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China: Import and distribution of food products using the example of dairy products

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published on 11 November 2020 | Reading time approx. 10 minutes
  

China, with its approximately 1.4 billion consumers and a steadily growing wealthy middle class of several hundred million citizens is an outstanding market for German and European food exporters. Many Chinese consumers are sceptical towards do­mestic products due to a large number of food scandals in the past. Imported food products however in general enjoy an excellent reputation due to their quality and safety. This article provides an overview over the essential Chinese food law regu­la­tions regarding a market entry for foreign food manufacturers as well as the basic regulations for the warranty for defects and consumer protection rights.

 

Market Overview China: Introduction

China has been and is experiencing enormous economic growth. China's growing prosperity is resulting in a rising number of consumers who are also open to Western products. Especially everyday food products as well as luxury foods from Europe enjoy a very good reputation and are therefore very popular with Chinese consumers.
 
The existing bureaucratic hurdles for a market entry however require a certain amount of flexibility, patience and regulatory advice, especially as e.g. tax and import regulations can change at short notice. These changes may have a political background or occur arbitrarily. The “trade war” between the USA and China, for example, has a significant impact on import regulations.

  

Chinese Dairy Products Market

There has been a number of food scandals in China over the last decades. As a consequence, many Chinese consumers have lost trust in the quality of domestic products and often have a developed a preference for imported products. Especially with regards to dairy products there still is a profound distrust as a result of the 2008 baby milk powder scandal (melamine contamination).

 

Since then a large number of regulations for local and/or imported food products has been enacted to prevent such scandals in the future. They strengthen the Chinese consumer protection efforts but also make it more difficult to enter the Chinese market due to the vast number of proofs, licenses and/or certificates. China currently is planning to immensely increase imports of dairy products and therefore offers an interesting market opportunity for German and European food enterprises.

 

Market Entry: Chinese Distributor or own Subsidiary

Food companies may look for a local Chinese partner as an importer and/or wholesaler. This option is particu­larly attractive where there is no experience in the Chinese market or with little product export quantities. Additionally, an importer/wholesaler can provide assistance with the compliance regarding Chinese regulatory requirements as well as distribution, marketing etc.

Another option is to establish a legal subsidiary in China (100 per cent owned subsidiary in the form of a limited liability company - “Foreign Invested Enterprise”). The advantage is to retain control of the products until delivery to the wholesaler or retail chain and to control e.g. cold chains, (intermediate) storage, packaging, product labelling etc. The “subsidiary option” also reduces liability risks. Moreover, a local subsidiary is more flexible in the area of customer acquisition, termination of delivery contracts and public relations (e.g. adver­tising campaigns). Furthermore, it enables a producer to limit the distribution to “exclusively domestic” in China, avoiding international (legal) exposure. It also facilitates payment modalities with local wholesalers and retailers.

Besides a wholly-owned subsidiary, a further possibility for a market entry is the establishment of a joint venture with a Chinese partner. Basically, a joint venture also offers the advantages of a wholly owned subsidiary. In addition, the Chinese partner can contribute its existing knowledge and experience in complying with regulatory requirements and in marketing the product.

   

General Import Regulations

The “Regulations of the People's Republic of China on Place of Origin of Imports” require a certificate of origin. In recent years, these certificates have been requested by authorities when products were not shipped from the country of origin.

For some products a prior application for an import license may be necessary and for certain products there exist import quotas. Those import restrictions are regulated by the Chinese Ministry of Commerce (MOFCOM). There are permitted, restricted and prohibited goods concerning import. Most goods fall into the permitted category and are therefore only subject to a so-called “Automatic Licensing System” on import. For products subject to import restrictions, an application must first filed with the competent authority. Prohibited products, for example chemical waste, are barred from import to China. However, under certain circumstances import bans can be issued (e.g. currently pork from Germany after the outbreak of swine fever). Import quotas often exist for agricultural products such as wheat, corn, rice or sugar.

If a product is imported for the first time, a certificate to prove the compliance of the product with the corre­sponding “Chinese National Standards”  (Guobiao standards or GB standards) is required. If imported products have been found to be harmful and banned in the past (e.g. contamination or the use of hazardous additives), the submission of a so-called safety report is required for a new import. This safety report must prove that the products are now harmless and comply with the relevant National Standards.

