China’s ‘gray channel’ crackdown could change the game for seafood industry

Distributors and importers of seafood in China are talking of a major crackdown on so-called “gray channels” which were tolerated over the years. A range of industry players who talked to SeafoodSource at the ongoing Seafood Expo Asia in Hong Kong pointed to a new hard-line approach by Beijing which is forcing seafood through official import channels. This has resulted in some Chinese buyers requesting lower prices to offset higher taxes being paid at the border.

In the boom time years of the past decade Chinese importers made a killing importing crustaceans, shellfish and other premium seafood and then not paying import taxes. Typically the products were smuggled over the border from Vietnam or sped in via speedboat - or driven by road – from Hong Kong which doesn’t charge duties on imports. “The gray channel is gone, Vietnam is now really not an option,” explained a veteran Beijing-based shrimp trader sourcing supply from Latin America.

Now, by all accounts, the authorities are checking customs, no longer tolerating the frequent corruption that allowed widespread smuggling in the past. While the Beijing government has used food safety as a pretext, the real reasoning behind the clamping down seems to be at least in part driven by an effort from a more economically-constrained China that wants to collect its taxes.

Tightening entry does also complement the aims of the newly revised food safety law put into force this year. That law was in part designed to get some confidence back in domestic food products – thus enforcing access rules for imports would seem to be part of the government’s efforts to bolster local firms which lost market share to imported food products.

In any case, there’s a major ripple effect here for major exporters of seafood like Ecuador, which had relied on the Vietnam channel to feed growing supply into China. Ecuador had sought lower tariffs from China, a close political ally, or a free trade deal but neither has been forthcoming.

What will likely happen is a period of several years of transition when various suppliers to China will have to get used to the idea of importing through the proper channels. But this also comes at a time of weaker consumer sentiment; that limits the price elasticity for imported products, which have traditionally enjoyed a major premium on domestic seafood products.

On the positive side of the shift to the official channels, there’s likely to be a shakeout of the players involved in Chinese seafood imports. A whole cast of often-shady players had crowded into this space in recent years seeking attractive margins. These ranged from large industrial companies with little knowledge of seafood but a hunger for cash to small-time players interested more in quick profits than in building a seafood business based on quality and traceability.

Higher standards demand official, international-standard logistics services, which is good for seafood producers and consumers. And ultimately enforcement of the rules will likely mean an effective barrier to entry for new entrants. If the ambition for traceability of the new food safety law is fulfilled then the countless containers of mislabeled product will in fact be accounted for.

The next few years are likely to bring a period of leaner margins for exporters as mainland China agents and importers seek to pass on the higher compliance costs. But ultimately a straighter application of the rules may work out best for everyone.


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