China’s new e-commerce law that took effect on January 1 is the Chinese government’s biggest push yet to end its rampant gray market of foreign goods.

Among a range of new regulations aimed at taming the chaos of China’s massive e-commerce market, the law states that all online vendors need to register as official businesses and pay taxes, including individuals. If enforced effectively, this will deal a major blow to the gray-market sellers known as daigou (代购) which have business models that are basically dependent on tax evasion.

High tariffs on imported goods and brands’ own China price premiums have created a big business opportunity for daigou sellers, which smuggle everything from baby powder to Chanel bags in their luggage to sell without the high markup.

For luxury goods, the price gap has grown for items sold in China vs. those abroad, according to Gartner L2’s Luxury China: Gray Market report. Among luxury fashion brands listing prices online, an item sold on their China site in 2018 was on average 21% more expensive than one sold on their US site. This was up from an average of 11% in 2017. The price gap with France is even wider, with luxury goods 36% more expensive on their China sites than their France sites.

The e-commerce law is part of a multi-pronged approach to deter daigou sellers avoiding tariffs. It was preceded by a tougher customs crackdown at airports during China’s Golden Week holiday period, with stringent luggage inspections and enforcement of fines for those caught trying to sneak goods in over the limit. In addition to going after individual sellers, the law also makes platforms like Taobao and WeChat liable for illegal goods sold through the platforms. While this pertains mainly to fakes or items with questionable product safety, it’s also reportedly hitting daigou sellers as well.

But enterprising individuals have shown when there’s a will, there’s a way. Reports have popped up that daigou sellers are posting hand-drawn images of items with code words on WeChat to avoid any automatic detection by the platform. They’re also asking people to place their orders via voice message. Meanwhile, daigou sellers smuggling beauty items in are simply taking them out of their boxes to make them look like personal items.

The fate of daigou has a direct impact on global luxury brands’ bottom lines given the fact that the majority of Chinese luxury purchases are made outside mainland China, and initial reports on customs crackdowns even hit luxury and beauty stocks.

If the Chinese government can succeed at stifling daigou sales in spite of sellers’ clever workarounds, the future of the market will depend on brands’ own pricing policies. Brands that keep China prices significantly higher than those abroad could still prove profitable for daigou sellers, meaning a continued high third-party influence on brands’ online presence.

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