China’s 17% VAT Is Trade Advantage

Keith Bradsher reports in The New York Times (“China’s 10-Year Ascent to Trading Powerhouse,” 12/09/11), that China has seized upon the broad rules available under the open global trading system governed by the WTO to accelerate Chinese trade.  The agreement with China, which was hammered out under GATT rules ten years ago, permitted China to impose higher tariffs to protect a then developing economy.  These rules are still in place and permit China to retain a tariff wedge of 25% on imported cars.

That tariff is not the only wedge.  China also employs a 17% Value Added Tax, which under GATT rules is subtracted from exports and added to imports.  Bradsher:

 “But the 25 percent tariff is only one reason a Grand Cherokee costs three times as much in Chongqing as in Chicago. In the name of energy conservation, China also assesses a sales tax of up to 40 percent of the vehicle’s price based on its engine size. Small, fuel-sipping Chinese cars pay the lowest rate, as little as 1 percent, while gas-guzzlers from the United States and Europe pay the highest rate.

 China also collects a 17 percent value-added tax on almost everything sold in the country, whether imported or domestically produced. But like many European nations, China uses a W.T.O. provision that allows the tax to be fully refunded to China’s export producers, who often pass along the saving to foreign buyers.

 What’s more, China limits foreign manufacturers to no more than 50 percent ownership of car assembly plants in China. That special rule, which China managed to negotiate for its W.T.O. accession agreement when its auto industry seemed tiny and vulnerable, has forced multinationals to set up numerous joint ventures in China and to transfer a wide range of technology to those Chinese partners.”