Cross-border e-commerce in the cosmetics industry – what are the limits of trade liberalization?

HM&P Law Firm
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    Cross-border e-commerce in the cosmetics industry – what are the limits of trade liberalization?
    Posted on: 05/06/2024

    In recent years, e-commerce business has spread across the world across in various industries, and the cosmetics industry is no exception. The explosion of cross-border e-commerce opens the door for cosmetics companies to seize advantage of opportunities in the global market. However, in addition to various opportunities, cross-border e-commerce also brings challenges and concerns, posing problems for authorities to solve the limits of trade liberalization in the cosmetics industry.

    1. The power of cross-border e-commerce in the cosmetics industry

    1.1. The importance of cross-border e-commerce in the cosmetics industry today

    According to the World Trade Organization (WTO), e-commerce includes the production, distribution, marketing, sale or delivery of goods and services by electronic means[1]. Cross-border e-commerce includes activities as defined by the WTO but the scope of activities is not limited by geographical distance. Therefore, cross-border e-commerce accounts for a high proportion in the international cosmetics industry, especially, after the supply chain crisis since the Covid-19 pandemic and Vietnam is not out of the seismic of global e-commerce. According to the Vietnam E-commerce White Book in 2023, the growth rate of e-commerce has not significantly decreased (11%), the scale will reach 16 billion USD and Vietnam will become the country with the highest growth rate in Southeast Asia (including Indonesia, Thailand, Vietnam, Malaysia, Singapore, Philippines)[2].

    (Source: Internet)

    Cross-border e-commerce is currently contributing to the development trend of the cosmetics industry. With the great development of technology and the spread of the Internet, online shopping has become an integral part. With the significant increase in the number of online consumers worldwide, cosmetics brands have shifted their focus to expanding their online sales channels to reach a wider audience and seize opportunities in new markets. Typically, leading cosmetics companies from France, the United States, Japan, Korea have succeeded in developing cross-border e-commerce strategies, from building online shopping websites under their own brand names to selling through giant e-commerce platforms such as Amazon, Alibaba, Sephora.... Their success is a true testament to the power and potential of cross-border e-commerce in driving the growth and expansion of the cosmetics industry.

    In addition, one of the critical factors in the development of the cosmetics industry is the ability of cosmetics companies to experiment and implement different business models through online platforms. By combining cosmetic products with online services, cosmetics brands can add value to customers and differentiate themselves in a competitive market. 

    However, there is no denying that the cosmetics industry is becoming increasingly competitive. Cross-border e-commerce requires companies to continuously improve the quality of their products, services and customer experience. Cosmetics brands must constantly innovate and adapt to market changes in order to survive and grow. The development of the multinational online market creates a significant competitive environment compared to the traditional business, which leads to constant changes on their business, therefore, cross-border e-commerce is one of the factors contributing to the development of the cosmetics industry in the digital age.

    1.2. Limits of trade liberalization for cross-border cosmetics business through e-commerce platform

    With the spread of the e-commerce wave, the cosmetics industry in Vietnam is facing a great challenge as it has not established a complete legal corridor for cross-border cosmetics business through e-commerce platforms. Most specialized legal documents, such as Decree 93/2016/ND-CP and Circular 06/2011/TT-BYT, have not fully and timely updated the changes of cross-border e-commerce.

    Especially in the context of an increasingly changing business environment to online forms, there is a need to establish a clear and flexible legal framework for Vietnamese cosmetics businesses to effectively operate on international e-commerce platforms such as Amazon, Alibaba, or eBay, and vice versa for foreign businesses when providing services to Vietnamese consumers. The lack of a legal framework also creates an unsustainable business environment in which many Vietnamese businesses are struggling. Recently, the legal regulation related to the management of cross-border trade activities is the Draft Decree regulating the management of imported and exported goods transacted via e-commerce ("Draft Decree"), which can be applied to business activities through multinational online platforms. However, the Draft Decree is not closely aligned with the current practice of the cosmetics industry.

