China Importing 101

The following is a repost of a great series written by Sean Mahoney which was featured on China Law Blog. Sean has extensive hands-on knowledge in the area of customs compliance, and provides a lot of relevant and valuable information. Although a bit long, it is posted in full below: 

There are thousands of stories, many of which we’ve read at China Law Blog, of companies attempting to sell into China before understanding the legal and regulatory environment for their product. Importing into China is one of these often-overlooked areas, specifically, the rules and regulations as they apply to individual products. In my experience, the importation process creates more issues and lost revenue over time than any other day-to-day activity involved with selling into China.

From the inception of your idea to enter the China market, to the daily grind of fulfillment and sales, there are three keys to getting your goods into the commerce of the PRC.

First, understand the importation process and how it should be performed for your specific product before you ship anything (even samples). DUE DILIGENCE.

Second, if you are importing your own products into China, your relationship with China’s importation regulatory institutions is vital to your success. If you are not the importer of record for your product, see point one.

Third, always make sure your paperwork is correct before you ship, especially with samples and new products. This includes keeping up to date with new laws, regulations and enforcement rules for your industry.

The rest of this post will focus on the core concepts vital to understanding the Chinese importation regime. The next post will concentrate on understanding the ins and outs of the actual importation process, with the final two posts looking at the why and how of creating strong relationships with The General Administration of Customs (GACC) and The General Administration of Quality Supervision, Inspection and Quarantine (AQSIQ).

When first selling your products to China there are a few core concepts, that if understood, will make speed bumps out of potential mountains.

1)      All products brought into China require an import license. The importer of record is not necessarily your customer, but the entity that has the import license (like a trading company).

2)      Many products require additional paperwork or special licenses to be imported.

3)      There is an actual list of products that require compulsory inspection (Import and Export Commodity Compulsory Inspection Catalogue).

4)      You cannot abdicate your responsibility to understand import regulations to the importer of record. Even if you have no operations in China and sell Inco Terms this side of the Water (or even CFR/CIF China port), your company is still liable and can be punished if your products are imported illegally or incorrectly.

5)      The law in China is always written to allow extensive leeway for Ministries and departments to enact their own regulations and enforcement mechanisms.

6)      There is an assumption behind all enforcement that you must prove your stated content or claims. For example, you cannot simply send an MSDS sheet with no testing to verify your claim of content.

7)      GACC and AQSIQ are the front lines of enforcement, many other agencies, departments and Ministries allow these two entities considerable freedom in how they enforce specific regulations at the border.

A good friend wrote me after reading last week’s post and asked me three questions. Why didn’t I discuss the Harmonized Tariff Schedule differences, similarities to US and EU laws and the Enterprise Classification and Management (MCME) system? I am sharing my answer with you the reader: The MCME is best discussed as part of my upcoming China Customs post as it is a GACC (The General Administration of Customs) program, and the other two are best discussed as part of today’s post. This post covers the seemingly mundane basics of the importation process in China.

China’s laws and regulations regarding imports are very similar (sometimes exactly the same) to US and EU laws and regulations. It is important to note this similarity while simultaneously understanding the differences in China’s real world enforcement and execution. A great example of this is HTS (Harmonized Tariff Schedule) codes. For those in the trade you know HTS codes are virtually the same in the US, Europe and elsewhere. In China, there is a slight difference; small enough to go unnoticed by many exporters, but large enough to cause issues when utilized incorrectly. You see, though the first six digits are the same most of the time, the 7th and 8th digits, and the 2-digit suffix, are often different from what we use in the US. To add to this confusion many items that use a full 10 digits in the US, only use 8 digits in China and vice-versa.

I guarantee some are reading this right now and saying to themselves, we use the same HTS and we have never had a problem. I am sure this is true. The question is not are you currently having a problem, the question is are you properly classifying your goods? This is important for obvious reasons, since if your goods are misclassified, you may not be paying the correct tariff and duties. If you are not paying the correct tariff and duties and you get audited, you may owe GACC a lot of money. This end result is very similar to the US, in that you will not escape without large amounts of money being spent on attorneys, fines, over due tariffs or all of the above.

In addition to the correct HTS code, there are certain items required on all shipping documents (yes even samples!) to China. If any of these is wrong or differs from the other documents you have provided (more on this in my upcoming post about GACC), it is a sure-fire way to get your shipment stopped. On all your shipping documents to China you need the following:

  • The correct HTS code
  • The importer’s CR (Customs Registration) Code
  • Product name with description
  • Product quantity
  • Country of Origin
  • Quantity of units, boxes, and pallets
  • Unit Value and Total value
  • Weight
  • Sometimes you also will need:
  • Part Number
  • Lot Number – Production date – Expiration date

A quick sidebar on CR Codes, the Customs Registration Code is a unique number given to every importer in China as part of registering with GACC. No company can import anything, except documents, into China without a CR Code/Number. Many foreign companies are unaware this number is required or that all companies must have this number to legally import anything into China. I will discuss in my upcoming posts the importance of understanding these types of requirements in your interactions with GACC and AQSIQ.

