Mitt Romney would declare China a currency manipulator
Source of picture: Wikimeda
By John Richardson
China's practice of providing value-added tax (VAT) rebates for importers of raw materials who then re-export finished goods is the subject of a new US Department of Commerce ruling.
And a leading international trade lawyer has warned that US companies are becoming increasingly impatient with Chinese trade practices in general.
We warned earlier this month that, as the global economy weakened, trade tensions between the two countries could build.
The VAT rebates apply to chemicals, polymers, fibre intermediates and other raw materials that are imported to manufacture finished goods for re-export.
In other countries with VAT, exporters receive the full refund of VAT paid on inputs.
In China, however, exporters receive varying amounts of VAT refunds, depending on the products involved. Producers of value-added goods tend to get higher VAT rebates, encouraging exports, whereas producers of basic materials get lower VAT rebates, thus discouraging exports.
The selective rebates were reduced in 2007 as part of China's drive to lower dependence on exports while boosting domestic consumption.
But as the economic crisis worsened, China's rebates were increased for some products.
Simon Evenett, a professor at the University of St Gallen in Switzerland, estimates that 71% of Chinese exports were affected by a change in rebates in 2010, compared with just 4% in 2007.
"Given that China's VAT rates vary between 13 percent and 17 percent, and that parts and component imports account for half the value added in many Chinese sectors, even small variations in these rebates can have a big impact on the profitability of exporting," wrote Evenett in an academic paper, which was quoted in this article in the Financial Times.
In 2010, Beijing paid out the equivalent of a fifth of total annual Chinese government spending in VAT rebates, added Evenett, who also runs the monitoring service, Global Trade Alert.
"What's more, all of this is World Trade Organisation (WTO) legal," he said.
In response to the VAT rebate scheme, the US Department of Commerce announced on June 19 that it had changed how it will calculate antidumping duties.
"The department will now deduct the un-refunded VAT from the export price to the US. This, of course, increases the dumping margin because the net export price is lower," said Edmund Sim, partner in the Singapore practice of law firm, Appleton Luff, and an expert in international trade legislation.
"And in anti-subsidy duty cases against China, the US claims that raw materials in China, when purchased from state-owned companies, are subsidised by the state, particularly in the case of some polymers and steel," he added.
"The US Department of Commerce will thus value the amount of subsidy by comparing the Chinese domestic price with the world price for the raw materials.
Dumping, under international trade law, is defined as when a manufacturer in one country exports a product to another country at a price which is either below the price it charges in its home market or below its cost of production.
Winning anti-subsidy, or countervailing, duties involves proving that an exporter has used a tax break, free land or another type of investment incentive intended to support domestic business.
Sim added that in all the cases he had seen, the calculated amount of subsidy was large because the Chinese domestic prices for raw materials were lower than international prices.
"This is the result of the VAT rebate policy discouraging exports of basic raw materials, which increases domestic supply and lowers domestic prices."
This applies to polyvinyl chloride (PVC), where, despite local capacity being well in excess of demand, end-users still import substantial volumes.
"This new US approach effectively targets the VAT refund policy both in dumping and anti-subsidy cases, which can be viewed as double counting," said Sim.
"At some point, therefore, the US will have to drop one of the approaches if the Chinese go to the WTO."
Sim added that he also got the sense that American companies were becoming less tolerant over long-running problems in China, including intellectual property rights protection and cyber attacks which sometimes result in intellectual property being stolen.
"In addition, US companies are complaining more strongly about being denied access to Chinese markets," he said.
"What the US is finding particularly frustrating is that, despite the tremendous improvement in its energy cost position thanks to shale gas, it still feels it cannot sufficiently penetrate Chinese markets."
A further source of tension is the fall in the value of the Yuan against the US dollar by around 1% in 2012, following several years of appreciation. The appreciation, which occurred between 2005 and the start of this year, is also viewed as insufficient by the US.
"We recently had an audience with Mitt Romney's trade adviser in Washington DC," said Sim.
"He confirmed that, yes, on day one of him being President, Romney would declare China as a currency manipulator.
"But this would be a strategy to get China to negotiate rather than a statement of policy. The Obama approach has been to instead ignore the issue," added Sim.
"How would China react? Pragmatically, it might ignore the rhetoric during the first few days of a Romney administration.
"It might then recognise that, despite the change in government, there was still continuity.
"Some of the officials in a Romney administration would likely have also worked for the second Bush administration. Governments like continuity when dealing with other governments," he said.