Chinese business and the Internet: the infrastructure for trust.

Author:Fort, Timothy L.


Although the Internet and E-commerce revolutions have clearly taken hold in the United States and Europe, the Chinese culture has been slow to adopt the Internet as a marketplace. The Authors cite a lack of trust on the part of both potential consumers and potential merchants as the primary obstacle to a robust Chinese E-commerce community. To remedy this lack of trust, the Article proposes the nation seek a middle way between reforms guided by Western rule of law and Eastern rule of ethics, thus incorporating effective regulatory strategies and the philosophical resources already within the Chinese cultural consciousness. The Authors propose a framework based on three distinct varieties of trust, and apply that framework across the specific policy problems that impede vibrant E-commerce in China--namely, the development of a workable regulatory regime, and the particular problems of privacy and defamation that seem to be related to the growth of E-commerce. Ultimately, the Authors suggest that to successfully navigate this dramatic shift to an Internet-enabled economy, China should embrace its past but recognize that the new E-commerce context also may demand new solutions.

TABLE OF CONTENTS I. INTRODUCTION: THE STATE OF E-COMMERCE IN CHINA II. THE ROLE OF ETHICS AND LAW IN TRUST-BUILDING A. Hard Trust, Good Trust, and Real Trust B. Toshiba in China: A Case Study of Trust C. The Fundamental Role of the Rule of Law in Trust-Building D. The Role of the Rule of Ethics in the Trust-Building Process: Confucianism III. LEGAL FRAMEWORK OF E-COMMERCE IN CHINA A. Access and Registration B. Application of Traditional Legal Principles to E-Commerce C. Hard Trust, Security, and the Regulation of Encryption IV. PROTECTION OF E-COMMERCE CONSUMER PRIVACY IN CHINA V. REGULATION OF DEFAMATION ON THE INTERNET A. Statutory and Judicial Framework B. Max Computer Station Inc.: The First Internet Defamation Case in China C. Assessment of Max Computer Station Inc VI. CONCLUSION I. INTRODUCTION: THE STATE OF E-COMMERCE IN CHINA

Although the fervor of Internet communications has diminished over the past two years, there is little doubt that electronically modulated communications are here to stay, including those that involve business transactions. (1) This may be more true of emerging markets, where Internet technology was in its infancy at the time of the dotcom bust. (2) This Article looks specifically at some of the issues necessary for the development of the Internet and E-Commerce in China where, in the last decade, they have gained a foothold and grown rapidly. (3)

In 1997, there were only 670,000 Internet users in China. (4) In 1999, that figure jumped to 2.1 million. (5) A survey report released by the China Internet Network Information Center (CNNIC) showed that in 2000 there were 8.92 million computers with access to Internet; 22.5 million Internet users in China; and 265,405 "www" sites with suffixes such as .cn, .com, .net, and .org. (6) The Chinese Academy of Electronic Information Industry Development estimated that the number of Internet users in China would grow to 27 million by the end of 2001. (7) Some sources are even more optimistic. One publication predicts China will have 374 million users by the end of 2005, making it the largest Internet market in the world. (8) The growth of Internet culture has been so rapid and influential that a very popular greeting--"have you hooked-up to Internet?"--has replaced the traditional greeting of thousands of years--"Chi le ma?" (have you eaten?). (9) In 2000, Chinese E-commerce revenue reached 77.16 billion yuan (U.S. $9.32 billion), of which business to business (B2B) trade accounted for 76.77 billion yuan (U.S. $9.27 billion), and business to consumer (B2C) trade accounted for 390 million yuan (U.S. $47.1 million). (10) In short, there is great potential for E-commerce development in China.

