How China is cracking down on border trade smugglers

(By Caixin journalists Feng Yiming and Denise Jia)

“We are doing what the local government has encouraged, so why have we been accused of smuggling?” Zou Ye asked, still deeply puzzled to this day.

Zou’s husband, the owner of a logistics firm at the Menglian Port in southwestern province of Yunnan, was arrested together with four colleagues in September 2023 for allegedly smuggling goods under false trade declarations, a grey area that is coming under greater scrutiny with lengthy prison sentences for offenders.

His company invested 15 million RMB (US$2.1 million) in 2018 to build a border trade market at the Mangxin cross-border corridor between China and Myanmar. Border trade allows local residents to conduct duty-free import and export transactions. Under regulations set up in 1996 and revised in 2010, residents can import and export goods worth up to 8,000 RMB a day tax-free.

During the Covid-19 pandemic, companies such as Zou’s handled a surge in trade, yet customs officials found most of the goods processed by his company belonged to businesses, not residents, as required by the border trade rules.

During the pandemic, border residents often offered to file duty-free import declarations for business owners, charging 40 RMB to 60 RMB for each deal, Zou said, describing this practice as a longstanding grey area.

The Yunnan border region, with limited labour and low local demand, has become fertile ground for such activities. Companies transport imported goods to the region then local residents divide the goods into smaller batches, each under the 8,000 RMB duty-free threshold, and transport them piecemeal across the border.

After the pandemic, digital cross-border trade platforms streamlined the process. Residents can now file declarations via facial recognition or smartphones, while goods move directly between foreign and Chinese trucks, often without residents’ physical involvement.

Despite this trade amounting to hundreds of billions of RMB a year, local governments, eager to promote the “border trade and local processing” model for economic growth, are often less motivated to stop it.

Now the regulation landscape has started to change. In September, China’s General Administration of Customs proposed revisions to the Regulations on Border Resident Trade Management to rationalise fragmented rules and enforcement challenges. The draft includes significant revision, particularly concerning policies for processing exports.

At an 8 November State Council meeting, Premier Li Qiang emphasised support for foreign trade, including border resident trade. A Ministry of Commerce release on 21 November reiterated these priorities.

Meanwhile, neighboring countries are also addressing the issue. An order issued by Vietnam will gradually limit duty-free border resident trade from 2025. This shift raises concerns about the impact on China’s border trade, increasing the urgency in regulating grey areas of its domestic market practice.

Earlier this year, China’s customs officials investigated a seafood processing company in the Guangxi Zhuang autonomous region for misreporting imports from Vietnam under the guise of border resident trade, arresting its operator over transactions that exceeded 100 million RMB.

Border resident trade thrives in Guangxi and Yunnan, which share a 5,000-kilometre (3,107-mile) border with Vietnam, Myanmar and Laos and operate more than 20 highway border crossings. This kind of trade increased 55.3% to 20 billion RMB in Yunnan last year, while in Guangxi it totalled 42.71 billion RMB.

Border trade has drifted from its original intent, however. Much of it now involves Vietnamese agricultural and seafood products, but also includes re-exports of other countries’ products, such as Ecuadorian shrimp and Norwegian salmon. Chinese companies buy these goods from Vietnam, transport them to ports then declare them as border resident trade.

Lin Qian, a senior partner at Beijing DHH Law Firm, identified two types of player in border trade smuggling: customs clearance companies and goods owners. Clearance firms rent border resident IDs to declare goods, while goods owners handle the procurement, payment and receiving of shipments. In the 119 border trade smuggling cases publicly disclosed between 2016 and 2021, 87% of goods owners were from non-border regions, Lin said.

Smuggled goods in such cases often have their point of origin altered or are disguised as eligible items. And the resident IDs used for customs declarations are often rented or purchased, or in some cases involve impersonation.

In recent years, China’s border cities have adopted a “border trade and local processing” model, in which companies establish processing factories, and residents are encouraged by local governments to buy overseas goods duty-free for resale to these factories.

In 2021, the Commerce Ministry announced a plan to encourage the processing of imported goods through border trade, selecting 13 border counties or cities as pilot sites.

By the end of 2023, 195 companies were registered in Guangxi’s border regions, processing goods worth 7 billion RMB a year. In Yunnan, the first border trade processing project began at Hekou Port in November 2023. By 23 January this year, the project had processed 1,043 tons of imported goods worth 1.83 million RMB, bringing an average monthly income of more than 2,000 RMB for residents who took part.

