Electronic cigarette ban and Sino-US trade war bankrupt Hong Kong’s vape transit industry

Since February this year, the Hong Kong Government submitted a draft amendment to the Legislative Council of the Special Administrative Region to prohibit the import, manufacture, sale, distribution and promotion of new tobacco products like electronic cigarettes. Not only the China domestic electronic cigarette industry has been facing export problems, but also the distribution and re-export industry in Hong Kong has been affected a lot.

In recent years, many domestic e-cigarette manufacturers ship their products to the warehouse of Hong Kong Logistics Company, and then export them to foreign countries after separating and packaging. However, the problem is that the Hong Kong government’s proposed amendments do not allow the distribution process, and the public opinion has affected many domestic e-cigarette manufacturers. Therefore, many domestic vape companies hand the transit business over to Macau. Besides, it led to the loss of a large number of export-related enterprises in Hong Kong, many companies have laid off staff and terminated operations one after another.

Although the e-cigarette ban bill has not yet been passed by the Legislative Council of Hong Kong and the amendment motion put forward by the Hong Kong Member of Parliament on 25 June has been passed, the ban on e-cigarettes has been postponed. However, due to a large number of bankruptcies in the distribution and re-export industry in Hong Kong, the industry expects that the new amendment will exempt the distribution of e-cigarettes in order to save the vape industry.

In February, the Hong Kong Food and Health Bureau issued a constitutional amendment proposing to prohibit the import, manufacture, sale and distribution of electronic cigarettes and HNB products. Even though the draft is subject to consideration and vote by members of the Legislative Council, with the growth objection of public opinion and the advance enforcement of some customs, it has led to the electronic cigarettes transit relevant enterprises on the verge of extinction.

Chen, the head of a warehousing and logistics company in Hong Kong, once disclosed to the Hong Kong media, “Shenzhen is the main producer of electronic cigarette products in the world. If manufacturers export products, they can obtain a certain proportion of export tax rebates according to the total value of goods. However, due to the different quantity of foreign purchases, there are also many small orders. If the manufacturer declares the products for each order separately, they must pay more handling fees according to the number of orders.”

Therefore, it is the usual practice of these manufacturers to apply for a customs declaration form from the domestic customs, then transport a large number of products to the storage and logistics company of Hong Kong for storage, and entrust the packaged products to be separated according to the order, and then re-exported to foreign countries. “For domestic manufacturers, this method not only saves costs, but also earns export tax rebates. Moreover, Hong Kong has a relatively tight shipping schedule, which will lead to the prosperity of warehousing, separating and re-export business. But as soon as the “ban” comes out, the whole line is facing a crisis!”

Chen explained that although the draft allowed electronic cigarette products to be transshipped “intact”, it stated that it was intended to prohibit “distribution” in Hong Kong. Many domestic manufacturers have learned that Hong Kong will prohibit the relevant processes after passing the legislation, and they take precautions, terminate cooperation with Hong Kong companies, and transfer to Macao companies for distribution business, and then arrange trucks to transport the goods to Hong Kong via the Hong Kong-Zhuhai-Macao Bridge. “The truck drive directly to the container terminal and board the goods on ship. We are not needed anymore.”

According to the data of the domestic electronic cigarette survey system “ecigku”, from January to April this year, the amount of re-export in Hong Kong has dropped from $206.16 million at the beginning of the year to $67.82 million. The lowest level of export data was in February when the Hong Kong government proposed a draft amendment.

Chen Minhui, chairman of the Hong Kong Electronic Cigarette Association, said that before the proposed amendments, the business of separating, packaging and re-exporting electronic cigarettes had flourished in Hong Kong, with three large and more than ten small companies with a total monthly turnover of more than 100 million yuan. But in recent months, many companies have closed down or contacted other businesses to struggle to survive. It is estimated that the monthly turnover has plunged to about 100 million yuan. “One of the companies had about 180 employees, but recently there have been many large layoffs. At present, only about 20 employees remain.”

He emphasized that all electronic cigarette products stored and separated will be exported and will not be sold in Hong Kong. The relevant processes should not be prohibited, which has affected many people’s unemployment. “It is better to regulate electronic cigarettes than to prohibit them by amendment.”

Zhang, who is also the head of the warehousing and logistics company, also said that he did not oppose the amendment to prohibit the import, manufacture and sale of electronic cigarettes, but should exempt from the right to distribute, because the related products are not sold locally. “I hope the government will listen to the voice of the transit industry and protect the industry’s survival rights and workers’jobs!”

In response to the industry’s request for an exemption from “distribution before re-export”, a spokesman for the Food and Health Bureau said that if new tobacco products were allowed to be re-exported in Hong Kong, a comprehensive law enforcement system would be needed to monitor the entire supply chain. “However, the relevant law enforcement work needs to invest too much resources, which will put unnecessary pressure on the overall law enforcement work.”

On the other hand, although Hong Kong’s draft amendment has been postponed, the impact on transit business includes not only the ban on electronic cigarettes, but also the tariff issue of Sino-US trade frictions. So far, the United States has implemented three tariff adjustments on e-cigarettes.

The earliest tax increase on electronic cigarettes in the United States can be traced back to August 23, 2018, when the tariff on electronic cigarette packages increased by 25% from 2.6%.

On September 24, 2018, the tax on electronic cigarette accessories increased from 0.6% to 10.6%.

On May 10, 2019, electronic cigarette accessories increased from 10.6% to 25.6%.

Before the new tax increase in August last year, many e-tobacco exporters were looking for a more stable way to deal with it. At that time, because there was no tax increase on electronic cigarette accessories, the common way was to declare through the form of accessories, then to the United States to process, assemble, heat shrinkage film, and finally to the hands of end-users, the price did not increase much.

However, with the latest round of tariff adjustment covering electronic cigarette accessories, and the United States began to strictly check the origin of goods and declared product names and other acts that do not conform to reality, so that domestic electronic cigarette enterprises must face the problem of how to re-export.

What’s the tax rate change of vapes in the trade war between China and the United States?

So, even if e-cigarette enterprises set up factories in other countries or declare them as stopped exporters to evade tariffs, as long as the e-cigarette still uses Chinese battery core, the origin of e-cigarette can hardly be identified as other countries, because the main value of e-cigarette comes from the core.

In addition, the United States has a very sound trade law, if the false declaration is checked, in addition to seriously affecting the sale of the product in the United States, there is a risk that enterprises will be prosecuted by the United States Government. You know, the U.S. Customs has a five-year retrospective period. If there is a record of violations, the Customs is bound to conduct a strict inspection of the goods.

Overall, Hong Kong’s distribution and re-export industry related to e-cigarettes is facing a huge crisis. On the one hand, with the growing dissatisfaction of public opinion on the ban on electronic cigarettes, most of Hong Kong’s electronic cigarette re-export and transit business declined sharply; on the other hand, because the largest domestic export market of electronic cigarettes is still the United States, the tariff issue of China US trade war has also led many domestic manufacturing industries to begin to shift to more advantageous logistics plans.

Although Hong Kong’s e-cigarette ban has been postponed and not been passed yet, and Trump has recently announced that he will stop raising tariffs on China, the chances of manufacturers returning to Hong Kong for separating and re-export are still rare when there is no clear regulation in Hong Kong carried out, regardless of any factor above.
After all, bans and trade war are only temporary.