Who Wins When China Tightens Its Cross-Border Grip?

With the focus on making cross-border commerce as fluid and intuitive for consumers as it can be for the retailers themselves, it can be more than a little jarring to be reminded that actual borders exist underneath it all.

Like the retail economy that rests on it, potential geopolitical instability is a global problem. Some are amiable, like the UK’s potential exit from the European Union, while others are much less so. Just about every foreign brand is finding out how far China’s government is willing to go to make sure homegrown brands have first dibs on breathing room.

The regulatory arm of the people’s government began slowly awakening back in February when it cracked down on the seemingly ubiquitous number of counterfeit goods that had been plaguing luxury markets for years. It was only the explosion of online retail and the widening availability of brand-damaging imitations that spurred action.

Could it be a situation of particular irony that something similar might be happening to Western online merchants?

The storm clouds of protectionist trade policy are mounting. In mid-April, Apple found out that its iBooks Store and iTunes Movies marketplace were both shuttered by Chinese authorities without much explanation, despite their seemingly benign existence on millions of iPhones in the West. An Apple spokesman predictably held the Cupertino party line and said the company was working to get its stores back online within China, no matter how long it takes.

But the narrative of “police state gone rogue with restrictions” doesn’t fit the bill in this case, especially with so many thriving Chinese startups rising to fill the gaps in their native markets.

“[The government is] interested in protecting the content that the Chinese people see, policing its national security and favoring indigenous giants, such as Huawei, Alibaba and Tencent,” Daniel Rosen, founding partner of China-specialized economic advisory firm Rhodium Group, told The New York Times. Those in charge are said to be “strongly disinclined to accept the dominance of foreign players on the Internet, not least those from the United States.”

Shutting out foreign players obviously spares more consumer dollars for them to spend on digital books and movies from homegrown companies, but the interconnected nature of modern international markets, as well as consumers’ persistent desire for brands not found on the mainland, means that sometimes even Chinese retailers can get burned.

The bureaucratic culprit, in this most recent case, is the “positive list” of cross-border commerce taxes, which restricted certain items, like milk products, without prior approval and is positioned to raise the tax burdens of retailers engaged in cross-border trade beyond the 10 percent mark. This increase isn’t likely to have much effect on the consumer-facing side of things, yet instead, the higher prices will most likely be absorbed by the cross-border marketplace owners, like JD.com, Tmall and others.

One at a time, these increases are hardly world-shattering, but in aggregate, they could start to weigh down balance sheets. A German baby formula, normally retailing for $39 prior to the positive list, will now go for about $44, given a new 11.9 percent tax.

And, just in case anyone’s wondering whether the Chinese government takes it easy on Chinese retailers, think again. The new regulations were handed down just hours before they were instituted in April, sending retailers scrambling.

“We have to comply with every regulation from the government, so on the day the list came out, some goods referred to were taken off the shelf,” Richard Liu, CEO of JD.com, told Reuters.

With cross-border growing more and more essential to even some downright provincial retailers, protectionist policies won’t serve to rustle the feathers of foreign-held brands.

Sometimes, they can throw the retailers they mean to safeguard into disarray as well.