In this model, residents import duty-free raw materials and sell them to processing companies. The challenges that residents face are sourcing the raw materials, finding the money to buy them and finding the firms that want them. In practice, these issues are often handled by the processing companies, thus creating the risk of smuggling.

Lin, who has handled a number of smuggling cases, suggested customs officials should ask whether processing companies are actually buying the goods abroad themselves, whether they have paid for the procurement or used agents for customs declarations. If the answer to any of these questions is yes, it can be regarded smuggling, regardless of any local involvement, Lin said.

A high-profile case in 2018 involved a cashew processor in Longzhou, Guangxi. Zanmei Industrial Co. Ltd. invested nearly 60 million RMB to build a factory in Longzhou in 2017, contributing 4 million RMB to local taxes each year. Customs officials found the company was using border trade to smuggle cashews, evading 100 million RMB in tariffs.

A former Zanmei employee said the company used border residents to break shipments into smaller loads that were carried to its factory by tricycles and issued invoices under the residents’ names to appear tax compliant. Processed goods were then sold to shareholders, who transported them to Yiwu, in East China’s Zhejiang province for sale. The employee claimed the business itself was probably legitimate, but its shareholders and management were suspected of smuggling.

Smuggling cases are usually easy for customs officials to investigate, as data related to border trade is traceable, one legal expert noted. “When investigating smuggling, customs officials typically ask border residents if the goods belong to them. If the answer is no, it is usually classified as smuggling.”

Shaodan, a lawyer from Beijing Leaqual (Shanghai) Law Firm and a former customs attorney, explained that customs authorities relied on two methods to detect border trade smugglers: whistleblowing from competitors or employees, and risk management alerts, such as suspiciously low prices.

Under China’s Criminal Law, individuals evading over 2.5 million RMB in taxes or more than 5 million RMB in the case of companies are subject to severe criminal penalties. Companies found guilty of smuggling may see responsible personnel sentenced to up to 15 years in prison, while individual offenders face up to life imprisonment.

In the Zanmei smuggling case, one shareholder was sentenced to six years, while another received a life term.

In a September notice to revise the Regulations on Border Resident Trade Management, China’s General Administration of Customs emphasised the need to modernise policies amid evolving economic challenges. The revision aims to transform border trade from a “transit economy” into a “real economy” activity by boosting local resident incomes.

The new regulations define Chinese border residents as primary trade entities. However, recognising individual limitations, the rules allow border cooperatives to assist with contracts, customs clearance and the certification processes. Banks are also urged to streamline trade financing.

An industry insider said the core idea is to separate the markets for goods procurement and local processing, with the aim of letting border residents lead the buying of goods while companies focus on processing.

Yunnan has implemented a “real trade, real transactions, real settlements, real invoices” policy. It also offers a preferential tax policy, reducing the value-added tax from 9% to 3% for local processors, which is intended to attract investment and keep imported goods within the province for processing.

For instance, Hekou Port Management Co. Ltd., established in 2022 and majority-owned by Hekou county’s state-owned assets authority, manages an online platform that connects processing companies with border residents while local banks offer unsecured loans of up to 24,000 RMB per person to fund procurement.

According to official data, Hekou county’s border trade in 2024 included 20.4 million tons of goods worth 1.2 billion RMB. This involved 144,000 transactions and generated 5.8 million RMB of income for local residents.

A fruit processing company set up a factory in Hekou county in September for durians. It imports whole durians from Myanmar and hires local residents to peel the fruit, which it then sells it on e-commerce platforms, the company’s boss told Caixin.

There are concerns about the sustainability of this model, however. For example, many agricultural resources in northern Myanmar are controlled by various local forces, making it difficult for border residents to source goods and organise shipments, a legal expert said.

Moreover, China’s reliance on imported raw materials such as durian raises fears of potential trade disruptions if exporting countries impose restrictions. Vietnam has already said it plans to phase out small-quota exports to China by 2030, tightening regulations on the informal border trade.

Lu Chen contributed to this report.

This article was first published by Caixin Global as “In Depth: How China is Cracking Down on Border Trade Smugglers”. Caixin Global is one of the most respected sources for macroeconomic, financial and business news and information about China.

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