China Economy: 'Buy More But Not Sell Less' – April 2012

British Embassy Beijing

Summary

State Council says it is planning to lower import tariffs on some energy/raw materials, consumer goods, and high-tech goods. This would help boost domestic consumption, reduce China’s trade surplus, smooth trade relations, and would be good news for UK exporters. The first ever State Council statement devoted solely to boosting imports potentially marks a positive shift. But no details given on the size/scope of planned tariff cuts, the precise products, or the timescale. 

Detail

The State Council met on 30 March to discuss measures to boost imports. The statement released after the meeting said the authorities will cut import tariffs on some:

• energy and raw materials products;

• consumer goods “related to people’s daily lives”;

• components that are inputs into high–tech or strategically important industries, and which are not produced domestically.

Other measures highlighted in the State Council statement include:

• zero tariffs on imports from ‘least developed countries’ (comment: this is a long standing policy position);

• Chinese companies are encouraged to import more from countries that have signed a free trade agreement (FTA) with China (e.g. ASEAN countries, New Zealand);

• 24-hour customs in special trade/economic zones

• state policy banks will be encouraged to help finance the importation of high-tech goods (comment: they have played a strategic role in helping to boost exports for years);

• streamlining the application/approval process for the use of RMB to settle import trade (comment: although RMB trade settlement has grown rapidly in the last couple of years, many companies and banks argue it would be growing more quickly if the paperwork was cut down significantly).

China is the world’s second largest goods importer (and largest exporter), after the US. Goods imports were $1.74 trillion last year, meaning China consumed 9% of global exports (less than China’s estimated 11% share of world GDP). Minister of Commerce Chen Deming said at the recent China Development Forum in Beijing that China would become the world’s largest importer within a few years. The expected next Premier, Li Keqiang, predicts China will import a total of $10 trillion in goods over the 12th 5-Year Plan period (2011-2015).

Comment

According to the state media, this is the first time the State Council has met solely to discuss boosting imports (past statements on imports have just been issued by the Ministry of Commerce). And the statement sheds more light on the types of products that could be in line for tariff cuts. In this regard, the State Council meeting/statement can be interpreted as a step in the right direction. But we are none the wiser on the size/scope of tariff cuts, the precise products, or the timescale.

If the authorities push ahead with tariff cuts it would help boost domestic consumption, reduce China’s trade surplus, and provide an additional source of demand for the global economy and for UK exporters. The authorities have stated they want to move to a ‘balanced trade’ situation.

In February, China ran a $31.5 billion monthly goods trade deficit, it’s largest in over ten years – though monthly goods trade surpluses are likely to return soon. China’s annual goods trade surplus has steadily fallen from a peak of 7% of GDP in 2007 to around 2% last year.

The authorities have the fiscal space to cut import duties if they so desire. Government revenue is growing strongly, and import duties anyway account for just 2% of fiscal revenue. The fiscal deficit was just under 2% of GDP in 2011, and is forecast to be 1.5% in 2012.

It remains to be seen which products will receive tariff cuts. Analysts argue there is little room for significant further cuts in import tariffs on energy and commodities. The import tariff on ‘mainstream gasoline products’ was cut from 5% to 1% last year, and for diesel from 6% to zero. There are no import tariffs on crude oil, iron ore, or coal.  An obvious candidate for tariff cuts would be luxury consumer goods, but the State Council statement implies this is not on the cards - despite state media reports over the last couple of years suggesting these high duties were going to be cut. As a result, Chinese shoppers will continue to spend vast sums of money on luxury items overseas, helping to boost consumer spending in, e.g., the UK, France, and Hong Kong rather than at home. In terms of ‘daily necessities’, a popular candidate for tariff cuts would be milk powder. A series of food safety scandals have led to Chinese demand for foreign milk powder, especially for infants, surging.

Despite the strong rhetoric on boosting imports some tariffs have actually gone up recently. With effect from this month, the import tax on liquefied crystal display (LCD) panels has been raised from 3% to 5% - to help China’s growing LCD industry and TV producers (though some commentators argue the impact on the latter will be negative). At the end of last year, China also announced plans to introduce new duties on cars imported from the US.

Disclaimer

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