Exporters and importers of foreign food products must register through the customs “Registration Systems of Imported Food and Cosmetic Importers and Exporters” and separately through the “General Administration of Quality Supervision Inspection and Quarantine (AQSIQ)”. Importers of foreign food products also must set up a “Sales Recording System”. This system must include various details such as the number of inspections, names, production dates, shelf life and names and dates of exporters and purchasers as well as delivery dates. These records must be kept for at least two years.

   

Dairy Products

For the import of food products there are additional regulatory and documentation requirements. An export of milk products to China is only possible if the manufacturer's country has concluded a corresponding agreement (protocol) with China.  For exporters of dairy products an additional registration with AQSIQ is required. AQSIQ inspection visits may take place before the products are shipped. For the sale of food products in China, a license must also be applied for at the responsible “Administration for Industry and Commerce (AIC)”/the local “Food and Drug Administration (FDA)”.

With regard to dairy products, for example, the following additional documentation, certificates etc. are required for an import (without claiming to be complete):

  • Hygiene certificate;
  • Copies of the certificate for the first import;
  • Original and Chinese label;
  • Authorization by the competent authority, provided the product is subject to certain quarantine require­ments;
  • Evidence in the event that the product packaging is marked with awards or prizes won by the product;
  • Certificate issued by the competent authority if the product is claimed to have a health-promoting effect.


Since dairy products are among the so-called “risk products”, there is a large number of regulations governing their import and retailing. Importers should therefore strictly ensure that all the necessary documents are complete and up-to-date.

 

Product-related provisions: Legal and sub-legal regulations, in particular National Standards

In China there is a large number of laws and regulations which govern not only the quality and specifications of products but also the protection of consumers (e.g. “Product Quality Law”, “Tort Law”, “Standardization Law”, etc.). According to the Product Quality Law, for example, a so-called "Product Inspection Certificate" must be available for a product.
 
In particular, the “Chinese Standards” (Guobiao standards) issued by the Chinese government which govern a wide range of products are of outstanding importance. There is a difference between “Mandatory National Standards”, “Voluntary National Standards” and “Industry Standards”. Compliance with the latter is only recommended. The legal effect of these standards is still controversial. For example, it is not yet clear whether a product that complies with the “Mandatory National Standards” but not with the “Voluntary National Standards” or the “Industry Standards” is considered "defective" in the sense of the Product Quality Law or the Tort Law or not.
 
Dairy products are particularly, among others, governed by the National Standard for Dairy Product Safety, which contains detailed regulations for dairy products. These regulations also include provisions for the production of dairy products. It should be noted that these Chinese regulations for the production of dairy products apply to products imported into China and must therefore be observed and complied with by foreign manufacturers or importers when producing for export to China. Compliance must be proven by appropriate records and certificates.

 

Labelling Requirements

The Labelling of foodstuffs including dairy products is based in particular on the Chinese “Regulation on the Supervision and Administration of Dairy Product Safety”. Mandatory information for foodstuffs includes the product name, ingredients, net weight and quantity, the name, address and contact information of the manufacturer or Chinese importer, the date of manufacture, the expiry date or the ‘use by’ date, recommen­da­tions for storage and nutrition declaration. Recommended information also includes the batch number, method of preparation and consumption, and allergy warnings. The mandatory information must be written in Chinese characters (technical language) and can either appear on the original packaging or be affixed on the original packaging by the exporter before shipment or by the importer before customs clearance in China. If infor­mation on the label is incorrect or if a Chinese label is missing, an import can be refused. Legally, the foreign manufacturer/exporter is responsible for the accuracy and legality of the label and its content. However, the Chinese importer/distributor has an obligation to check and may not import/distribute food without or incorrect labels. In practice, the importer/distributor is therefore responsible.

 

Warranty for Defects and Consumer Protection in China

Claims due to the defectiveness of a product are firstly subject to the contractual provisions and secondly to the statutory provisions on warranty for defects and product liability. In recent years, China has made considerable efforts to strengthen consumer protection. Regulations can be found in the Consumer Law (sale of goods to end consumers), but also in the 2018 Food Safety Law and the Product Quality Law.

   

Advertising Law

Misleading or false advertising is prohibited under the Chinese Advertising Law, which applies to all channels (print, radio, television, Internet, etc.). As a rule, advertising must be truthful, lawful and “healthy and positive”. In addition, certain wordings are prohibited e.g. superlatives such as “best, biggest”, or terms such as “state, state-run, official” and also ethnic, racial, religious or sexually discriminatory wordings and phrases. For so-called “Health Foods”, further requirements apply, which are intended to prevent, for example, normal foods from being advertised as medical products. It should also be noted that the manufacturer and the advertising company can be jointly liable in the event of violations of the law and that administrative sanctions can also be imposed.