Chinese consumers, however, are not as active as their American counterparts in online shopping, despite the fact that the number of Internet users is doubling every six months. The Reports and Statistics of China's Internet Development in 1999 indicated that "85 percent of interviewees said they would purchase goods online when the conditions were ripe. Nevertheless, they would only buy small commodities such as books, tapes, or videos. The quality of goods, safety and convenience of payment are major worries for potential online purchasers." (11)

This tepid attitude toward online shopping on the part of consumers does not change even when the group of Internet users expands further. According to the semi-annual survey report on the development of China's Internet released by the CNNIC in January 2001, security is one of Internet users' concerns. In 2000, only 31.67% of interviewees had purchased commodities or services via the Internet, and only 8.64% of interviewees had purchased commodities via auction websites. (12) The motivations for online shopping varied from timesaving to curiosity. (13) The most frequently purchased products and services were books, magazines, and computer equipment. (14)

According to another source, the percentage of online shoppers is even smaller than CNNIC's estimate. A 2000 survey conducted by Beijing-based Analysis Consulting Limited in Beijing, Shanghai, and Guangzhou--China's most wired cities--shows no more than ten percent of Internet users purchased products on the web during August, September, and October of 2000. (15) Not surprisingly, the B2C market only accounts for 0.5% of the whole E-commerce revenue in 2000. Consequently, although there were 667 B2C dotcoms in early 2000, only 205 survived after mergers, acquisitions, and bankruptcies depleted their numbers by the end of 2000. (16)

There are many barriers to Internet growth in China, including slow access speed, high prices, insufficient Chinese language information on the web, inability to protect personal privacy, and poor Internet Service Providers (ISPs). (17) Additionally, China lacks a standard credit system and an effective express delivery network, the two critical elements for the operation of E-commerce. (18) It appears, however, that the major reason for consumer unease is simply that many Chinese Internet users do not trust E-commerce modulated ways of doing business and are dissatisfied with the current service available in the E-commerce world. As the CNNIC survey indicated, 15.7% had experienced delays in receiving purchases after their order and payment. (19) Less than 2.0% of the interviewees were very satisfied with online shopping, 26.0% of the interviewees were satisfied with online shopping, 51.2% of the interviewees felt ambivalent toward it, 17.2% of the interviewees were unsatisfied with it, and 3.9% of the interviewees were very unsatisfied. (20)

For more expensive goods, the level of confidence was even lower. Slightly more than 55.0% of the interviewees prefer cash payment for goods of over RMB 1000 yuan (U.S. $120), and only 8.0% of the interviewees prefer online payment. (21) More than 31% of the interviewees said that "security can not be guaranteed"; 32.0% of the interviewees said that "the quality of products, service after the delivery, and credit of the producer can not be guaranteed"; 12.6% of the interviewees complained about inconvenient payment procedures; 9.9% of the interviewees complained that delivery is slow; 7.4% of the interviewees complained about unattractive prices; and 5.9% of the interviewees complained about unreliable information. (22)

The small percentage of Internet users shopping online, the majority of online shoppers' dissatisfaction with E-business, the overall concerns about the security and reliability of online shopping, and E-business' credibility simply reflect the basic fact that consumers do not have sufficient trust in E-commerce corporations and the Internet. Businesses do not trust consumers either. For instance, a senior executive from an E-business admitted that "we can deliver goods only when we make sure the payments have been transferred to our account. Unfortunately, this process is not under our control and could last weeks." (23) As a result, E-business's distrust of consumers reinforces the latter's distrust of E-business, because consumers have no good reason to extend trust to an E-business when it insists on delivering goods only after obtaining hard currency. It is not surprising that "doubtful of the safety of payment online through credit cards, many online buyers in China tend to choose slower, inefficient, yet safer methods of remittance." (24) Buyers and sellers perceive the threats to safety not only from third parties, or hackers, but also from the contracting parties. Accordingly, for electronically modulated business to flourish in China, there must be greater consumer and seller confidence.

In Part II of this Article, the authors coin a tri-partite distinction for assessing elements of trust. By breaking trust into component elements of "Hard Trust," "Real Trust," and "Good Trust," one can differentiate the kinds of infrastructure necessary to build the foundation for Chinese Internet confidence. Some of those foundations are legal; as a result, the Article considers the dimensions of three issues--security, privacy, and defamation--in sketching the parameters of a larger project regarding the necessary legal considerations for a sound infrastructure. Another part of this infrastructure is moral--the ethical underpinnings available to ground a sense of duty online. For this, the Article briefly explores Confucian sources in Part II.D, illustrating some of the resources available in traditional Chinese culture to approach the development of the Internet. This Article does not claim to be comprehensive. It would take at least a book, perhaps a multivolume tome, to fully describe the moral and legal infrastructure for something as encompassing as the Internet in a place as rich...

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