Unaccountable Chinese Retailers Threaten American Consumer Safety and Business; Outdated Laws Are Not Keeping Pace with Technology
E-commerce sellers based in China disproportionately sell illegal knockoffs and unsafe product to American consumers¹. The American legal system, not equipped for the advances in internet commerce, has given them carte blanche to engage in these activities without repercussions. Sellers based in China now account for 36% of Amazon’s US marketplace². Their total sales, at over $100 billion, exceed the GDP of the state of New Mexico. Compared to two years ago, China’s share of the top 10,000 sellers on Amazon has risen 26% to 40%³. Their numbers are growing, they are taking marketshare, and it’s time America starts paying attention.
When American businesses sell illegal knockoffs, committing intellectual property (IP) infringement, or sell unsafe product they run the risk of a lawsuit. The business’s owners may be held personally liable for the damages done. This is not the case for sellers based in China. It takes about 1–2 years to serve defendants there⁴ and because China does not enforce US judgments⁵ lawsuits against defendants based in China are usually impossible. A Chinese seller selling fake Nike shoes or hazardous hover boards can make big sales, and before a lawsuit can be filed, funnel the money out of the United States and back to China where it cannot be recovered. At worst, they may lose their e-commerce account and the money in it. Usually this amounts to just one week’s sales after expenses. In contrast, American sellers face potential personal bankruptcy and jail time. Compared to their American counterparts, Chinese sellers are incentivized to break US law.
E-commerce marketplaces such as Amazon have begun to self-police. They use overseas employees or third party contractors who are poorly trained in US law to determine what can and cannot be sold on their platforms. However, these marketplaces have perverse incentives. Most take a percentage of every sale, safe or unsafe, fake or authentic, fraudulent or not.
In 2018, Amazon’s gross merchandise volume, the total value of all goods sold on the marketplace, was $288 billion dollars. Amazon takes a commission on every product sold by third-party sellers on their marketplace, usually around 15%⁶. If we conservatively assume non-compliant products on Amazon are 1 in 1000, Amazon generated $43 million in commissions off of non-compliant products in 2018 alone. With additional income generated from storage, fulfillment fees, and advertising included, Amazon’s revenues from non-compliant product would be about $144 million in 2018.
Adding insult to injury, Chinese sellers make big profits selling directly to US consumers, but don’t pay US income taxes⁷. Chinese sellers are both increasing in number and taking marketshare from American e-commerce sellers. Combine this with e-commerce taking marketshare from US brick-and-mortar stores and it means reduced tax revenues for federal, state, and local governments⁸.
Compared to sellers based in China, American businesses are at a disadvantage when selling online in the United States. Knowing the language, the culture, and branding should afford domestic businesses a home court advantage. Instead, acceptable advantages, like cheap labor and proximity to factories, are combined with unfair advantages such as limited legal repercussions and 0% tax rates to stack the deck against American businesses.
The tariffs are making the situation even worse. Chinese sellers who lie about the country of origin or the value of their goods to reduce their import tariffs stand to lose a shipment. Americans who do the same go to prison. I’m the CEO of a toy company named Viahart. When I told one of my Chinese suppliers that I was worried about impending tariffs, he looked at me like I was stupid. He put is hand on my shoulder, took me aside, and said “Don’t worry! We’ll just say the products are made in Vietnam!” This is par for the course.
We pay the tariffs and we pay our taxes. Our competition does not. This shortchanges American governments of tax revenue and puts our business and our employees at risk of being overcome by foreign cheaters. The longer this is allowed to go on, the greater the risk to our economy. “Designed By Apple in California, Assembled in China” stands to become “Made and Designed in China”.
Chinese sellers are notorious for their black hat sales tactics on the Amazon platform. Whether it’s gaming reviews or driving fake orders to a product to make it more prominent in search, China is the best. Having honed their skills on Chinese marketplaces like taobao.com, they are the innovator who brings the scams to the United States⁹.
