1. On the Legal Issues in China ’ s E- Business Development Prof. WANG Guo An (Andrew) Vice Director of International Affairs Office Zhejiang Gongshang University Voice:86-136-0051-6079(cell) 86-571-28877313 Fax: 86-571-28877312 88846798 www.zjgsu.edu.cn/english/eindex.php www.zjgsu.edu.cn/english/eindex.php http://econet.zjgsu.edu.cn/andrew.wang/index2.htm http://econet.zjgsu.edu.cn/andrew.wang/index2.htm E-mail: wangguoan@mail.zjgsu.edu.cnwangguoan@mail.zjgsu.edu.cn

2. Contents I. Introduction II. The Characteristics of e-Business III. Legal Issues in China’s e-Business IV. Suggestions Regarding Making Laws on e-Business V. Conclusion

3. I. Introduction CNNIC "17th Statistical Survey Report on the Internet Development in China" Internet users : Some 110 million by the end of December,2005, No.2 in the world Broadband users : 64.3 million, ranking No. 2 in the world The number of computer hosts : 49.5million The numbers of domain names : 622534 The numbers of websites : 694000 The total number of IPv4 addresses : 74.39 million ranking 3rd in Asia Chinese e-business volume : US$77.5 billion Web sites for e-commerce : over six hundred.

4. I. Introduction Various types of legal problems have arisen through the new mode of e-business. How to resolve them remains a headache not only for the members of the business leadership community, but also for the lawyers and the judges in China. To date, only one law, the Digital Signature Law of China was passed by the Standing Committee of China National People’s Congress on August 28, 2004 and would be enforced on April 1, 2005.

5. II.The Characteristics of e-Business 1. Being commercially transnational and boundless 2. Instantaneous communication and prompt convenience 3. Reduction of costs 4. High efficiency and selectiveness

6. III.Legal Issues in China ’ s e-Business 1. Conclusion of contracts online 1.1. Validity: The Digital Signature Law of China was passed by the Standing Committee of China National People’s Congress on August 28, 2004 and would be enforced on April 1, 2005. 1.2. Revocation and withdrawal of an offer and acceptance According to the United Nations Convention on Contracts for the International Sale of Goods, 1980,7) as well as Articles 17 and 27 of the Contract of Law of the People’s Republic of China, a business’ offer can be withdrawn or ‘altered’ provided that the notice of withdrawal of the offer reaches the offeree before or at the same time that the actual offer reaches the offeree; similarly, a contractual acceptance can be withdrawn if the notice of withdrawal of the acceptance reaches the offeror at or before the time at which the acceptance reaches the offeror.8) The above stipulations are applicable only to the conclusion of contracts in traditional business transactions, including by registered ‘snail’ mail. They are not applicable to e-business transactions in China, however, because an offer or acceptance completed via the WWW can reach the other party and become effective immediately. Essentially, this method has made the withdrawal and revocation of an offer or acceptance impossible because of the instantaneousness of communication online.

7. III. Legal Issues in China ’ s e-Business 1.3 Confirmation of the arrival of acceptance According to Article 26 of the Contract of Law of China, an acceptance from the offeree takes force upon its arrival at the offeror; hence, it is reasonable to assume that the contract is concluded. How can company leaders confirm, however, whether the acceptance actually has reached the offeror? If the offeror has discovered that the offeree’s acceptance is unfavorable to him, the offer may delete it from his e-mail server and declare that the acceptance never arrived. In addition, the timing of the arrival of the acceptance is difficult to verify, a fact that many people have taken advantage of learning different ways to alter or modify it in ways that benefit them or their company.

8. III. Legal Issues in China ’ s e-Business 2 Taxation The taxes or tariffs associated with e-commerce fit broadly into three categories, each according to the different kinds of trading completed online. 2.1 Taxes on visible trade The Chinese government can levy taxes on visible goods sold via the Internet through company web sites in the exact same fashion as they can and do on transactions conducted at a physical store. There is no need to change or adjust the way it levies taxes. The tax rate levied and collected can be based on the trading volume or/and the profit margin of the Internet-based enterprise.

9. III. Legal Issues in China ’ s e-Business 2.2 Taxes on invisible trade Invisible trade refers to online services provided by service professionals to their customers. Services can be provided via the Internet server so that their customers may utilize it for business-related inquires or professional consultations. In other cases, the service providers send the required information directly to their customers upon request and only based on the agreed terms and conditions of the contract. Examples include onsulting services companies, Internet-based private companies, and electronic newspapers and journals whose customers and readers must pay the required charges in order to obtain the needed information or services through the Internet. While the commodities are considered invisible, the transactions still involve payment. The appropriate taxes are levied on the basis of the amount of payment or money flow.

