Current Trade News

China Moves to Slow Exports

(Source: Forbes.com via I.E. Canada Daily e-news Bulletin: July 18, 2007)

After years of soaring economic growth fueled by low-cost goods sold abroad, the Chinese government is tapping the brakes on its export industry. Quietly.

Without fanfare (or media coverage) in the West, Beijing earlier this month dramatically cut the tax rebates that exporters get on more than 2,200 products, including soap, plastics and glassware. For another 553 goods--particularly those that cause pollution and use up a great deal of energy--it eliminated the rebates completely.

The move is intended to let the air out of China's ballooning trade surplus with the rest of the world, which is projected to reach $250 billion in 2007. It is also expected to keep some of the country's scarce natural resources within its borders and to boost production in high-tech industries.

"They don't want to just sell low-end plastic toys, they want to sell biomedical devices," says Seattle lawyer Dan Harris, who specializes in China business issues.

The move will also raise costs--which are likely to be passed on to consumers--for many exporters operating in China, including U.S. businesses. However, according to John Frisbie, president of the U.S.-China Business Council, the industry group whose members include Motorola (nyse: MOT - news - people ), General Electric (nyse: GE - news - people ) and others, the effect on U.S. companies will be relatively minimal. That's because most U.S. producers in China sell to the Chinese market instead of exporting.

"There will be some American companies impacted, but that's a far smaller group than Chinese companies or other Asian companies that have moved their production to China," Frisbie says.

Why would Beijing want to halt exports, its economic cash cow? It doesn't. And in fact, if the government plays its cards right, that cow might just become a little more lucrative. The new policy is designed to boost income for the government (though the value isn't known yet) and create better jobs, especially high-tech manufacturing jobs that produce value-added tax revenue--not low-cost textiles.

Beijing's goal here is to rebalance its dramatically off-kilter economy. China's domestic consumption rate is the lowest among the world's major economies, and exports account for as much as 25 per cent of its growth, according to some estimates. Most economists agree that this type of growth is unsustainable.

Thus, the new policy aims to curb production of low-tech goods (like cheap plastic trinkets) by reducing the tax rebate for exporters more than 50 per cent in many cases. For producers of many chemical and energy products, which reduce the country's scarce natural resources and harm the local environment, Beijing has completely eliminated the rebates to keep those goods in China.

By curbing exports in these industries, China alleviates some of its friction with manufacturers in the U.S. and Europe that accuse the Asian country of dumping its cheap goods abroad. Earlier this year, the Bush administration decided to slap import duties on some Chinese paper products, reversing nearly a quarter-century of its trade policies with "non-market economies."

The decision to slash tax rebates on exports also alleviates some of the U.S. pressure on China to let the yuan appreciate relative to the dollar. This is good news for Treasury Secretary Henry Paulson, who began a "Strategic Economic Dialogue" with Beijing last December and who has taken heat from Congress for not being hard enough on the Chinese regarding currency issues.

But don't think China is increasing costs to exporters just to appease the U.S. or other countries. Beijing could stand to make a lot of money from collecting the tax on which it is curbing refunds. In fact, Harris, the Seattle lawyer who has chronicled the issue on his "China Law Blog," speculates that "honest and legal" companies--particularly American and European ones--could be left holding the bag if Chinese exporters don't pay the tax, as he says is often the case.

And if prices on exports go up for American consumers, he says, that's "more money going into the coffers of the Chinese government."