Barriers and Legal Solutions to e-Logistics in China

and Jinquan Tang2



(1)
Management Science Department, Xiamen University, Xiamen, 361005, China

(2)
Management Science Department, Minjiang College, Fuzhou, 350108, China

 



Abstract

In 2004, the World Investment Report observes the trend of the changes of interest of foreign investment from manufacturing to service industry. In early 1970s, only 1/4 of foreign direct investment (FDI) went to the service industry. Now, it has soared to 60 %, or USD$440 million. The structure of the FDI in the service industry has also changed. Traditionally focused on trade and finance, foreign capital now has developed better appetite toward power, telecommunication, water service, and various commercial sectors. China’s logistics is certainly one of them and receives much more attention than ever after China’s WTO entry. After December 11, 2004, China has opened up its logistics industry to overseas competition, in keeping with its WTO commitments. China’s entering into the WTO has inspired a wave of reforms in existing laws and regulations, including laws in e-commerce. There is no formal, centralized regulation of e-commerce, but beginning from 2000, some government agencies and some local governments have begun to issue regulations specifically targeted at the Internet, but without coordination this effort is creating a patchwork of rules. On August 28, 2004, the Standing Committee of the 10th National People’s Congress enacted the Electronic Signature Law of the People’s Republic of China” (“E-signature Law”), effective April 1, 2005, to boost electronic business, which for the first time legalizes increasing electronic deals. The law grants electronic signatures the same legal effect as handwritten signatures and seals in business transactions, and setup the market access system for online certification providers to ensure the security of e-commerce. While the Internet, and the need to regulate e-commerce via the Internet, has made the process of drawing up new laws more complex, it is also the case that the uneven use of the Internet in China may itself prove to be a barrier to the countrywide management of logistics. Therefore, this article plans to discuss some barriers to e-logistics in China, especially from legal perspectives and introduces some legal solutions thereafter. Finally, this article wants to conclude that China has to be sensitive and responsive to changes in rules and regulations that will cause uncertainties and lead to a decline in confidence in its information and communication technology (ICT) and logistics industries.


Keywords
WTOe-CommerceBarriers to e-logisticsLegal solutions


(Published by “Proceedings of The KIECA International Conference 2005 on Trade, Investment, Logistics & E-Biz,” Korea Internet e-Commerce Association (KIECA), 2005. 10.1, pp. 333~345.).



7.1 Introduction


In 2004, the World Investment Report observes the trend of the changes of interest of foreign investment from manufacturing to service industry. In early 1970 s, only 1/4 of foreign direct investment (FDI) went to the service industry. Now, it has soared to 60 %, or USD$440 million. The structure of the FDI in the service industry has also changed. Traditionally focused on trade and finance, foreign capital now has developed better appetite toward power, telecommunication, water service, and various commercial sectors.1 China’s logistics is certainly one of them and receives much more attention than ever after China’s WTO entry.

Even though most of the companies are small in comparison with their overseas counterparts, and the whole industry is still in its early stages of development, the size of the mainland’s logistics industry was worth around RMB 60 billion (US$7.22 billion) in 2003 and is expanding at a rate of 30 % year-on-year.2

The value of China’s logistics and related markets has exceeded RMB 2 trillion (US$242 billion), and there are 730,000 logistics enterprises in operation. In 2003, China’s logistics industry realized RMB 788 billion of added value, up 10.5 % over that of the previous year and 1.4 and 3.8 % higher than growth rates of gross domestic product and the service industry in the same period.

The International Monetary Fund (IMF) predicted the market share of the logistics industry in China will rise to RMB 1 trillion (US$120 billion) in value by 2010, compared with the RMB 461.8 billion (US$55.6 billion) in 1999.3

In 2003, the China Logistics Information Center (CLIC) reports, the highway transport sector grew 2.5 % to handle 11.4 billion tons of cargo; rail transport, 6.5 % to 2 billion tons; water transport, 10.6 % to 16 billion tons; and air transport, 7.4 % to 2.17 million tons.

