A gray market trader sorts through duty free purchases at Jeju airport.

JEJU, South Korea — The blue 30-gallon plastic bags filled the trolleys — eight or nine in each cart — stuffed with the discards of Amorepacific, Jurlique, and other duty-free goods’ packaging.

The specially designated “repacking” zone at Jeju’s international airport was tucked in the corner out of sight from the gates but the sounds of bristling plastic and the screeching of tape gave it away. Here, dozens of Chinese sorted through their buys from a Shilla Duty-Free pick-up counter, taking advantage of the chance to buy products sold cheaper here than at home.

Working quickly to take off all the signs that these products were freshly bought, they hastily stuffed them into suitcases, a tactic to dodge customs’ $5,000 goods limit on arrival back in China. Some were sorting products on the table but many had planted themselves on the ground, scratching away at the boxes and wrapping until a bed of packaging threatened to engulf them.

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Shilla had five staff members on hand to distribute the blue plastic bags and continuously clean up the scene, which could pass for a tornado’s path. As one plane departed for China, 26 carts filled with packaging were wheeled away.

While some people were stocking up for themselves or friends, much of this product would go on to be resold in daigou networks. Chinese tourist shoppers and enterprising resellers have made their footprint known nearly all around the world from Paris to New York but Jeju Island, in particular, has risen to one of the premier destinations for Chinese to engage in this kind of price arbitrage. It provides an easy location, just a 90-minute flight from Shanghai, and in contrast to the rest of South Korea, visa-free access to Chinese passport holders.

Trolleys full of discarded duty free goods packaging are collected at Jeju airport and wheeled out.

Trolleys full of discarded duty-free goods packaging are collected at Jeju airport and wheeled out.  Tiffany Ap/WWD

The cottage industry becomes evident as soon one embarks on a plane from China for the quick jaunt. The duty-free shopping magazine aboard Korean Air’s Shanghai-Jeju route is a 240-page tome, a kind of heftiness that recalls the golden days of publishing. In lieu of a “wake me for meals” sticker, the airline provides “wake me for shopping” labels.

Seoul suffered when political tensions over the THAAD missile defense system saw China ban group tours from going to South Korea but Jeju proved resilient with its flow of parallel traders. Nonetheless, however well the island weathered those tensions then, the gray market that has prospered here and all across the globe could find it has met its match with China’s new e-commerce laws.

The new rules that took effect on Jan. 1 were a wide-sweeping set aimed at regulating the e-commerce space. Although online shopping has exploded in the nation, expanding to approximately 30 percent of the country’s total retail sales, there’s been little government oversight until now.

“The idea behind the law to protect consumers in China,” said Jeff Unze, president of strategic partnership at Beyond, an app that specializes in cross-border shopping for Chinese consumers. “That’s the intended purpose: to make e-commerce more fair.”

“You have a lot of resellers, and fly-by-night companies that come on to platforms, sell tens of thousands worth of product and then before products can be returned, or product quality is assessed they shut down and pop up as something else on Taobao,” Unze added. “It’s really to protect the consumer, have better regulation to make sure everyone is paying taxes and working customer services, that everyone has legitimate products, and really force some of the bad actors out.”

The new rules do a number of things. For one, it makes platforms such as Taobao and Pinduoduo at least in part responsible for the sale of counterfeit items. Failing to address claims of counterfeit items could lead to fines of up to 2 million renminbi.

It also widens the channel for legitimate cross-border shopping, something on which Chinese consumers face spending caps. “The new law raises the tax-exemption limit for cross-border purchases, with the single purchase amount limit increasing from 5,000 renminbi (or $720 at current exchange) and the annual amount limit increasing to 26,000 renminbi (or $3,780 at current exchange),” explained Rogerio Fujimori, analyst with RBC Capital Markets.

But causing the industry some anxiety is the increased scrutiny on the kinds of small internet businesses, the model that resellers rely on, requiring them to register for a license and pay taxes. It’s a further tightening the screws on the gray market which has already been hurt by stricter border checks and a general move to lower tax rates on imported consumer goods.

“Given that daigou primarily profit off of the markup between overseas products and those already sold in China, their margins will become even thinner and they may exit the business completely,” Azoya Consulting predicted.

In late September over a holiday period, Shanghai customs officials clamped down harshly on resellers, increasing checks on travelers and even inspecting every passenger on a plane coming from Jeju Island. The move made luxury stocks tremble worldwide. Already then, traders started to recognize that the winds had shifted against them.

The daigou heyday looks to be coming to an end soon.

The daigou heyday looks to be coming to an end soon.  Tiffany Ap/WWD

Mailing product from overseas to China as personal packages, another favorite method of resellers, has also dried up substantially.

“With the postal method, the idea is the check rate is so low with customs, they can compete on it,” Unze said. “Last year, it was 2 to 3 percent. In 2018, it’s been 20 percent. If suddenly you had to pay duties on 20 percent versus 2 percent, that presents a real big hardship.”

Brands themselves can be expected to be hit in a ripple effect, at least in the short-term although many are optimistic it will redirect sales to official channels over time.

“In the long-term, this is positive for the sector,” said Fujimori, “as it establishes a more level playing field by curbing parallel trading [and] import duty avoidance, protecting luxury brands in Mainland China and supporting luxury e-commerce development, which is still in its infancy.”

While how quickly the effects materialize depends on how the rules are enforced, Nancy Zhang, head of partnerships at the cross-border e-commerce tech company BorderX Lab, said that “up to 20 to 30 percent of what a company might assume are consumers in a home market could actually derive from resellers” and that companies should be prepared. 

In the U.S., “we would encourage companies to do audits of their customer base. Look for signs such as shopping addresses known to be freight forwarding addresses in California, or Flushing, Queens, or Oregon,” Zhang said.

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