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Setting a new foundation: This China trade war isn’t about semiconductors

Contrary to widespread belief, the beauty industry is thriving despite China's economic downturn.

Many Chinese customers, cautious of making large-scale purchases like apartments after nearly three years of mandated masks and regular lockdowns during the pandemic, are now splurging on lipstick, perfume, moisturizers, and other personal care products.

French, Japanese, South Korean, and American cosmetics firms have all invested extensively in China, but they aren't seeing any return on their investment.

Companies producing cosmetics in China are thriving, but imports are declining because of restrictions placed on them by the government during the pandemic.

While issues of national security and technical innovation are at the center of China's trade battles with the West in regards to semiconductors, the disagreement over cosmetics is driven mostly by financial concerns.

"I'm not talking about peanuts," French Finance Minister Bruno Le Maire stated. He also noted that "for many French companies," China "represents between 30 and 35% of their total revenues."

U.S. Commerce Secretary Gina Raimondo made the announcement to increase exports of personal care items to China during her trip there last month. "No one can argue that health and beauty aids interfere with our national security," Raimondo added.

In accordance with legislation passed in China in 2021, businesses will be required to list each and every ingredient used in their products, along with the exact quantities. All of their suppliers' addresses and the locations of their final assembly must be uploaded to a Chinese database. They worry that if they do, low-cost Chinese manufacturers will be able to imitate their products.

The need that numerous items, including hair colors and sun creams, be tested on live animals before they can be marketed to Chinese customers is one of the most controversial Chinese requirements.

According to Cosmetics Europe's director of technical regulatory affairs, "it's not only the requirements that are onerous but the timelines under which things need to be done — they are unrealistically short."

Companies of LVMH's and L'Oréal's size have the resources necessary to comply with the regulations. However, some smaller firms are delaying exports to China until they can find a faster and cheaper way to comply with the regulations.

The French government is spearheading an effort this year by the European Union and 11 other cosmetics-exporting countries, including the United States and Japan, to have China abolish many of the regulations. During his April visit to China, French President Emmanuel Macron brought up the subject with his hosts. The worries were "at the core of discussions" with his Chinese counterparts, Le Maire said during his July visit to Beijing.

Le Maire stated that he and Chinese Vice Premier He Lifeng had agreed to establish a working group to identify shared standards, and that they planned to hold their first meeting in Paris before the year's end. However, there is no assurance that talking things out would end the conflict.

When it comes to the cosmetics industry, China is second only to the United States. However, foreign corporations have always had a hard time setting up shop there.

The majority of cosmetics sold in China were required to undergo animal testing for many years, even if they were later found to be safe for human use. Companies either conducted covert animal tests in China or stopped importing products from that country.

Many Chinese-made items and, starting in 2021, imported cosmetics not making health claims are no longer required to undergo animal testing in China.

However, "special cosmetics," which include goods with sunscreen or antiperspirant as well as products like hair dye or skin lightener, are still required to undergo animal testing in China. Forcing animals to ingest or inhale a test material, or applying the substance directly to the skin or eyes, are all examples of such experiments, as stated by Jason Baker, senior vice president of PETA Asia. The most prevalent animals are rabbits, guinea pigs, and mice.

According to Michelle Thew, CEO of the advocacy group Cruelty Free International, China uses over 20 million animals annually for testing and research for various purposes, with Japan and the United States far behind.

The global cosmetics and personal care business backs Chinese government efforts to minimize the number of animals used in testing on products supplied in the country. Unilever, the parent company of the Dove and Vaseline brands as well as the Dermalogica skin care line, has stated that it has been collaborating with Chinese academics and government officials to eventually eliminate the necessity for animal testing of imported cosmetics.

"The move from animal testing to paper-based risk assessments is undoubtedly a positive one," said Carl Westmoreland, head of the Unilever safety and environmental assurance center. There may be additional paperwork, but this is a really positive development for us.

Facsimile inquiries sent to China's regulatory body, the National Medical Products Administration, on August 8 went unanswered. The Ministry of Foreign Affairs has ignored the problem.

Recent data shows that multinational cosmetics companies are fast losing ground in China to their indigenous rivals. The first half of this year saw an 8.7% increase in retail sales of cosmetics in China compared to the same period in 2022. Overall imports, however, dropped by 13.7%.

Factories in China, many of which are owned by Chinese enterprises, benefited from the disparity between expanding sales and decreasing imports. Sales at Hangzhou's Proya Cosmetics were up 35% in the first half of the year, compared to the same period in 2016.

"There is a rising acceptance of domestic brands," said Chris Gao, a China cosmetics analyst at CLSA, a Hong Kong-based trading and investment business.

According to Chinese customs data, sales of French beauty products to China, which totaled $5.4 billion in 2016, dropped by 6.2% between January and June of this year compared to the same period in 2017. The United States and South Korea both saw drops in their cosmetics imports, by 22.2% and 19.8% respectively.

International cosmetic brands like La Prairie and Shiseido have seen sales decline due to a government crackdown on merchants in Hainan, a duty-free hub. Some international companies may be importing less not only because of the bureaucratic hurdles, but also because they have a surplus of items in China.

Domestic Chinese cosmetic companies are trending up as China's duty-free shops clear up their inventory surplus. Euromonitor International, a market research firm, reports that, over the past three years, Chinese-born beauty brands have experienced substantial growth, with the top 10 brands now accounting for 27% of retail sales in the skin care and makeup categories.

The Chinese market is also projected to expand further. McKinsey, a consulting organization, predicts that by 2027, China would be responsible for roughly 16 percent of all beauty retail sales worldwide.

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