Forget China’s bilateral exchange-rate regime with the dollar, it’s a Chinese government policy of value-added tax adjustments that has been boosting China’s exports, according to a university Professor.
Simon Evenett, professor of International Trade and Economic Development at St. Gallen University, explained to CNBC’s “Trade Links” that 70 percent of all China’s exports have been subject to a VAT adjustment policy that has been propping up Chinese firms and exports.
“Many Chinese firms buy lots of parts and components abroad. They have to pay 17 percent VAT on them and the government gives them back the sum of that VAT. The amount of VAT they get back depends on what the government wants, and the Chinese government has been ramping up those rebates in sectors which they want to see boosting exports,” he said.
Evenett said that during the global economic crisis, which has brought about a slowdown in the Chinese economy, 70 percent of all the nation’s exports have benefited from this “implicit subsidy” and protectionist stance, which has huge economic benefits for China, but adverse effects on the rest of the global economy.
“[In China that amounts to] 1.1 trillion dollars’ worth of exports every year — 7 percent of global exports — it’s probably the largest “beggar thy neighbor” protectionist policy in the world. It’s huge. And the reason they’ve gotten away with doing it is that they’ve chopped this measure up into 13 different decrees, and no-one’s ever added it up before.”
Evenett said that the report he and his team have put together on China’s complex rebate policy “took a hell of a long time to put it together,” and that he has sent it to the U.S. Congress and Brussels.
The VAT rebate policy is having such a dramatic effect on Chinese firms that some are surviving purely from the rebate, he said.
“Profits margins in China are so thin that if they get a larger rebate, this adds to the overall net profitability of their exports, and it’s a great way of encouraging firms to deflect sales from the domestic markets to foreign markets,” Evenett said, adding that the “huge loophole” does not actually violate any WTO rules and that the motive for such a policy in China is much more about “export management.”
“They are using this to dial-up and dial-down the incentives in different sectors. In sectors where they take a lot of heat from foreign trading partners, they reduce the VAT rebates. In sectors where they want to ramp up exports, they increase them.”