$2.7 Billion Loss Caused by Chinese 代工 (Dai Gong) in Korean Duty-Free Industry: Time for District Regulations to Take Place

'代工 (dai gong)' or illegal retail traders are merchants who trade goods bought from abroad without being regulated by laws or taxes. Tax is a compulsory financial charge imposed on individuals or firms by the government to maintain society through public services. It would be problematic for stakeholders not to pay taxes as it would decrease the government budget, possibly supporting citizens to achieve better living standards. Retail traders who contributed to the low collection of tax began acting as early as the 1970s in countries including Korea, Japan, and China in forms of exporting trending goods directly from abroad. Among various types, this article will focus on the Chinese traders that export goods from Korean duty-free shops.

The three roles of the tourism industry are consumers, tour agencies, and sellers (duty-free shops). Conventionally, the tour agencies attracted travelers, sent them to the producers who provided goods and services, and paid the sellers with what they got paid by the travelers. However, as the number of sellers increased faster than consumers, some tour agencies turned into individual retail traders that bulk purchase goods from one country to sell them in their country at a lower price than their municipal rate. The sellers highly welcomed this, as the consumption of individual retail traders highly contributed to their total sales. The sellers soon started competing, striving to capture more of them. However, due to the nature of duty-free shops, they could not compete through product differentiation but only through price competition. Duty-free shops led them to create a concept called consumer commission, which is a charge duty-free shops pay to the tourist bureau or retail traders for change of attracting tourists to their shop or bulk purchasing. This price competition benefited the retail sellers but not duty-free shops, as they all had to give as much consumer commission as possible to the retail sellers to survive in the competition.

The problem is that this competition needs to go further. Korean duty-free shops have paid over 1.3 billion U.S. dollars (1.9 trillion KRW) as consumer commission a year, which is problematic not only as a transaction in the parallel market but also because of the sheer loss it causes to the Korean economy. This situation has only been exacerbated by the COVID-19 crisis, as the tourism industry was one of the most hardly struck industries. Duty-free industries have left immense amounts of stocks and meager sales rates. In consequence, the duty-free shops had no choice but to increase the consumer commissions to attract as many consumers as possible. According to the Korea International Trade Association, Korean duty-free shops paid around 2.7 billion U.S. dollars (3.9 trillion KRW), which is more than double the amount before the COVID-19 situation.

At this point, government intervention seems inevitable. At this point, government intervention seems inevitable. On May 15th, The Ministry of Culture, Sports and Tourism announced that tour agencies that sell low-quality and investigate low-priced travel plans. The investigation initially aimed to restrict and withdraw possible illegal individual retailers. However, the travel agencies found various vulgar tricks to find loopholes in the regulation. Trim, subpar companies may merge into a corporate organization with government approval or register multiple entities if one is thrown out. Officials surely know the agency's plan to go through loopholes. The real problem is that they have done nothing but declare they will impose "stern actions" repeatedly.

One hope is that the COVID-19 situation is restoring, opening up countries' borders, and giving back the popularity of the tourist industry. The change will allow consumer commission rates to fall due to the reduced need for 'dai gong' with an increased consumption rate due to a more significant tourist influx. Nonetheless, the post-covid consumer commission rates were still irrationally high. Therefore, the government's more forceful action is required to stabilize the unrealistically high consumer commission rate and aim to destroy the 'dai gong' culture in the long term.

A possible solution is for the Korean government to become a 'dai gong' itself. It acts as a bridge to connect Chinese consumers to Korean duty-free shops while imposing a heavy toll on selling goods to illegal retail sellers. This way, all the stakeholders may benefit. The duty-free industry would not experience losses by paying heavy consumer commissions while keeping a similar sales rate. The government may also save the possible leakage of wealth to China by illegal retailers and minimize unpaid taxes. Finally, Chinese consumers will still be able to purchase the goods at a lower price.