   

Product Quality Law

According to the Product Quality Law, a buyer/consumer can demand repair or replacement of the product or repayment of the purchase price and compensation in case of damages, if the product does not have the specified properties without previous indication of this, if the product does not meet the product standards which were indicated on the product itself or on the packaging, or if the product does not meet the quality indicated by the product declaration or product description, samples etc.
 
In addition, if a retailer has taken remedial action towards a consumer, but the manufacturer or another upstream contractor is responsible for the cause of the remedial action, the retailer may seek recourse from the latter.

 

Consumer Law

The Consumer Law regulates obligations regarding information and labelling, product warnings and product recall at the supplier`s own expense. The legal consequences equal those in the Product Quality Act. The regulation is not directly applicable to a manufacturer, since in the relationship between manufacturer and retailer, the retailer is usually not a consumer within the meaning of the law. Nevertheless, a manufacturer may be indirectly affected if a claim is made against a retailer and recourse is sought from the manufacturer.

 

Product Liability

There are several provisions for claims for compensation and damages in the Product Quality Law and the Tort Law. Additionally, there are special provisions for the protection of consumers and concerning dairy products and foodstuffs. The current Tort Law will expire at the end of 2020. However, similar stipulations have been incorporated into the new Chinese Civil Code, which will come into force on January 1 2021, and which will replace the Tort Law. Product liability claims can be asserted not only by consumers but also by commercial purchasers. According to Article 41 Tort Law, the manufacturer and seller of a defective product are jointly and severally liable for damages, regardless of fault, if damage to the human body or property of third parties is caused as a result of product defects.

 

Particularities of E-Commerce

Buying on online platforms, the consumer has a right of withdrawal from contracts for a period of one week, without the need for a reason for the withdrawal. An exception however applies to perishable food. For online sales there are more extensive information obligations towards the consumer. The seller must provide com­pre­hensive information on the product, quality, delivery, price and charges, contact details, safety information, and is liable for any infringements. A special license is required for the distribution of food products.

   

Product Warning and Product Recall

Chinese law provides for product warnings and product recalls. According to the law, if a defect in a product is discovered after it has been placed on the market, the manufacturer or seller is obliged to take prompt corrective measures such as the publication of a product warning or a product recall. In this respect, a defect already exists if the product poses “unreasonable risks to the safety of the human body or the property of others”, whereby defectiveness already exists if the product does not comply with the statutory and sub-statutory norms and National Standards for the protection of the physical health and safety of people and property. The competent authority must be informed immediately if such irregularities occur. Defective products must be destroyed and/or will be seized by the competent authorities in order to prevent the product from being (re-)placed on the market.

   

Administrative and Criminal Sanctions

Products that do not meet the minimum requirements of the National Standards, which have been illegally produced or whose ingredients are counterfeit are subject to confiscation. In addition, fines may be imposed which are higher than the value of the confiscated products. If the misconduct is significant the business license may be revoked too.

 

 In order to ensure consumer protection, certain specific rules apply to the distribution of milk and dairy products in particular in the event of violations of the National Standards and food law. The main penalties imposed for infringements are fines. Serious cases may be subject to criminal prosecution (e.g. use of harmful chemicals, products below the National Standards and breaches of the obligation to report irregularities).

 

There are various public “black lists” for companies that violate laws or fail to comply quality standards (e.g. for importers of dairy products). An entry in such a black list has considerable negative effects on the company's Social Credit Score. The Corporate Social Credit Score is a database containing information on domestic Chinese companies which is collected by various authorities (registration authorities, tax authorities, etc.). Especially “deductions” in the score due to misconduct can have negative effects, e.g. exclusion from state tenders, higher inspection frequency, etc.

   

Conclusion

China has strict requirements for the import of food products, in particular dairy products. The large number of regulations and the severity of possible sanctions is due to a number of food scandals, especially the milk powder scandal, which have lastingly shaken the confidence of Chinese consumers.

 

Nevertheless, despite the extensive regulation, exporting food/dairy products to China can be a profitable model for manufacturers. Companies exporting to China for the first time should pay particular attention to being able to present all the necessary papers and supporting documents. Often special regulations apply to certain product groups and special documentary evidence is required, which may cause an import to fail. However, extensive preparation and accompanying advice from an experienced consulting firm such as Rödl & Partner can help avoid unpleasant surprises and make the project a success.

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