China’s Ministry of Finance has recently announced that, starting June 1, China will slash tariffs by 50 percent for 14 categories of goods. These relaxed tariff rates come at a time when the government is playing with fiscal policy in order to increase domestic consumption.
While recent policies like the new Food Safety Law and the Consumer Protection Law have striven to increase consumption of domestic products, the government has conceded to Chinese consumers’ preferences for international brands of goods targeted by the import tariff cuts, like skincare products, shoes, and fur clothing. This is great news for exporters of these goods, as their imported products can now enjoy an improved comparative advantage with domestic goods in China.
The new tariff rates for the targeted import goods can be found below:
Cosmetics and Skin Care Products: 2 percent (from 5 percent)
Shoes (sports shoes, boots, etc.): 12 percent (from 22 to 24 percent)
Fur Clothing: 10 percent (from 23 percent)
Men’s and Women’s Suits and Outerwear: 8 to 10 percent (from 17.5 percent to 24)
Kashmir wool, knitted, and crocheted items: 7 percent (from 14 percent)
Diapers: 2 percent (from 7.5 percent)
Steep import, consumption and VAT taxes for import goods will push mainland Chinese to buy international brands abroad, where luxury brands can be 50 to 70 percent cheaper than prices in mainland China. The number of overseas Chinese tourists exceeded 100 million in 2014 and is expected to double to 200 million by 2020, and last year, Chinese tourists spent RMB 1 trillion (US$165 billion) while travelling abroad; almost a 28 percent increase from the US$129 billion spent in 2013. This large increase in overseas Chinese tourists who often make purchases abroad has led to a tourist services trade deficit that totaled US$107.9 billion in 2014.
The Chinese government is eager to compensate for this growing deficit by incentivizing its citizens to purchase international brands at home and cashing in on increased import tax revenues. However, critics have stated that the tariff cuts alone may not be enough to significantly increase domestic consumption of imported products. A price analysis compiled by consulting agency SmithStreet for Reuters revealed that VAT and distribution and department store costs are largely responsible for the high prices of imported goods. Reducing import tariffs by 50 percent would only be able to reduce the actual retail prices of items like Western-style suits, fur clothes, and boots by three to six percent. Furthermore, international brands that are produced in China would not be affected by the changed import tariff rate.
Significant price decreases are only possible if the companies themselves make adjustments to market pricing in China. Indeed, following the announcement on the tariff cuts, some companies like cosmetics firms L’Oreal and Estee Lauder Companies Inc. stated they will make adjustments to product pricing in China. This can be of mutual benefit to the Chinese government and these international brands, as the consumer base in mainland China is widened and the government is able to increase revenue from import taxes.
In addition to cutting tariff rates, the government has stated that it will also seek to increase the variety of international brands sold in duty free shops, as well as the number of duty free shops across China. This, along with the reduced tariff for selected imports, should open the door for more international brands looking to reach consumers in China.
As the economy in China continues to slow to a projected seven percent later this year, we are sure to see more policy announcements by the Chinese government that have implications for investors in import and export business in China.