10. III. Legal Issues in China ’ s e-Business 2.3 Taxes on digitized information The digitized information refers to computer software, books, music, pictures, industrial designs, and visual materials sold on the Internet. The taxes levied on them are considered royalties. Industry experts and government officials in many countries have failed to reach agreement on whether the digitized information constitutes a product or service since computer software is easily available on the Internet and consumers can download the program products directly from their own homes. In every sense, e-commerce has been a hard nut to crack for tax administrators plus tax and tariff collectors in China for the following manners:

11. III.Legal Issues in China ’ s e-Business 2.3 Taxes on digitized information (1)E-business involves no paper work. This has caused tax and tariff evasion attempts to become easier for those willing to take the risks because it is extremely difficult for the tax or tariff collector to obtain the evidence upon which the tax or tariff frauds are based. (2) Disputes may arise in taxation jurisdiction (3) The changeability and mobility of e-business has made it more complicated and difficult for tax law enforcement departments

12. III. Legal Issues in China ’ s e-Business 3 Intellectual Property rights violations online 3.1 Copyrights violations online With the advance of the world’s information technology industry, online literary masterpieces, music, visual and video works, architectural and industrial designs, and other multimedia products can be easily compressed, duplicated, and transmitted without written authorization from the publication authors or inventors. Anyone possessing access to the Internet can gain access to the products, download and duplicate them, and then sell them. By doing so, they have violated or intruded into the authors’ or owners’ rights. Such copyrights violations lead to unfair competition in the market and their owners’ great economic loss.

13. 3 Intellectual Property rights violations online 3.2 Inappropriate connection of websites The connection between websites is one of the key information technologies in the development of the Internet, which can make the files or the documents connected from different servers so that the information can be shared by all the Internet users in the world. In this way the owners of the websites or domain names or the enterprises can effectively push the sales of their products or services online. However, the connector may not enjoy any rights of the connected files and documents. Once the owners of the connected files or the connected documents have raised an objection to the connection, a legal dispute will inevitably occur and other legal issues will follow. Does it involve the violation of the owners’ rights if their connected files or documents or works are duplicated, sold and transmitted by the Internet users without the owners’ approval since the connected files or documents are easily available to the general public online? Who will the defendant? The connector or the Internet user who has duplicated, sold and transmitted or made use of the connected files or documents? Or will the connector AND the Internet user be the defendants in the dispute? So far there has been no laws concerning the legal issues resulting from the connection of websites and most of such disputes have ended with a compromise outside the court by the parties involved

14. 3 Intellectual Property rights violations online 3.3 Inappropriate or illegal registration of domain names Recent government reports show that the number of Chinese enterprises’ brand names or trademarks registered improperly or illegally by businesses overseas amounted to over six hundred. Examples include the following: Haire, 505, Changhong, Wahaha, Qingdao Beer, Jianlibao, and Quanjude Roast Duck, to name only a few.12) Another forty or so brand names from Zhejiang Province were registered online by individuals residing in foreign countries.13) The legal owners of those brand names or trademarks were forced to fight in court to get them back. Had they been unsuccessful, none could have pushed or promoted the sales of their products or services through the growing online market.

15. III. Legal Issues in China ’ s e-Business III. Legal Issues in China ’ s e-Business 4. Security of e-business According to the 14th Statistical Survey Report on the Internet Development in China released by CNNIC on July 20, 2004,14) among the Internet users, 28.9% of them are worried about the security of transactions. Since the Internet is globally open and accessible to anyone with a computer and a www connection, the security of e-transactions is a great concern for all the parties involved. Internet users in China have experienced increasing problems with individuals maliciously spreading computer viruses, personal messages being intercepted online, the transmission of slanderous material against Chinese statesmen, intrusion into others’ websites and privacy, and stealing or altering of business data to one’s own advantage. For example, on August 11, 2003, the computer virus WORM_MSBlast.A intruded upon China and infected the majority of domestic Internet users in a few days. The worm virus broke the record and became one of the most serious computer virus.15) It was reported that the home page of the famous e-business enterprise of http://www.8848.com was attacked by the famous www.baidu.com with DDoS at 18:00 on January 21, 2005 and at once 8848’s website was paralyzed for over 26 hours and all its sale activities were stopped. It sustained great economic loss.16) Mr. LIU Benfu, an Internet economist, commented: if an Internet enterprise attacks its competitor by establishing an Internet alliance without keeping the alliance informed, the Internet enterprises alliance has become an “hackers alliance” and it is very unfair to both the enterprises in the alliance and the attacked internet enterprise. Mr. Hu Gang ， an Internet legal expert, said, it is an new crime in the era of the Internet that a websites alliance has made such a devastating attack on another website; so far there is no law in China governing such attacks. Mr. WEI Wei, Planning Manager of http://www.8848.com said: “Such attacks by www.baidu.com can be directed at any Internet enterprises and even www.sina.com can be paralyzed in a minute. The e-business community in China were terrified by the attack.17) Understanding both its severity and sensitive nature, the protection of one’s business information and company secrets is not only a matter of technology, but also an issue of national and international law.http://www.8848.com www.sina.com

