One of the more interesting – if not predictable – consequences of the current economic downturn has been a lifting-of-the-curtain on just how unprepared Beijing’s bureaucrats are to deal with it. Price controls and proposals to establish a “stabilization fund” for the perpetually declining stock market are only the most public manifestations of this phenomenon. But there are others, and most if not all of them clearly suggest that – when it comes to economic trouble – the authoritarian DNA of the party in power trumps all that talk about open economies and trade (I’ve discussed this topic at length, most recently here)
In this spirit – last week state-owned media announced that, in the face of a declining export sector, Beijing is seriously considering a restoration of the export tax rebates that it cut last July with such fanfare. Export tax rebates, for those who don’t follow this sort of thing, are just what they sound like: cash refunds on taxes paid in the process of manufacturing a product. For manufacturers of high-volume, low-value products, like textiles, those rebates often account for the total margin on a product – especially in the current manufacturing environment where rising resource and labor costs are driving smaller manufacturers out of business.
There are, however, a couple of problems with tax rebates. First, they can be interpreted as a subsidy, and thus are illegal under the WTO. In either case, whether or not they are a subsidy, the US government and others have filed complaints with the WTO claiming that they are subsidies, thus endangering whole industries (and subsidies). And second, many argue (correctly, I think) that export subsidies enable low-quality manufacturing and inhibit innovation (again, subsidies).
So, last Spring, under extreme pressure from the US to reduce the trade deficit, China announced that it was trimming export tax rebates on some 2800 products, including a reduction of the textile rebate from 13% to 11%. It was a small gesture, but a major step to regularizing its trading relationships with the US and others. At the time the cut was announced, it was widely assumed that it would have a negative effect on exports (it did). But, at the same, it was widely assumed that China’s economy was vibrant enough to employ the jobs lost.
Well, what a difference a year makes. Twelve months later it looks like the rebate is returning to 13%. Here’s the lede (and then some) from today’s China Daily story on the decision:
The Ministry of Commerce (MOC) has officially made suggestions to the State Council, or the cabinet, to increase tax rebates for certain exporting items including garments, toys and shoes, in a move to prevent exports from sliding significantly, Nanfang Daily reported Tuesday, citing unnamed sources.
Customs data showed that trade surplus for the first six months shrank to $99 billion, down by 11.8 percent year-on-year, and the trade surplus in June alone declined by more than 20.6 percent, making it $5.5 billion less than the previous month.
Exports of the most seriously influenced textile and garment sectors declined by 4.2 percent year-on-year to $15.5 billion in June, representing the slowest increase in five years.
I’m not a betting man, but if I were, I’d bet that somebody in Washington, D.C. is getting ready to file a complaint – and pronto – with the WTO over this business. And if they aren’t, I’d bet that there’s a political candidate (in the textile-producing Carolinas) ready to demand that they do it yesterday.
Whatever happens, let’s take this as one more potent signal that folks in Beijing are more worried about China’s economic (and employment) situation than they’ve been letting on recently.
Do you have a sense of whether the rebate increase can compensate for the rising price of other inputs.
Ralston – That’s a question for the economists. Obviously, though, that’s the idea behind the rebate increase.