In addition, according to the “2004 Chinese Circulating Industrial Development Report” released by the Ministry of Commerce and the Development Research Center (DRC) of the State Council in Beijing on April 13, 2005, the circulating industry, which mainly consists of wholesale, retail, and other-related sectors, has played an important role in fueling the country’s economic development and has maintained rapid growth. Among them, the added value of China’s logistics industry accounts for 8 % of the country’s GDP.

However, in contrast, as Huang Hai, assistant to the Ministry of Commerce (MOC) Minister, puts it: “Low efficiency in the circulating industry is a hard nut to crack. China’s logistics cost is two times as high as that in developed countries. In addition, Chinese logistics companies are less well organized with few links and are seldom grouped, which prevents them from becoming internationally competitive. Few circulating companies have adopted advanced technologies, such as e-commerce.”4

For example, the high cost of logistics is a severe impediment to the growth in international investment and trade in Shanghai according to China Transport News. A recent survey of 170 Shanghai-based trading companies shows that, despite the mainland’s inexpensive labor, their costs in procurement, transport, and finance are higher than those for similar operations in the USA by as much as 40 %. The publication also reported that, by lowering its logistics costs by 1 % point per unit, Shanghai could gain more than US$5 billion in import and export revenues.5


7.2 Impact of WTO on China’s Logistics and Distribution Industry


The complexity of the legal regime is always an issue in logistics management in China. Law and regulations relating to logistics management are enforced by more than one governmental ministry or bureau in China.6 An outline of the status of the different services and their licensing authorities is given in Table 7.1.


Table 7.1
Regulatory framework for foreign participation in distribution
















































Sub-sectors

Foreign participation

Authority for license approval

International freight forwarding

Regulated

MOFCOM

Airfreight forwarding

Regulated

CAAC, MOFCOM

Logistics center

Encouraged

MOC, MOFCOM

Domestic trucking

Regulated

MOC, MOFCOM

Consolidation

Regulated

MOC, MOFCOM

Warehousing

Encouraged

MOC, MOFCOM

Customs brokerage

Heavily Regulated

CGA, MOFCOM

Shipping line

Regulated

MOC, MOFCOM

Airline

Heavily Regulated

CAAC, MOFCOM


Abbreviations

MOFCOM—Ministry of Commerce, CAAC—Civil Aviation Administration of China, MOC—Ministry of Communications, and CGA—Customs General Administration

Source Hong Kong Trade Development Council, EIU with some modifications by Yimeei, Guo

On the one hand, bureaucracy is basically intended to resolve conflicts among different interest parties, i.e., consumers, entrepreneurs, labor, other producers, and environment. But on the other hand, it could create more hurdles for those parties. Multinational logistics operators may spend months, if not years, applying for the necessary operating licenses and permits, which are issued by different government ministries, departments, or bureaus. FDI will continue to be introduced into China only if foreign investors are protected from bureaucratic red tape and the uncertainty of political risks by an increasingly improved legal framework.7

The goal of the rules under the WTO is to help producers of goods and services, exporters, and importers conduct their business, while allowing governments to meet social and environmental objectives. The overriding purpose of the system is to encourage trade flow as freely as possible, so long as there are no undesirable side effects. In part, this means removing obstacles or barriers. It also means ensuring that individuals, companies, and governments know what the trade rules are around the world, and giving them the confidence that there will be no sudden changes in policy. In other words, the rules have to be transparent and predictable.