    A notable change in the Draft Decree is that owners of e-commerce trading floors and e-commerce websites who do not have a commercial presence in Vietnam when providing services are required to establish a representative office in Vietnam[3]. This regulation is aimed at increasing the responsibility of foreign enterprises providing e-commerce services to the management of authorities for activities in Vietnam, and at the same time creating conditions for enterprises providing cross-border e-commerce services to supervise the activities of e-commerce floor owners in the territory of the South of Vietnam. Otherwise, this change is insignificant if compliance with specialized laws is still an unanswered question. 

    Does trade liberalization mean removing all barriers, including the legal framework, to strengthen a country's cosmetics industry? The lack of regulations for cross-border cosmetic business activities via e-commerce has significant consequences for domestic enterprises or even consumers, and requires timely amendment by the Legislative Assembly.

    2. Trade liberalization - impact on the domestic cosmetic industry

    2.1. Increased competitive pressure from imported foreign cosmetics

    (Source: Internet)

    The domestic cosmetics industry is facing increasing competitive pressure from foreign cosmetics companies in many aspects, including product quality, price, and strict legal standards for entering a country's market.

    First and foremost, one of the biggest challenges for domestic cosmetic companies is the pressure on product quality. Foreign cosmetic products are often valued for their quality, as they comply with the strict standards of the FDA in the United States and Canada, the EC guidelines in European countries, and the use of advanced technology in the manufacturing process. Meanwhile, some domestic companies may find it difficult to meet these standards due to limitations in research and development capacity, capital and technology, resulting in a lack of competitiveness in providing high-quality products.

    Second, pressure from foreign cosmetic products may also come from competitive prices. Although Vietnam has not committed to reduce import tariffs for CPTPP (Comprehensive and Progressive Agreement for Trans-Pacific Partnership) member countries in the field of cosmetics, major cosmetics markets such as Japan, South Korea, and Thailand are increasingly improving production capacity and optimizing technology, resulting in relatively low import prices for products reaching Vietnamese consumers. In fact, domestic cosmetics enterprises often face competition from imported products with lower prices due to low domestic production and transportation costs, e-commerce platforms often have incentives on product prices to stimulate supply-demand of online customers as well as support policies from exporting countries.

    Third, the domestic cosmetics industry is facing disparities in brand and customer sources from international enterprises. International cosmetic companies usually own their long-standing cosmetic brands in the market. These brands have a stable and loyal customer base, creating a solid competitive advantage to maintain their business and invest in product R&D. On the contrary, the majority of domestic cosmetic companies are small and medium enterprises, which do not have an existing number of customers, which may lead to difficult to reach target customers.

    2.2. The challenge of legal compliance

    2.2.1. Lack of control over imported cosmetics through e-commerce

    While e-commerce offers many benefits in terms of expanding market access and reducing shipping costs, it also presents management challenges. On e-commerce platforms, sales can be made quickly and easily, in contrast to the complex business controls typically associated with a product that is applied directly to the human body. Companies can easily set up online stores and sell cosmetic products without having to comply with regulatory requirements for product safety and quality.

    Quality management and protection of consumer interests for cosmetics are becoming a major challenge for relevant government authorities. Due to the application of the cosmetic post-inspection mechanism, these cross-border purchased products are not subject to any inspection at the entry stage[4]. In practice, when cosmetics are ordered through foreign e-commerce platforms or directly from websites of foreign cosmetic enterprises, it becomes more difficult to protect consumers' interests and there is no entity responsible for the product. This issue raises questions about the ability to control and handle the consequences of cosmetics trade on cross-border e-commerce platforms.

    Many cases have been documented where unsafe or substandard cosmetic products are sold on foreign e-commerce websites in Vietnam. These products often lack quality control and may pose health risks to consumers. Meanwhile, the intermediaries as foreign e-commerce platforms are not responsible for defective products. Therefore, it is necessary to have stricter control coming from relevant authorities through legal documents when foreign goods are imported into Vietnam.

