China-US Trade War 2.0 Looms: China Takes the Lead in Canceling or Reducing Export Tax Rebates on Certain Products

#1 · November 25, 2024, 3:22 pm

Quote from chief_editor on November 25, 2024, 3:22 pm
Recently, China's Ministry of Finance and the State Administration of Taxation issued an announcement canceling export tax rebates for 59 items, including aluminum and copper products, and reducing the export tax rebate rate for 209 items such as photovoltaics and batteries from 13% to 9%.

Understanding Export Tax Rebates

The purpose of export tax rebates is clear: Export tax rebates are designed to allow goods to enter international markets at tax-free prices, thereby enhancing their competitiveness and promoting export trade. As an international convention, export tax rebates effectively neutralize the tax burden on export goods, a measure widely adopted by countries around the world.

In the years following China's accession to the WTO, export tax rebates significantly aided Chinese products in expanding their market reach and establishing a global presence. However, as China's products gained increasing market share and manufacturing competitiveness, the benefits of export tax rebates have diminished over time.

Although some worry that reducing or canceling export tax rebates could lead to short-term cash flow pressures and increased costs for export enterprises, even potentially undermining price competitiveness, the Chinese government has several strategic reasons for making this adjustment.

Reasons for Lowering or Canceling Export Tax Rebates

International Context: Addressing New Tariffs from the US The looming "Trump Tariff 2.0" threatens to impose a 60% tariff on all Chinese exports to the US. Under such high-pressure tariffs, even the highest 17% export tax rebate would be of little help. Increased tariffs raise product prices, and maintaining export tax rebates would only partially offset the impact. In essence, this approach would equate to subsidizing foreign buyers, effectively transferring wealth abroad.

Combating Anti-Dumping and Countervailing Investigations China has been the world's most frequently investigated country for anti-dumping for over 20 years and for countervailing measures for over 10 years. Products such as hot-rolled steel coils, crystalline silicon photovoltaic modules, and aluminum wires have been major targets. Recently, these investigations have extended to new areas like electric vehicles and lithium batteries. For example, the EU recently imposed a 10-year anti-subsidy tax on Chinese electric vehicles. By canceling or reducing export tax rebates, China aims to alleviate some of the pressure from these trade remedy investigations.

Targeting Overcapacity in Key Industries The products affected by this policy adjustment, such as photovoltaics, aluminum, copper, glass fibers, ceramics, and asbestos, are industries with severe overcapacity. Take photovoltaic panels as an example—they represent one of the most overproduced sectors in China. Historically, export tax rebates were used to enhance the competitiveness of these products in international markets. Now that these industries have achieved global dominance, they no longer require subsidies. Moreover, given the strong reliance of foreign markets on these products, domestic producers can pass on increased costs to overseas consumers with minimal impact on demand.

Promoting Domestic Industrial Upgrades Addressing overcapacity requires the elimination of outdated production capabilities. Lowering export tax rebate rates helps domestic enterprises phase out inefficient operations and focus on improving cost control and technological innovation. For instance, after the export tax rebate for steel products was gradually eliminated in 2021, China introduced new tariffs on high-value-added steel imports, encouraging the steel industry to enhance product quality and achieve industrial upgrades.

Encouraging Overseas Expansion Instead of relying on subsidies for internal competition, domestic enterprises are being pushed to compete internationally. As foreign markets impose stricter restrictions, such as the US and EU's recent measures against Chinese goods, this policy will drive Chinese enterprises to accelerate capacity expansion overseas and diversify export channels. Southeast Asia, India, and Mexico are becoming popular destinations for such investments. Notably, CATL (Contemporary Amperex Technology Co., Limited) recently announced its willingness to build a factory in the US if permitted—an acknowledgment of the challenging trade environment.

Reducing Fiscal Pressure From a fiscal perspective, the rapid growth of export tax rebates has imposed significant pressure on the state budget. In the first 10 months of this year, China's export tax rebates amounted to RMB 1.6958 trillion, a 9.9% year-on-year increase—exceeding the revenue from most major tax categories. With policies such as trade-in programs for domestic goods gaining traction, this shift represents a transition from subsidizing foreign markets to supporting the domestic economy.

Strategic Implications

The cancellation and reduction of export tax rebates reflect a multi-faceted strategy. Domestically, it addresses overcapacity, promotes industrial upgrades, and relieves fiscal pressure. Internationally, it mitigates the risks of trade disputes and encourages businesses to diversify export destinations and establish production bases abroad.

While export enterprises may face short-term challenges, this policy adjustment is expected to foster greater resilience and competitiveness in the long run. It aligns with China’s broader economic goals of high-quality development, reduced reliance on subsidies, and a more balanced approach to international trade relations.

As global trade dynamics evolve, this move signifies China's proactive stance in adapting to external pressures while strengthening its domestic economy and industrial base. For enterprises, the path forward lies in innovation, quality improvement, and global integration. For the international market, the rise in prices of these essential goods may become an inevitable cost of dependence on Chinese products.