The government’s ambitions, as laid out in the Five-Year Plan, in accordance with the implementation of WTO and the Sino-US bilateral agreements, deem the next few years as crucial to the development of an integrated logistics and distribution industry. Accordingly, the central government continues to encourage state-owned firms to form alliances with both domestic and foreign partners (Table 7.2).8


Table 7.2
Market access restrictions in logistics services


































Sector

Limitations on market access

Road

Foreign majority stake of up to 75 % in JVs currently permitted; wholly foreign-owned enterprises (WFOEs) permitted by 12/11/04

CEPA allows WFOEs from 1/1/04

Rail

From January 1, 2003, foreign majority stake permitted; WFOEs permitted from 1/1/06

CEPA allows WFOEs from 1/1/04

Maritime

Minority shares allowed in JVs, degree depends on sub-sector of maritime transport services

CEPA allows WFOEs from 1/1/04 in most areas, depending on sub-sector

Storage and warehousing

WFOEs permitted by 12/11/04

CEPA allows WFOEs from 1/1/04

Freight forwarding

Foreign majority stake of up to 75 % in JVs currently permitted; WFOEs permitted by 12/11/05

CEPA allows WFOEs from 1/1/04


CEPA agreements apply to “qualifying Hong Kong service suppliers,” which can be taken to include Hong Kong permanent residents and juridical persons such as corporations, trusts, partnerships, joint ventures, sole proprietorships, or business associations organized under the relevant laws of the Hong Kong SAR

Source USA—China Business Council; Access Asia; Baker & McKenzie

On August 5, 2004, the National Development and Reform Commission (NDRC), MOFCOM, Ministry of Public Security, Ministry of Railways, Ministry of Communication, General Administration of Customs, State Administration of Taxation (SAT), Civil Aviation Administration of China, and the State Administration for Industry and Commerce (SAIC) jointly issued the “Opinions on Promoting the Development of a Modern Logistics Sector in China.”

According to the opinions, a “logistics enterprise” refers to an economic organization that owns or rents transportation vehicles and warehousing facilities, contains in its business scope the provision of transportation and warehousing services, is able to provide integrated transportation, agency, warehousing, loading and unloading, processing and delivery services, and has the capacity to bear independent civil liability. The opinions set out preferential registration, tax, finance, and customs policies to encourage the development of logistics enterprises. The opinions also encourage major foreign logistics enterprises to establish subsidiaries in China and domestic logistics enterprises to take advantage of foreign capital, equipment and technology.

In addition, after December 11, 2004, China has opened up its logistics industry to overseas competition, in keeping with its WTO commitments. In other words, China’s restrictions on geographic location, equity participation, and the number on foreign invested retail enterprises were removed.9 Worldwide, the logistics services industry grew in all major markets, with management increasingly capable of expanding operations and making operations more economical.


7.3 e-Commerce in China



7.3.1 The Meaning of e-Commerce


Electronic commerce (e-commerce) includes any form of economic activity conducted via electronic connections.10 E-commerce is the trading of goods and service that takes place electronically, such as over the Internet.11 E-commerce is the general term for the computer-to-computer processing of a growing variety of transactions, whether or not they take place using the Internet. These transactions range from electronic data interchange (EDI)—the well-established handling of business-to-business purchase orders, invoicing, remittance notices, and other routine documents—to electronic payment systems, credit cards, and consumer sales of goods and services.12

Baker and McKenzie (2000) pointed out that e-commerce is defined as the term used for commercial transactions involving the creation, advertising, sale, and distribution of products or services conducted by processing and transmitting digitalized data—including text, sound, and visual images—over open (e.g., Internet) or closed (e.g., Intranet) networks. The term generally includes transactions conducted through the Internet, Intranet, EDI, electronic mail (e-mail), and so forth.13

On March 28, 2000, the Beijing Municipal Administration for Industry and Commerce (“BAIC”) issued the “Notice of the Beijing Municipal Administration for Industry and Commerce Concerning E-Commerce Activities Registration” (the “Circular”). The Circular defines e-commerce to include using the Internet to sign contracts and conduct business, disseminate commercial advertising, promote products, provide Internet access, network technology services, graphic design or e-commerce or information services, or undertake any other profit-making activity.

Although e-commerce is not clearly defined in Chinese legislation, yet transactions using data messages are legally recognized under the “Contract Law of the People’s Republic of China,” which took effect on October 1, 1999. The data messages cover messages in the following formats: telegrams, telexes, facsimiles, EDI, and e-mails.