforms like Taobao. Furthermore, the absence of an effective tax scheme means the government is missing out on collecting billions of dollars in potential revenue.

The draft E-commerce Law of the People’s Republic of China (E-commerce Law), is currently in its second round of deliberation and is the first law dedicated to regulating online retail in China. The law is expected to be passed in March 2018, giving administrative agencies greater control over e-commerce activities that will have far-reaching implications on all participants, including overseas businesses.

The end of anarchy in cross-border e-commerce
The E-commerce Law aims to tighten supervision over cross-border e-commerce. Foreign retailers will no longer be allowed to sell directly to Chinese customers. Instead, they will have to market to the Chinese audience by going through a Chinese-owned or controlled e-commerce platform with a government-issued internet content provider (ICP) licence.

Digital infrastructure will be put in place to ensure that e-commerce imports will follow the relevant Chinese laws when it comes to declaring goods, paying taxes and going through inspection and quarantine procedures. E-commerce processing centres, operated by Chinese e-commerce platforms, will have to enforce these procedures before distributing their products. An example of an e-commerce processing centre is the Alibaba-controlled Hangzhou Cross-Border E-commerce Processing Pilot Area.

The law will lead to longer shipping times and higher prices for foreign products sold on the Chinese Internet, a disadvantage that could negatively impact the micro, small and medium-sized enterprises (MSMEs) that benefit most from the current ‘inclusive trade’ model.

Increased liability for e-commerce platform operators The second draft of the E-commerce Law places the responsibility squarely on e-commerce platform operators when it comes to protecting consumer and intellectual property rights (IPR). For example, platform operators are required to investigate and punish IPR infringements brought to their attention and will be held accountable for any failure to act. Additionally, they are asked to verify the person’s identity and the business’s operating permits before granting access, while also taking punitive action against businesses that engage in illegal practices.

The measures being taken to strengthen IPR protection are expected to benefit foreign companies that have long seen their sales in China undermined by counterfeiting. The second draft of the E-commerce Law in particular requires businesses accused of infringing IPR to file non-infringement declarations and present evidence to prove their innocence in order for e-commerce platforms to lift their punishments.

Personal data security
The first draft of the E-commerce Law included concrete rules for collecting and using consumer information. However, the second draft dropped those provisions and e-commerce operators must now comply with the Cybersecurity Law of the People’s Republic of China (Cybersecurity Law), which went into effect on 1st June 2017. The Cybersecurity Law requires foreign companies that are operating in China to store personal data locally. Any data sent across borders will be subject to stricter scrutiny for security-related reasons.

Foreign companies that are dependent on e-commerce sales in China, like Apple and Amazon, will be hit the hardest. Among other things, it will mean setting up local transaction processing and cloud storage centres, which will be costly and ineffectual at improving business efficiency and data security. Another worrying sign is that in the second draft of the E-commerce Law, a provision in the document allows commerce and taxation ministries to access consumer data on e-commerce platforms, raising fears that the State may be given too much access to consumers’ personal information.

Points under discussion
On the 4th November 2017, at the National People’s Congress Standing Committee Meeting members proposed revising the law. Several delegates lobbied for the law to encompass WeChat business activities. Although WeChat is not considered an e-commerce platform, business transactions were projected to reach renminbi-yuan (CNY) 800 billion by the end of 2017. Anonymous and unlicensed sellers frequently reach out to potential consumers on the application, free from proper institutional supervision.

Regarding personal information safety, members argued that the E-commerce Law should be more specific about which government departments can request information from e-commerce operators. They proposed that the information should be provided in ways that do not disclose the identities of individual consumers, with exceptions being made for police investigations.

The E-commerce Law should delegate responsibilities to specific supervisory bodies in order to ensure its implementation, argues Yin Zhongqing, vice chair of the Financial and Economic Affairs Committee of the National People’s Congress of the People’s Republic of China. At the moment, the law talks about “relevant agencies” without adequately specifying who will carry out tasks such as overseeing financial transactions and maintaining basic digital infrastructure.

Indicator for the future
The E-commerce Law together with other recently passed policies, like the Anti-unfair Competition Law of the People’s Republic of China, reflects what the central government considers to be at the top of its reform agenda. This includes tighter control over personal data, stronger IPR protection, and a more assertive policy stance when dealing with foreign businesses. As e-commerce’s role in Chinese retail continues to grow, businesses will have to tread carefully. The key to drafting a good e-commerce law is to guarantee market fairness and efficiency without stifling innovation in one of China’s most dynamic economic sectors. When the law is finally released during the National People’s Congress plenary session in March, it will be closely watched by e-commerce participants as well as entrepreneurs in other industries as an indicator of what is to come.

China Policy is a research and strategic advisory group based in Beijing, China. Working with clients at the leadership, executive and research levels, they deliver clear insight into China’s policy world as it affects strategic and operational decision-making not only in China but around the world.