Caixin Weekly | Border Trade Rife with Black and Gray Markets, Regulatory Gaps in Urgent Need of Patching (AI Translation)

财新周刊｜边境贸易充斥黑灰产 监管亟待补漏洞

Zou Ye's husband operates a port management company at Menglian Port in Yunnan Province, China. In 2018, their company invested 15 million yuan to establish a border trade market and inspection yard through the Mangxin Passage, a freight corridor linking China and Myanmar. Surprisingly, in 2023, customs authorities accused five individuals, including Zou Ye’s husband, of smuggling through deceptive trade methods. The company aimed to facilitate logistics; however, during the pandemic, the trade volume surged, leading to customs investigations revealing involvement of entities beyond border residents. [para. 1]

Border trade practices have specific policies that exempt border residents from import duties on goods valued below 8,000 yuan per day. During the pandemic, many border residents helped declare imports for goods owners in exchange for a small fee, suggesting issues within the trade system resting on border residents' allowances. From 2016 to 2021, 119 verdicts related to border trading smuggling were published, highlighting the gray areas exploited by some businesses. These operations usually involve local residents moving goods across the border in small quantities, closer to smuggling, than legitimate trade. [para. 2][para. 3]

Despite systemic issues, digital platforms have made it easy for border residents to declare imports. Some regions have thus become susceptible to smuggling and customs evasion. The growing scale of cross-border trade markets presents challenges of regulatory oversight, even as local governments implement policies like “cross-border trading plus local processing.” The objective here is to boost economic growth by transitioning from a "channel economy" to a "port economy." However, effective governance is continuously challenged by rampant disorder within these markets. [para. 4][para. 5]

Efforts are underway to update the "Border Trade Management Measures" to standardize and support on-site processing policies better. Concurrently, the Chinese government is launching initiatives promoting stable foreign trade growth, focusing on advancing border trade development and processing imports locally. Meanwhile, Vietnam is implementing restrictions on duty-free border trade, which by 2030 will shift all trade procedures to major ports, creating another challenge for China's border trade. [para. 6][para. 7]

Trade through the Mangxin Passage, crucial for goods like sugarcane and coal, experienced substantial growth during the pandemic. Despite this, irregularities in trade practices persisted, as border trade corridors became synonymous with tactical evasion of customs duties. Conflicting responsibilities between facilitators like Zou Ye’s company and the involved goods owners compound enforcement complexities. This discrepancy underscores the challenge in regulating border commerce authentically reliant on local resident trade. [para. 8]

Governments have encouraged “border trade plus local processing” that entails residents sourcing goods for local processing with imported items sold to processing plants. This approach, though fostering economic zones, poses practical challenges. The outlined presence of a 9% VAT adjustment in some provinces notably enhances industrial attractiveness. However, the model remains subject to misuse, demonstrated by cases of local enterprises falsely claiming imports under resident trade exemptions. [para. 9]

Investigations by customs authorities into resident-involved smuggling cases have emerged, with companies misreporting trade transactions being targeted. China's revised preventative measures aim to ensure legitimate trade and policy benefits continue aiding local economies. However, the divided responsibilities between residents and multinational enterprises perpetuate a "cat and mouse game," complicating customs' enforcement efforts and the efficient distribution of regulatory adjustments. [para. 10]

The overall effectiveness of these complex systems reflects in Hekou, Yunnan, where government-backed platforms facilitate cross-border procurement with VAT incentives stimulating business viability. Neighboring nations like Vietnam pose additional challenges by limiting trade flexibility. Operational efficiency improvements, coupled with impending regional changes, compel urgent compliance enforcement to sustain border trade viability. [para. 11]