Hat tip to ChinaLawBlog who linked to their own Steve Dickinson’s article in the China Economic Review on how China’s VAT rebate policy is affecting Chinese manufacturing and exports:

But the initial amendments to VAT rebates, introduced on July 1, 2007, illustrate in very concrete terms how the policy is intended to work. Furthermore, the appointment of the China Customs Bureau, an agency controlled by the central government, to police the system suggests that Beijing is unwilling to stand for local intransigence.

As a general rule, China imposes a 17% VAT on all exports but, in order to encourage manufacturers, a 13% rebate of these exports has been available. On July 1, though, the Ministry of Finance completely revoked the rebate for high pollution/high energy products. For low value added products, the rate was reduced to as low as 5%.

The changes applied to more than 9,000 export items across 1,718 product categories.

A look at the impact on a specific product type shows how the change in VAT rebates fits within the new trade policy. Steel is a good example, as it implicates all of the concerns raised by the new policy – production uses large amounts of energy and raw materials and causes pollution, while exports of raw steel involve no additional value added and cause trade friction.

However, other goods made from steel involve varying degrees of value added and the rebate changes reflect this.

The VAT rebate for steel pipe, which involves no value added, is reduced to zero. Moving slightly up the value added chain, cast iron house wares and stainless steel tableware now qualify for a rebate of 5%. For power tools, the rate is 9% and for more sophisticated cutting and shaping tools it is 11%.

This article is an easy to read primer on China’s VAT rebate policies and the effect they are having on their manufacturing industry as well as the implications to importers of Chinese products. The major impact? Pretty simple and obvious: Substantial cost increases (particularly to U.S. importers who must also deal with the low value of the dollar). As Steve Dickinson indicated in his article, China is trying to implement a policy of “quality not quantity”.

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