Recently, China's Ministry of Finance and the State Administration of Taxation issued an announcement canceling export tax rebates for 59 items, including aluminum and copper products, and reducing the export tax rebate rate for 209 items such as photovoltaics and batteries from 13% to 9%.

Understanding Export Tax Rebates

The purpose of export tax rebates is clear: Export tax rebates are designed to allow goods to enter international markets at tax-free prices, thereby enhancing their competitiveness and promoting export trade. As an international convention, export tax rebates effectively neutralize the tax burden on export goods, a measure widely adopted by countries around the world.

In the years following China's accession to the WTO, export tax rebates significantly aided Chinese products in expanding their market reach and establishing a global presence. However, as China's products gained increasing market share and manufacturing competitiveness, the benefits of export tax rebates have diminished over time.

Although some worry that reducing or canceling export tax rebates could lead to short-term cash flow pressures and increased costs for export enterprises, even potentially undermining price competitiveness, the Chinese government has several strategic reasons for making this adjustment.

Reasons for Lowering or Canceling Export Tax Rebates

International Context: Addressing New Tariffs from the US The looming "Trump Tariff 2.0" threatens to impose a 60% tariff on all Chinese exports to the US. Under such high-pressure tariffs, even the highest 17% export tax rebate would be of little help. Increased tariffs raise product prices, and maintaining export tax rebates would only partially offset the impact. In essence, this approach would equate to subsidizing foreign buyers, effectively transferring wealth abroad.
Combating Anti-Dumping and Countervailing Investigations China has been the world's most frequently investigated country for anti-dumping for over 20 years and for countervailing measures for over 10 years. Products such as hot-rolled steel coils, crystalline silicon photovoltaic modules, and aluminum wires have been major targets. Recently, these investigations have extended to new areas like electric vehicles and lithium batteries. For example, the EU recently imposed a 10-year anti-subsidy tax on Chinese electric vehicles. By canceling or reducing export tax rebates, China aims to alleviate some of the pressure from these trade remedy investigations.
Targeting Overcapacity in Key Industries The products affected by this policy adjustment, such as photovoltaics, aluminum, copper, glass fibers, ceramics, and asbestos, are industries with severe overcapacity. Take photovoltaic panels as an example—they represent one of the most overproduced sectors in China. Historically, export tax rebates were used to enhance the competitiveness of these products in international markets. Now that these industries have achieved global dominance, they no longer require subsidies. Moreover, given the strong reliance of foreign markets on these products, domestic producers can pass on increased costs to overseas consumers with minimal impact on demand.
Promoting Domestic Industrial Upgrades Addressing overcapacity requires the elimination of outdated production capabilities. Lowering export tax rebate rates helps domestic enterprises phase out inefficient operations and focus on improving cost control and technological innovation. For instance, after the export tax rebate for steel products was gradually eliminated in 2021, China introduced new tariffs on high-value-added steel imports, encouraging the steel industry to enhance product quality and achieve industrial upgrades.
Encouraging Overseas Expansion Instead of relying on subsidies for internal competition, domestic enterprises are being pushed to compete internationally. As foreign markets impose stricter restrictions, such as the US and EU's recent measures against Chinese goods, this policy will drive Chinese enterprises to accelerate capacity expansion overseas and diversify export channels. Southeast Asia, India, and Mexico are becoming popular destinations for such investments. Notably, CATL (Contemporary Amperex Technology Co., Limited) recently announced its willingness to build a factory in the US if permitted—an acknowledgment of the challenging trade environment.
Reducing Fiscal Pressure From a fiscal perspective, the rapid growth of export tax rebates has imposed significant pressure on the state budget. In the first 10 months of this year, China's export tax rebates amounted to RMB 1.6958 trillion, a 9.9% year-on-year increase—exceeding the revenue from most major tax categories. With policies such as trade-in programs for domestic goods gaining traction, this shift represents a transition from subsidizing foreign markets to supporting the domestic economy.

Strategic Implications

The cancellation and reduction of export tax rebates reflect a multi-faceted strategy. Domestically, it addresses overcapacity, promotes industrial upgrades, and relieves fiscal pressure. Internationally, it mitigates the risks of trade disputes and encourages businesses to diversify export destinations and establish production bases abroad.

While export enterprises may face short-term challenges, this policy adjustment is expected to foster greater resilience and competitiveness in the long run. It aligns with China’s broader economic goals of high-quality development, reduced reliance on subsidies, and a more balanced approach to international trade relations.

As global trade dynamics evolve, this move signifies China's proactive stance in adapting to external pressures while strengthening its domestic economy and industrial base. For enterprises, the path forward lies in innovation, quality improvement, and global integration. For the international market, the rise in prices of these essential goods may become an inevitable cost of dependence on Chinese products.