11-Year Prison Term Stirs Fear Among China’s E-Commerce Secret Smugglers

The recent 11-year jail term handed down to a merchant on Taobao, China’s biggest consumer-to-consumer online marketplace, has raised the alarm in the country among amateur shopkeepers about being caught in the act of a widespread activity: “grey importing.” Essentially: smuggling. Usually done by sourcing goods from overseas – especially Hong Kong with its lack of a sales tax – where prices are lower than under China’s hefty import taxes, it’s an open secret that this illegal practice is one of the secrets behind the success of much of China’s C2C and B2C e-commerce industry.

The imprisoned e-tailer, identified only as Ms Li (pictured right), is an air stewardess who, like many people in the country, is also an amateur shopkeeper on Alibaba-owned Taobao. She sold cosmetics, making use of her job to buy up – and smuggle in – hundreds of thousands of dollars in pricey make-up from South Korea. In addition to the jail term, she was fined 500,000 RMB (US$79,000). Her boyfriend was identified as an accomplice and will spend the next five years in jail. The courts found the duo guilty of dodging sales taxes to the tune of 1.13 million yuan ($178,000). Another man, a Mr. Zhu, was found to have assisted the pair by getting them further staff discounts at a Samsung-run duty free shop in Korea (he’s a Samsung China employee), and he’s facing seven years in the slammer [1].

Smuggling luxury

Sure, this kind of smuggling happens a lot in offline retailing too. The most notorious act of grey importing is seen with the human gadget mules who carry sacks full of iPhones and iPads over the walkable border from Hong Kong to Shenzhen, thereby evading China’s import taxes and allowing the smugglers to make a profit whilst still selling the gadgets for a tad less than the official price in mainland China. Or, when it comes to electronics especially, it’s all about getting access to the hottest gadgets as quickly as possible – rather than waiting the inevitable few months for the iPhone to get its local regulatory approval to be sold.

Chinese social media users reacted with shock to the hefty sentence. Some bemoaned the excessive import taxes in China that make luxury items as much as 30 percent cheaper in other countries. That tax rate might be cut soon for 730 selected items, but it remains to be seen if the move can stop the hemorrhaging of import tax revenue in China to a combination of monied Chinese buying luxury goods overseas, and grey importers smuggling in every item under the sun.

But for now, the courts have clearly set an example with the Ms Li case, and other online merchants must be worried about how their own grey importing might be detected, possibly landing them in prison too. Hopefully it might also cause a rethink of the sales tax.

As for the scale of the problem, Professor Lu Benfu from the Chinese Academy of Sciences has been telling local media this week that the smuggling problem amounts to an annual trade volume of RMB 10 billion ($1.58 billion). But with China’s B2C e-commerce market – to say nothing of the C2C sector – worth as much as 81.8 billion RMB (or $12.9 billion) this year, that could well be a conservative stat to apply to China’s addiction to smuggling luxury items.

[Image of Ms Li: 17utt; main image: Flickr user tweedlebopper]