One such scam is the false allegation of IP infringement. Chinese sellers accuse their competition of IP infringement to get their competition shut down by Amazon. In the meantime, they capture their sales. Chinese sellers defraud the United States Patent and Trademark Office¹⁰ into awarding design patents for public domain designs and then use those fake patents to accuse their rivals of IP infringement¹¹. Amazon wrongfully takes down the accused without a trial and often destroys their inventory. Foreign false accusers, using untraceable e-mail addresses based in China, face no legal repercussions.
Chinese sellers don’t just make false allegations of IP infringement, they are the prime offenders. They disproportionately commit IP infringement on Amazon. Even though Amazon takes a commission on the sales of infringing products, current law requires IP holders, not Amazon, to do the policing. After Amazon receives a complaint of IP infringement, poorly trained overseas Amazon employees and contractors judge whether the allegation is correct. They often get it wrong, frustrating American IP holders and costing them big money. An allegation of IP infringement or counterfeiting is serious. As such, the US court system uses judges who have been approved by the Senate. Amazon uses $2/hour contractors in India. US judges take an oath to be impartial. Amazon takes one to maximize its profits. In comparison to the US courts system, Amazon is a kangaroo court¹².
The problem of who is responsible for policing e-commerce marketplaces for IP infringement has existed since 2004¹³ and with more and more Chinese sellers selling on US e-commerce marketplaces it has only gotten worse. The marketplaces are overwhelmed and their decision making is clouded by their making money on the sale of infringing IP and their desire to minimize the cost of determining what is and what is not IP infringement.
The online IP infringement legal system is broken and needs to be changed. Amazon says it agrees and they are lobbying Congress for stiffer penalties for counterfeiting¹⁴. An Amazon spokesperson recently said¹⁵ “We already have programs and processes that go well beyond our obligations under U.S. law.” If Amazon has programs and processes that go well beyond the obligations of U.S. law, but their marketplace is still plagued by widespread IP infringement and unsafe product, then it follows that we need raise the standard of the law. The e-commerce marketplaces have known of these problems for a long-time and they have not solved them. Let’s stop waiting for them to.
To stop the rampant IP theft and unsafe product sold in the United States by entities operating in China but selling in the US, we must change the incentives. We must level the playing field between American businesses and their Chinese counterparts to make a fair market for US companies and a safer one for US consumers.
To make this a reality, we need a new law¹⁶, one which can achieve bipartisan support. The Online Business & Consumer Fairness Act is that law and it has 5 simple parts that will solve these problems once and for all.
1.To help American consumers know from whom they are buying, require e-commerce sellers not based in the United States¹⁷ to list their verified company name and address on the marketplaces on which they sell.
2. To hold e-commerce sellers not based in the US accountable, allow them to be sued via a registered letter to the address listed on their marketplace profile.¹⁸
3. To right the wrongs of IP infringement and unsafe product which harms American consumers, require e-commerce sellers not based in the United States to purchase product liability and intellectual property infringement insurance with a $1 million dollar limit per occurrence.¹⁹
4. To level the playing field for American small businesses and increase government revenues, require e-commerce marketplaces to withhold 7% of sales receipts made by foreign sellers until filing of a tax return²⁰.
5. To end the incompetence of outsourced tech company IP infringement judgments, shift the burden of determining what is and is not IP infringement away from the marketplaces and to the US court system.
The American economy exists for the benefit of the American people, not foreigners who break our rules, hurt our consumers, and profit in the process. The Online Business and Consumer Fairness Act, finally addresses these issues, but needs your support. Next time you receive a substandard product asking for a 5 star review in broken English, write to your Congresswoman. If you’re an Amazon seller yourself, before you’re attacked by a competitor or wrongly accused of IP infringement again, write to your Congressman. Tell them how many people you employ, the taxes you pay, and what you do for your local economy. And tell them you support The Online Business and Consumer Fairness Act.
Footnotes
[2] : Marketplaces Year in Review 2019
[3] : 40% of Merchants on Amazon Based in China
[4] : Suing a Chinese entity in the United States? Expect a two year wait to serve process
[5] : Enforcing US Judgments in China. Not Yet.