Knowing what to put on your documentation for selling into China is only part of the battle. Knowing which documents are required is equally, if not more important. All shipments to China require the following documents:

  • Invoice on Company Letterhead (address must be included)
  • Packing List on Company Letterhead (address must be included)
  • Certificate of Origin
  • Airway Bill/Ocean Bill of Lading
  • Documents that may be required (product dependent)
  • US Department of Agriculture Health or other Certificate
  • Local Health, Sales and Operations Licenses
  • Certificate of Analysis
  • MSDS with Proof of Content (also applies to food, wine and other categories, in these cases content must be on letterhead with no MSDS)
  • Certificate of Free Sale
  • Bottling/Production/Manufacturing date on Letterhead
  • CCC Mark or other special import license documentation

There is also a difference between shipping your goods for the first time and all subsequent importations. First time imports usually require greater documentation than all repeat importations. This is typically true for products where additional licensing is required (retail products, food, chemicals, items requiring CCC mark etc.).

Labels are the final area I will cover in this post. Chinese language labels are required for all products that will end up on retail shelves. What is required varies from product to product with the standards for electronics and food/beverage being the most stringent. One requirement that crosses all product lines is that the Chinese label cover the foreign language label.  Common requirements include:

  • Product Name
  • Raw Materials/Ingredients
  • Country of Origin
  • Date of Production (Year/Month/Day)
  • Expiration Date (Year/Month/Day)
  • Storage Condition
  • Distributor Name and Address

The core to any interaction with GACC and AQSIQ is relationship building. My good friend Professor John Osburg writes, “Information in China flows through personal relationships. These relationships are best viewed as communication channels which equal resources for assistance.” It is vitally important to the success of your ongoing China importations to create communication channels with both GACC and AQSIQ in a legal and legitimate manner.

One of the complaints I consistently hear is about the capriciousness and unpredictability of Chinese customs officials. The reality is China’s system is no less capricious than in the US. Both countries provide ample flexibility for customs enforcement of ambiguously written laws. In the end, dealing with China customs is a person-to-person interaction and there are some people, regardless of country, that are harder to deal with than others.

In many ways, dealing with China Customs is no different from dealing with US customs. They are not your friends, but if you take the time to treat them as humans and to create a relationship, they typically will not make your life any harder than it has to be as an importer. No one likes it, government official, vendor or customer, when you only talk with them when you have a problem that needs to be solved. In our experience if you follow three simple rules, your interactions with GACC should be greatly improved.

Understand the laws and regulations as they pertain to your specific product. Whether you are acting as the importer of record (IOR), or another organization is the IOR, it is yourresponsibility to make sure all documentation is accurate and correct. There is no faster way to get on a custom official’s bad side than by you or your IOR importing goods incorrectly, especially if you are not using accurate information that is basic to any importation in China.  Guanxi, or relationships, will not excuse you or your importer from failing to import goods under the laws and regulations of the PRC. In the end, it is your product and your brand name that will be negatively impacted by importing goods incorrectly.

All the knowledge in the world only goes so far when dealing with an individual government official. Someone in the importation chain must have a working relationship with China customs. Whether you are importing for yourself, using a broker, or relying on your customer to import, it is vital to build a legitimate relationship with your local GACC office. The best way to do this is via the Enterprise Classification Management (MCME) system, which I will discuss below. We always advise to maintain a wide breadth of contacts at your local customs office, as part of your ongoing transactions and for maintaining or improving your AEO (Authorized Economic Operator) status. Additionally, even if your volume of imports cannot meet the requirements for AA status (see below), it helps more then it hurts to maintain these lines of communication with GACC.

Always approach customs officials from a position of mutual respect (this is also vital when dealing with AQSIQ). If you approach the conversation angrily, accusing the official of ineptitude or any other manner of disrespect, things will not go well. Even if the governmental body has clearly incorrectly applied the law, find a way to make the conversation positive and use it as an opportunity to build a relationship, rather than turning the interaction into a confrontation. This is true in the US, but holds even more weight in China. Individual customs officers are accustomed to being approached with a lack of respect from the importer and are typically ready to react accordingly.

The MCME system in China incorporates an Authorized Economic Operator (AEO) classification system. All information on how to achieve and maintain status and the current status of each importer are publicly available. There are five (5) management categories of AEO in China:

  • Class AA:               AEO Certified
  • Class A:                  Preliminary AEO Status
  • Class B:                  Normal Status
  • Class C:                  Easy to obtain, Subject to Intense Scrutiny
  • Class D:                  Beginner, Subject to Intense Scrutiny

Within classes AA and A there are very tangible benefits:

  • Customs Account Manager (AA only)
  • Trust Release (AA only)
  • Electronic and Paperless Clearance (with release prior to physical arrival at port becoming more frequent)
  • Early Clearance Against Cash Deposit
  • Expedited clearance schedule
  • Prioritized access to GACC including after hours service
  • Lower rate of deposit for GACC Bank Guarantee Deposit Account System
  • Allowed to participate in GACC pilot programs

Though just about everyone is aware of China Customs (GACC), many foreign companies doing business in or with China know little or nothing about the General Administration of Quality Supervision, Inspection and Quarantine (AQSIQ). This lack of knowledge is dangerous, as AQSIQ has more power than GACC in many aspects of importation approval. In today’s post I will introduce AQSIQ as an institution, with some brief advise on how best to interact with them.