16. III. Legal Issues in China ’ s e-Business III. Legal Issues in China ’ s e-Business 5. Spam and rampant pornography online According to the CNNIC, each week each Internet user receives twice as much unwanted spam as wanted email messages. Besides, pornography has also become a social hazard on the Internet. The unwanted spam and pornographic materials pose not only a headache for the Internet users, but also a threat to the moral health of China’s youth. It is estimated that 700,000 pornography websites exist in the world, and the figure increases at the rate of 200-300 every day. Online pornographic activities have become rampant in recent years and have not only polluted China’s social environment, but have also degraded the physical and psychological health of young Chinese people. Chinese parents and teachers are so worried that some of them do not allow their young kids to have access to the Internet in order that their children’s growth may not be adversely affected. In order to crack down pornography online, a campaign was launched in the summer of 2004 in China. From June 10 2004 to July 17, 2004, Chinese parents submitted more than 20,000 complaints to the Internet Society of China (ISC) and exposed more than 300 pornography websites. By the end of July, more than 700 pornographic websites had been shut down and hundreds of people had been detained as a part of the campaign to crack down online pornography.18) How to curb the spread of pornographic materials and related activities online while, concurrently, bolstering the more regular and orderly development of the country's Internet services remains a legal issue, too.19) By strictly reinforcing related rules and regulations, the government must see to it that pornographic websites will not rebound.

17. III. Legal Issues in China ’ s e-Business 6. Legal protection of consumers’ rights According to the 14th Statistical Survey Report on the Internet Development in China by the CNNIC, poor quality of online products, poor after-sales services and poor credit of the producer (43.8% of the Internet users think.), unreliable online information (7.3% of the Internet users think.) are the greatest concerns for the Internet users in China. Therefore, 50.8% of the Internet users have seldom or never visited e-shops or e-stores and only 0.3% of the Internet users say that their primary objective to use the Internet is to go e-shopping though 42.3% of them use the Internet to get information and 34.5% of them use it for entertainments and relaxation. Only 37.9% of the Internet users effect online payment while the majority of them adopt cash on delivery (24.4%) or remitting from the post office (18.9%) or from the bank (18.1%).20) In order to increase the e-trade volume, legal protection of consumers’ rights and interests should be reinforced in addition to the establishment of a nation-wide credit assessment system. Chinese consumers do not have enough in terms of effective legal protection from law-enforcement departments when e-commerce and other Internet issues are concerned. In e-business, there is no face-to-face contact and the consumers cannot examine products of interest before their purchase. The after-the-sale services offered for some Internet transactions also contains much room for improvement in China. As a result, potential online consumers in China feel more vulnerable to cheating and business fraud through false information online than in the physical storefront businesses. Many are generally reluctant to disclose personal or corporate information on the Internet. Although there is a Chinese law regarding the protection of consumers’ rights and interests, it has yet to be strictly enforced.

18. IV.Suggestions Regarding Making Laws on e-Business 1. Establishment of an efficient and authoritative legislative body 2. Strengthening International cooperation and exchange 3. Revising some parts of the present laws while making a law on e-business 4. Consideration of the Chinese e-business environment

19. V. Conclusion V. Conclusion The rapid e-business development in China has created the urgent task of designing and passing e-laws that address the conclusion of online contracts, the taxation on visible and invisible goods traded online, the protection of intellectual property rights online and business information and privacy online, as well as the prevention of exposing to or endangering children with the rampant growth of the online pornography industry.