[6] : Selling on Amazon Fee Schedule
[7] : How Amazon and eBay became a tax haven for Chinese Sellers
[8]: In theory, Chinese sellers profiting in the United States pay tax in China instead of in the United States. However, if tax on the profits earned by selling to US consumers is paid at all, it is most likely paid in low-tax jurisdictions like Hong Kong. If Chinese sellers are, in the United States, importing their goods, storing their goods, shipping their goods, selling their goods, advertising their goods, and even accepting returns, they should be paying taxes here as well. Also, it’s worth noting that Chinese sellers, for years, never paid sales tax anywhere in the US.
[9] : In China, the process of generating fake orders to improve visibility in online search is called 刷单, or shuadan, which essentially means swipe (as in credit card) order. When you run shuadan through Google translate you get “brush”. American sellers, lacking a word in English for this concept, therefore call it “brushing”.
[10] : The USPTO, while significantly better than those employed by the marketplaces to determine IP claims, is not the US court system. They have been caught unprepared by the wave of applications, fraudulent or not, coming from entities in China. IP applications are taken under penalty of perjury to deter false applications, but there are no repercussions for those who commit perjury from China. The USPTO relies on that penalty of perjury to process applications and does not verify every single claim made in an application. Further, they lack the resources.
[12] : Amazon acknowledged this when they launched a program to outsource patent infringement decisions to US trained lawyers. There’s a catch, however. The lawyers, who seem to be selected by Amazon, are paid for by the accused and the accuser, not Amazon. When one party is doing great business with arbitrators like Amazon is here, the arbitrators are incentivized to skew their decisions to favor the party which hires them, so as to ensure continued business.
[13] : Wikipedia Recap of Tiffany vs. eBay, a case focussing on whether eBay was responsible for counterfeit Tiffany merchandise sold on its platform. It’s from 2004, before the wave of Chinese e-commerce sellers or even Fulfillment by Amazon!
[14]: (Paywall) Amazon Ready to Pour Billions Into Policing Products on Its Site
[15]: (Paywall) U.S. Signals Crackdown on Counterfeit Goods Sold Online
[16] : These ideas were originally proposed via a written Congressional testimony submission in November 2019. Some of the ideas, coincidental or not, were featured in a Department of Homeland Security Report to the President on Counterfeiting. You can find parts 1, 2, 3, and 4 of my congressional testimony video here.
[17] : Who qualifies as an e-commerce seller not based in the United States? Any corporation engaging in e-commerce with American consumers which does not have an owner who is a full-time resident of the United States or US citizen. Also, any person engaging in e-commerce with American consumers who is not a full time resident of the United States or US citizen.
[18] : This is the part of the law that holds everything together. Without it, other provisions are useless. We must hold sellers based in China accountable. [2020/02/11 Edit: Instead of using regular mail, this law could allow service of lawsuits by e-mail to an e-mail address listed by the seller. This would be faster, more practical, and consistent with how business is done in the 21st century.]
[19] : Requiring foreign companies to carry insurance if they wish to do e-commerce business with American consumers may seem extreme, but it is not. Insurance requirements are common in automobile law. For example, it is illegal to drive in Texas without liability insurance. For more, read this great article about the uses of insurance and the downsides of limited liability corporation law.
[20] : I assume that foreign sellers have a 20% profit margin on their sales and would pay, on average, a 35% tax rate on those profits. 20% * 35% = 7%. At 7%, it is less than half of the average marketplace commission, 15%. Similar to US payroll withholding, this money will be refundable upon proper filing of a tax return. While this may sound burdensome, American small businesses already must deal with similar in the form of quarterly or monthly estimated taxes. Dishonest foreign importers will now stand to lose more than their shipment and will be incentivized to follow the law like their American counterparts. Let’s level the playing field and, instead of raising taxes, get the tax revenue from those who should be paying it anyways. [2020/02/10 edit: We can solve 90% of the problems with the US e-commerce market with the other 4 parts of this proposed law. At the time of writing, I neglected to mention that the customs bonds importers are required to carry prevent the US government from being shortchanged on tariff payments. With all this said, I continue to believe that while income tax withholding is audacious, it is right for the United States.]
Thank you!
Thank you to Avraham Eisenberg, Robert Scott, Brandon Fuhrmann, Margaret Nyamumbo, and Ryley Lyon. Each of you significantly improved this article with your suggestions, edits, and ideas.
