[Inside Chodong] Why the 'Domestic Duty-Free Allowance' Needs to Be Realistically Adjusted

Before the pandemic, the domestic duty-free shop industry recorded annual sales growth of 20-30%. Even during the sharp decline of group tourists (Yukers) due to China's THAAD retaliation, domestic duty-free shops proudly maintained their position as the world's number one, with sales reaching 24.86 trillion won by 2019, thanks to the influx of Daigou (Chinese personal shoppers) seeking Korean duty-free products. However, after the spread of COVID-19 blocked air routes, the industry took a direct hit. Last year, the domestic duty-free market shrank by 38% in just one year to about 15.5 trillion won, and some duty-free shops found it difficult to bear the high rental fees and withdrew from airports.

While Korea's world-leading duty-free shops were struggling, Chinese duty-free shops soared. Immediately after the outbreak of COVID-19, the Chinese government took an unprecedented step by allowing domestic visitors to Hainan to purchase duty-free goods online for 180 days. The annual per capita duty-free shopping limit was also increased more than threefold from 30,000 yuan (about 5.15 million won) to 100,000 yuan (17.15 million won). Hainan's duty-free sales more than doubled from 13.6 billion yuan (2.4 trillion won) in 2019 to 32.7 billion yuan (5.78 trillion won) in 2020, and this year it is expected to nearly double again, reaching 9.3 billion dollars (about 10.63 trillion won).

Our government also tried to support the duty-free industry by temporarily reducing duty-free license fees, cutting airport duty-free rental fees, allowing duty-free purchases on non-landing sightseeing flights, and permitting domestic sales of long-term inventory, but these measures were insufficient. Starting in March next year, the current 5,000-dollar (5.95 million won) domestic duty-free purchase limit will be completely abolished. The industry hopes this will provide some relief, but consumer reactions are far from favorable.

The bigger problem is that the domestic duty-free market is overly dependent on Daigou in a situation where there are virtually no domestic tourists. This year, domestic duty-free sales are expected to barely recover, increasing by 15% from last year to 18 trillion won. However, the commission fees paid by duty-free shops to Daigou are also estimated to increase by 1 trillion won from last year, reaching 2.3 trillion won this year. This is due to excessive cutthroat competition among domestic duty-free shops to attract Daigou. Currently, Daigou accounts for up to 98% of domestic duty-free sales, with 97% of that concentrated on a single product category: cosmetics.

Even if overseas travel resumes, if Chinese tourists or Daigou are lost to Chinese duty-free shops, recovery of sales based solely on domestic demand seems difficult. A duty-free industry official pointed out, "If the COVID-19 situation continues, it is uncertain whether the number of Daigou entering China from Korea can be maintained, or how long the demand for Korean duty-free cosmetics will continue in mainland China."

Ultimately, to save domestic duty-free shops, bold institutional reforms and government support are needed, which is the hope and request of the related industry. The first step is to revise the duty-free limit, which has remained at 600 dollars (about 670,000 won) for seven years, considering the increased consumption level of the public and the effect of stimulating domestic consumption. Currently, neighboring countries have higher duty-free limits: Japan's is 200,000 yen (about 2.05 million won), the United States is 800 dollars (950,000 won), and China is 5,000 yuan (about 950,000 won).

Recently, Professor Hong Seong-hwa of Jeju National University (Department of Tourism Management) proposed designating the Jeju region as a pilot area for temporarily raising the duty-free limit for one year and increasing the duty-free limit up to 30 million dollars to verify whether domestic demand for overseas shopping can be redirected domestically. In the National Assembly, a Customs Act amendment bill aiming to raise the domestic duty-free limit to 800 dollars was proposed in 2019 but was discarded due to the expiration of the session. Other measures such as improving the license fee system and online sales of duty-free goods to foreigners are also being discussed. Our duty-free industry itself is at a crossroads of survival, making it difficult to hesitate due to concerns about tax fairness or encouraging luxury consumption.

/Consumer Economy Department Deputy Chief ikjo@

This content was produced with the assistance of AI translation services.