    2.2.2. Customs policy and tax impacts on cross-border trade in cosmetics

    Although the Draft Decree is in the process of being developed and adopted for practical application. However, under the current regulations and the expected regulations in the Draft Decree, which will be updated on December 17, 2021[5], the quality control activities for cosmetics purchased directly from overseas by consumers are almost unregulated. Specifically, according to the provisions of Article 13, Point B, Clause 1 of the Draft Decree, imported goods transacted through e-commerce with a customs value of each item of less than VND2,000,000 or more than VND2,000,000 for single-unit imported goods (excluding goods subject to inspection and goods listed under the control of the Ministry of Culture, Sports and Tourism) are exempt from licenses, conditions and professional inspection, with a limit of 01 orders/day and not more than 04 orders/month for each organization or individual. Thus, if this regulation is implemented in practice, cosmetics will not be subject to specialized inspection in this case.

    Meanwhile, regarding import tax, according to the provisions of Article 29 of Decree 134/2016/ND-CP, goods with a total customs value of less than VND500,000 or a total import tax payable of less than VND50,000 for a single import are exempt from import tax. However, according to Article 14 of the Draft Decree, the cases in which goods are exempt from import tax have changed in the direction of expanding the possibility of exemption. Specifically, imported goods transacted through e-commerce are exempt from import tax if (i) the customs value of imported goods is less than VND2,000,000; or (ii) the customs value of imported goods per order exceeds VND2,000,000 but the total import tax payable is less than VND200,000.  Therefore, this creates some pricing pressure on domestic cosmetics enterprises, as import taxes also affect the prices of cosmetics from these enterprises to some extent. However, unlike the quality control of cosmetics, which needs to be implemented more strictly due to the safety nature of cosmetics, the author believes that exempting small value cosmetics from taxes when purchased from abroad is reasonable because this provision is aimed at consumers. However, in order to balance the interests of domestic cosmetics enterprises, the author suggests that the Draft Decree should limit the total value of tax-exempt goods in one year for an individual/organization engaged in cross-border online trading activities, thereby restricting the practice of splitting orders to benefit from tax exemptions.

    3. Ensuring fair competition for businesses in the face of trade liberalization

    In order to ensure fair competition for cosmetics enterprises in the context of trade liberalization, control measures on imported cosmetics through tax, customs and special inspection policies play an important role in protecting the domestic cosmetics industry. One of the most important measures is to establish a reasonable tax and tariff policy for imported cosmetics. By applying appropriate import taxes and tax exemptions, the government will help create a fair competitive environment for both domestic and foreign enterprises. Applying tariffs that reflect the level of competition among cosmetic products promotes fairness in the market.

    In addition, strict control of cosmetics through customs regulations plays an important role in ensuring and improving the quality and safety of imported cosmetic products. One problem with the current draft legislation is that the specialized inspection procedures are not uniform. While the draft decree stipulates specialized inspection responsibilities for imported goods according to specialized laws, the draft decree on cosmetics management does not mention this issue. Therefore, it is necessary to give reasonable consideration to the provisions in the drafts in order to uniformly apply them on the basis of strict and effective implementation to prevent the import of products that do not meet the quality or legal requirements of the host country. For example, referring to the regulations in Canada, the country will conduct random testing of imported cosmetics to ensure compliance with quality and safety standards. This activity not only helps prevent the importation of counterfeit or substandard products, but also increases consumer confidence in cosmetic products on the market, including those purchased through e-commerce methods.

     

     


    [1] [https:// docs.wto.org/dol2fe/Pages/FE_Search/DDFDocuments/31348/T/WT/L/274.DOC], retrieved 2024-04-18.

    [2] Part II Chapter II Vietnam E-commerce White Book.

    [3] Clause 1 Article 35 of the Draft Decree.

    [4] Clause 1 Article 3 and Clause 8 Article 51 of Circular 06/2011/TT-BYT.

    [5] https://moj.gov.vn/qt/tintuc/Pages/chi-dao-dieu-hanh.aspx?ItemID=3369, retrieved 03/22/2024.