World View: Consumer protection in China

  • Article by: THE ECONOMIST
  • Updated: March 17, 2014 - 7:58 PM

New law offers more protection, but could hurt local, foreign firms.

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Fifty-two years ago this month, President John Kennedy gave a speech to Congress in which he argued that consumers “are the only important group in the economy who are not effectively organized, whose views are often not heard.” His eloquent plea for their protection led to the United Nations guidelines for consumer protection and to the annual celebration of World Consumer-Rights Day on March 15.

Nowhere is that day marked with more gusto than in China, where it is known as san yao wu (three one five). Every year on that date, the national broadcaster airs a much-watched program lauding consumer rights. It is also used as an excuse to bash successful foreign firms — Apple was last year’s main target — for small or imagined transgressions.

This year China better honored Kennedy’s legacy. Internet firms were rumored to be in the cross hairs.

But something more important also happened. On Saturday a new consumer law, the biggest reform in this area in 20 years, came into force. At face value, it appears to give a big boost to consumer protection. Retailers must take back goods within seven days; in the case of online purchases, consumers do not even have to offer a reason. Consumer data will be protected from misuse, and permission will have to be sought for any commercial use of them. Class-action lawsuits, hitherto rare in China, will become easier to file.

The motivations for the law seem sincere. The government is keen to shift the economy toward consumption-driven growth. Regulations protecting consumers should help, by bolstering their trust in merchants. Max Xin Gu of K&L Gates, a legal firm, also believes the law “is timed to come hand-in-hand with the anti-corruption campaign” launched by President Xi Jinping: both are meant to allow ordinary people to benefit from the rule of law.

James Feldkamp is the founder of Mingjian, a pioneering Chinese website offering independent product reviews (akin to America’s Consumer Reports). He agrees that trust and transparency are key to boosting consumption. However, he worries about how the law will be implemented and enforced. Indeed, it may leave consumers ill-protected even as it saddles firms with extra costs and complexity.

For example, although parts of the law resemble the E.U.’s strict rules on data privacy, it has important gaps. Michael Tan of Taylor Wessing, another law firm, notes that it does not grant a “right to be forgotten” (by having firms expunge all record of a former customer). It leaves businesses in the dark on how exactly they can use customer data, and fails to impose on them a duty to ensure their accuracy.

Opening the door to class-action lawsuits may also prove problematic. In the United States, aggrieved consumers can club together and go to court themselves. In China, points out Tan, only government-controlled consumer associations will be allowed to launch such suits: “no ambulance-chasers here.” It is hard to imagine consumers persuading these official bodies to bring suits against state firms.

Consumer businesses fear that besides falling short in protecting punters, the law will tie them up in red tape. Publicly, local firms such as Alibaba, an e-commerce giant, say they are ready. Privately, many are worried. An executive at another big Chinese firm grumbles that “it’s a boatload of work and internal coordination to hit compliance.” Worse, the bureaucracy and the risk of prosecution may deter entrepreneurs from starting firms to compete with established ones; if so, the result will end up being bad for consumers.

China is catching up with the European Union’s exacting standards of consumer rights in much the same way as it has begun imposing E.U.-style curbs on car emissions. In both cases, pressure from ordinary Chinese prompted the government to tighten standards. Besides benefiting the public, the pollution measures give an edge to firms with the most advanced technology, which in this case happen to be foreign multinationals.

As for the consumer law, Western firms, used to operating within strict consumer-rights regimes back home, ought to cope better with it than domestic ones. But the opposite may happen. Although on paper the law does not discriminate between Chinese and non-Chinese businesses, a local lawyer worries about “sporadic and discretionary enforcement,” in the same way that China’s antitrust laws have been applied strictly to foreign firms, whereas local ones have usually been spared.

Copyright 2013 The Economist Newspaper Limited, London. All Rights Reserved. Reprinted with permission.

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