AQSIQ is most widely recognized for its oversight of food/beverage products and scrap materials, yet it controls, directly or indirectly, thousands of products including:

  • Chemicals
  • Cosmetics
  • Any item which requires a CCC Mark
  • Items that require compulsory inspection
  • Specialized machinery like Refrigerators

All told, AQSIQ has 19 internal departments and 15 separate “affiliates” and it manages the administration of the Certification and Accreditation Administration of China (CNCA) and the Standardization Administration of China (SAC). AQSIQ has 35 Entry-Exit Inspection and Quarantine Bureaus (usually known as CIQ’s), nearly 300 branches, more than 200 local offices, nearly 3500 laboratories and tens of thousands of employees in China to assist with its mandate. To quote AQSIQ’s own website:

AQSIQ participates in the planning and checking of national ports opening up to the outside world. According to the relevant law, AQSIQ formulates the List of Entry-exit Commodities subject to Inspection and Quarantine of Entry-exit Inspection and Quarantine Agencies. AQSIQ administers the inspection and quarantine clearance for the entry-exit goods related to environment, health, animal and plant health, and human safety, and for transportation means and personnel. At ports, an inspection and quarantine clearance management model is applied to entry-exit goods, that is, “Inspection application first, and customs declaration second”.

According to the Law of the People’s Republic of China on Import and Export Commodity Inspection and its implementation regulations, AQSIQ carries out inspection and supervision on import and export commodity and its packaging and transportation means. AQSIQ conducts legal inspection, supervision and administration over commodities included in the List of Entry-exit Commodities subject to the Inspection and Quarantine of Entry-exit Inspection and Quarantine Administrations, and conducts sampling test over the non-listed commodities.

As evident from its own description, AQSIQ is responsible for inspecting and supervising the import and export of ANY product specifically listed under its authority and for sample testing non-listed commodities. I am always saying “Inspection application first and customs declaration second” to clearly signify how AQSIQ has greater relevant authority than GACC for all products in which it has been given statutory oversight. Yet virtually every month a company already exporting products to China will contact me with no knowledge about AQSIQ and no idea why AQSIQ has authority over their products.

Much like GACC, AQSIQ has become a much more efficiently run and managed institution over the last decade, especially in the last five years. However, it has not developed a professional relationship infrastructure like the Customs MCME system. This only heightens the importance of discovering in advance if AQSIQ has oversight over your product(s) exported to China. If it does have that authority, it is vital to learn as much as possible about the specific law and regulations pertaining to your product before you begin exporting it to China. Once you have acquired this knowledge, it is important to reach out and create a relationship with AQSIQ in the Chinese ports and cities in which your products will be imported and used. Depending on the circumstances, your WOFE office or your customer would work on creating this relationship.

Although there is no MCME system in place for directly working with AQSIQ, several laws have recently been enacted requiring registration by all exporters and importers in certain product categories, with the most notable being all food and beverage imports starting in 2012. This required registration allows foreign companies a foot in the door to create a working relationship with AQSIQ.

I will leave you with an example of the value in knowing the regulatory details regarding your product and in having a relationship with the appropriate branch of AQSIQ. A few years ago, I was working with dozens of customers in a specific part of the food industry. One customer in particular had an ongoing problem exporting one of its more valuable food products to China. Over the course of five years, AQSIQ had rejected every sample and order shipped by our client. Even though both the importer and exporters tests showed they were in compliance, AQSIQ continually claimed the product was outside the allowed limits for nitrate and nitrite.

We offered to assist our client in finding a workable solution to this ongoing problem. We quickly identified the AQSIQ standard allowing only three testing methods for nitrates and nitrites, two of which were never used in the US. Our next step was to approach a customer outside of the largest ports with a good working relationship with their local CIQ. Via this relationship, we approached the local CIQ and after several days we were able to agree among the three parties to:

  • Use the exact same testing method (the one we use in the US),
  • Use the same quantities of solution
  • Use the same fluid to create the solution
  • Share all test results

In the end, all tests came back nearly identical and all showed that the product was well within China’s standards for both nitrate and nitrite levels. Because of this, our customer was able to ship its product to China on a consistent basis for the first time in six years. This result would not have been achievable without the intercession of someone with an ongoing relationship with AQSIQ and a thorough understanding of the rules and regulations pertaining to that specific product.