China's export tax rebates up 7th time in year

A customer in Shanghai looks at televisions in a shop.
As early as April 2009, the export tax rebate of CRT televisions
was already at the maximum rate of 17 percent.

 (Liu Jin/AFP/Getty Images)

June 8^th, China’s Ministry of Finance and State Administration announced that the export tax rebate rate would be raised yet again to “ensure the stability of export”. This is the seventh rise of the tax rebate on exported goods from China since August 2008. Trade experts said that this move was a perversion of China’s promise to avoid acts that may provoke protectionism and does not honor trade compliances as agreed upon at the G20 Summit. This current export tax rebate may indeed spark protectionism among trade partner countries. 

More Intensive Impact 

Compared with the previous six raises, this adjustment now involves a far wider range of

products – including over 2,600 items of the manufacturing industry – and will produce a more intensive influence. It is estimated that the latest tax rebate will reach 25.2 billion Yuan. The export tax rebate on down-stream products in agriculture, medication and steel were also increased. The rebate on exported canned foods and juices rose to 15 percent, up from 13 percent. Rebates on luggage and bags, shoes and hats, toys, furniture were increased to 15 percent from 13 percent. Rebates on some plastic, ceramic and glass products were raised to 13 percent from 11 percent. The tax rebate of CRT televisions, various television components, optical-fiber cables, uninterrupted power supplies and refined copper foils, etc., were already at the maximum tax rebate of 17 percent as of April 1^st 2009. Rebates on garments and textile products rose to 16 percent, only 1 percent shy from the full tax rebate rate. 

Transferring the Risk Can Only Play a Limited Role

“Economic risk and financial risk have to be weighed. Export tax rebate policy is designed to reduce public risk by increasing financial risk. This is risk transfer, namely, public risks in economic society were put into a risk pool, but the volume of the risk pool is limited”, said Liu Shangxi, Vice President at Research Institute for Fiscal Science, Ministry of Finance.

Thus, the upward readjustment of the export tax rebate can only play a limited role. In the long term, China’s government will need to speed up the transition and upgrade foreign trade mode and propel domestic demand. Also, more support should be given to pubic consumption expansion, and adjust the income distribution structure.

Trade Distortion May Spark Trade War

This unprecedented expansion of the export tax rebate may spark not only, “ordinary trade protectionism, but trade distortion as it is an implicit trade subsidy; China wants the prices of its commodities low”, said Barfield, trade scholar of American Enterprise Institute in an interview with Voice of America. He mentioned that it was still hard to judge whether or not these tax rebates violate WTO regulations and are an illegal subsidy, before considering the tax rebate structure. Regardless, it is still unforgivable.

Hufbauer, a senior fellow and trade policy specialist at the Peterson Institute of International Economics said to Voice of America, “China contradicted the April 2009 G20 summit commitment by boosting [its] export tax rebate, which is cause for concern.” He stated that the current crisis sparked acts of trade protectionism from many countries.

As there is no value-added tax in the U.S., the U.S. won’t take a similar tax rebate measure to stimulate export, rather it may increase the import tax to protect its own industries. Currently there are many proposals in Congress trying to address the countervailing duties and anti-dumping duties on products imported from China.