China’s decision to lower import tariffs for a range of consumer products is good news to the local economy, Chinese consumers, as well as leading international players who are aiming to take a big bite of the China pie. At the same time this action poses threats and challenges to others.

The game-changing cut took effect on December 1, 2017, when import tariffs for 187 products went down from an average of 17.3% to 7.7%. This includes popular import categories such as baby food and formula, dairy, cosmetics, whiskey, and health supplement. The biggest drop in tariff appears in products such as vermouth (65% to 14%), baby formula (20% to 0%), and electric toothbrushes (30% to 10%). Whiskey and cosmetics also went down from 10% to 5%.

However, whilst some companies such as Nestle, Danone, P&G and baby formula brands will benefit from the change, others are not so lucky. Listed below are the victims and the reasons why.

The travel retail sector

Chinese tourists are known to be big spenders for overseas purchase, especially in premium groceries, baby food, health supplement and beauty products. Many of them consider shopping abroad as bargain hunting because items are tax-free. However, the introduction of a lower tariff for imported products will lead to a lower retail price within China. This means consumers are able to find the same products with comparable price at home, which lowers their enthusiasm for shopping when travelling overseas.

The “Daigou” community

Literally translated as “buying on behalf of”, a Daigou (代购) is a shopper based outside of China who purchases products for consumers in China. The emergence of the “daigou” phenomena is a result of the bargain hunting culture in China, driven by the desire to get better quality, more authentic, and safer products for lower prices. The change will impact “daigou” sales in the same way it does to the travel retail sector, especially when there is a growing concern over daigou shoppers selling counterfeit products to consumers in China.

Korean brands

Korean brands have enjoyed huge popularity in China over the past few years due to the on-going “Korean wave” across Asia. However, the geopolitical row between China and South Korea over the deployment of THADD (an anti-missile defence system) in the latter has caused widespread boycott of Korean goods and brands among Chinese consumers.

For example, South Korean supermarket chain Lotte Group planned to abandon its stores in China, as the company experienced substantial sales loss due to consumer boycotting the brand. Although both countries have agreed to make amends to rebuild their relationship, the anti-Korean sentiment in China is unlikely to be diluted immediately. This means Korean brands will not benefit from the lower imported tariff in the near future, as consumers are still reluctant to buy anything Korean. This will lead to slow growth and a shrinking market share among Korean brands on the global market.

The dynamics of the Chinese retail space is expected change significantly following the import tariff cuts. Local sales of international brands will flourish, although it depends on the diplomatic ties between China and the country of origin. More companies will see China as a vital importing destination, hence intensifying competition between domestic and foreign brands.