The COVID-19 epidemic has devastated the tourism and retail sectors worldwide, leading to many Chinese being confined within their homes. But this did not stop their desire to shop, which was ignited with the implementation of Hainan's new tax-free policy, with "daigou" also ready to start.

The new business dubbed "daigou" in Chinese, refers to the activity that an army of informal traveling shopping agents purchase products in bulk from stores outside the Chinese mainland or duty-free shops and import them informally to the mainland.

South China's island province of Hainan has been committed to opening-up as a top priority through offering greater visa-free access and duty-free shopping for tourists, with four offshore duty-free shops now in operation there, two in Haikou, one in Qionghai and one in Sanya.

Starting from July 1, Hainan increased its annual tax-free shopping quota from 30,000 yuan to 100,000 yuan per person, expanded the range of duty-free goods from 38 categories to 45, and lifted the previous tax-free limit of 8,000 yuan for a single product.

From July 1 to 27, data from the General Administration of Customs (GAC) showed Hainan reported 2.22 billion yuan (about 317 million U.S. dollars) worth of sales in duty-free shopping by tourists, up 234.19 percent from the same period last year.

Also, such a large tax-free discount has naturally lured many people to engage in daigou.

Local authorities deem such business illegal smuggling, and have been cracking down on this growing practice.

According to the report by International Business Daily sponsored by the Chinese Commerce Ministry last month, Haikou Customs has launched three rounds of crackdowns on "illegal and criminal smuggling" through offshore duty-free channels since November 2019, with 13 "smuggling gangs eliminated" and thousands of items including cosmetics confiscated.

At the same time, 63 passengers who violated the regulations on offshore duty-free shopping were not allowed to enjoy the policy within three years, the report said.

Why does daigou exist?

"Daigou is a normal business practice, based on an inevitable fact that market prices are different in different places," Wang Jian, member of China's e-commerce law drafting group, professor of University of International Business and Economics, told CGTN.

According to Wang, the reason why daigou exists is that there are opportunities for arbitrage in the market. "In other words, consumers know that the same goods cost lower elsewhere, so they are certainly inclined to find someone else to go there for purchase when unable to get there themselves."

"Arbitrage is actually ubiquitous in the world, rather than only in Hainan," said Wang, stressing it's the booming development of e-commerce that makes daigou so extraordinarily compelling.

"In fact, the emergence of trade exactly owes to the existence of global arbitrage opportunities. As the global market becomes more unified and the flow of information is more abundant, daigou may emerge endlessly," he added.

Is daigou illegal?

"There is currently no clear official definition of daigou, but it is not entirely an illegal or criminal act in itself," Feng Xiaopeng, a partner of King & Wood Mallesons specialized in e-commerce and customs compliance for nearly 20 years, told CGTN.

According to Feng, the reason why daigou is banned is that the secondary distribution turns "articles" into "goods" of trade.

"Based on the regulation on offshore duty-free shopping in Hainan released by GAC in July, it is forbidden to purchase duty-free goods for others or resell them in the mainland market with the purpose of making profits. However, the actual conditions are much more complicated as it is difficult for regulators to determine the limits of 'profit-making'," Feng noted.

As Feng puts it, the customs has always supervised whether the article is for personal use (including self-use and as a gift to others) and whether it is within reasonable quantity. In other words, the import of self-use articles within the quantity generally is exempted from import duties.

He further suggested that it is feasible to define "profit-making" by considering whether the frequency of daigou and the amount of payment are sufficient to constitute consideration.

Wang Jian also agreed that it's hard to say arbitrage is illegal. "Daigou is actually exploiting policy loopholes."

In his view, the more different policies and regulatory treatments are given in the market, the more likely it is to cause price differences, and the more likely it is to the emergence of arbitrage behaviors such as daigou. It can be said that arbitrage behavior is more caused by policy factors. "For example, tax-free and taxed products, clear and poor sales channels are all likely to result in diverse prices."

"Arbitrage is a good behavior of market mechanisms, through which prices can be stabilized and the market can be improved. It can also allow the government to adjust regulations to make it more suitable for originally set goals," Wang explained.

"Thus, arbitrage itself is not a bad thing and daigou itself does not violate the laws of the market," he said, noting that it's just that daigou lets us see that the existing policy is not detailed enough in terms of supervision and may deviate from the established goal in the process of practice."

It's essential to distinguish between market behavior and illegal behavior. The legitimate consumption of consumers and legitimate operation of businesses should be guaranteed, Wang added.

How to supervise daigou?

Wang Wei, director of the administration's ports supervision department of GAC, once said there is no supervision system special for daigou from the customs supervision system in China. "Currently, the customs mainly implements different supervision policies based on different channels of daigou, such as passenger inspection, or postal delivery."

"In practice, violations of laws and regulations in daigou are mostly investigated and dealt through administrative means such as customs supervision, and only the cases with serious circumstances will be resolved by judicial means, usually with the crime of smuggling ordinary goods," Feng Xiaopeng told CGTN.

He further interpreted that Chinese E-commerce law does not have specific provisions for tax-free purchasing. "In fact, the offshore duty-free policy for Hainan is still mainly operated by offline entity duty-free shops. However, some online transactions, like booking online,  can appropriately refer to the regulatory provisions of the E-commerce Law."

"Compared to domestic supervision, the overseas laws are more concerned with the taxation issues arising from the inflow and outflow of large amounts of funds in personal accounts. For example, there are relevant regulations in the United States that reselling requires a specific certificate and paying corresponding taxes," Feng cited.

Professor Wang Jian admitted that this kind of personal fragmentation and small-amount purchasing behavior, to some extent, has certainly caused great trouble in customs supervision and resulting in rising regulatory costs, noting that people should be wary that such behavior may distort the original intention of tax exemption, namely the country transfers part of the tax dividend to consumers.

"We must correctly handle the relationship between the market and government supervision, which should be a coordinated relationship. We cannot blindly deny the act of daigou as well as government oversight toil. It's necessary to give the market and regulators some room and time for adjustment," he told CGTN.

The policies on retail imports via e-commerce introduced by the customs, like capping the quantity for purchasing the iPad, according to Wang, are precisely a measure to improve and reduce market distortions.

"The direction of future regulatory policy innovation is to simplify and unify regulatory methods as much as possible, allowing the full flow of information and commodities," he mentioned.