China Imposes Health Care Tax – Is This Enough to Reshore US Manufacturing Operations?

by Taras Berezowsky on

An interesting piece in the Wall Street Journal reports that China has passed a Social Insurance Law and will be imposing a tax on all foreign nationals working within China to go towards subsidized hospital visits and retirement funds.

The paper quotes Christopher Xing, a China tax partner at KPMG, who estimates companies could pay roughly 37 percent of monthly income per employee, and employees in turn could pay 11 percent, representing potentially hundreds of dollars per month per worker.

The law had been passed last year, but starting July 1, this law will be on the books and enforceable. Many of us know China’s track record with legal enforcement (especially as far as intellectual property, among others, is concerned), so this could well be a yawn. But what’s interesting is how close it hews to what is happening here within the US health care debate, and if there are implications for further reshoring initiatives.

Essentially, the Chinese government intends to begin taxing companies and workers for state health care (reminiscent of an enforceable universal health care policy); even though they’re in the midst of sinking billions into a health-care restructuring effort, there’s a concern that the mandatory tax will be going toward inferior health services.

The fees could either be a ploy to tag international companies with more costs, or a play on an economic necessity. Echoing a previous MetalMiner post, “[China’s] vast population is aging and anxious about access to basics like health care, the article states. “Less worry about the future could prompt consumers to spend more of their savings, rather than squirrel it away for emergencies.

Conversely, foreigners may complain that China is just squeezing them for extra cash, especially in light of many expatriates already holding international coverage and likely not staying in China for the “15 years required to draw pensions, according to the article.

This Chinese tax, therefore, got us wondering: will this be one more notch in favor of reshoring certain business operations to the US? Or even near-shoring to avoid doing business in China?

As the Economist recently noted, labor arbitrage is becoming less of a sure thing in China these days as wages continue to rise for domestic workers. The Boston Consulting Group recently released a report on US reshoring, noting that Chinese wages are rising 15 to 20 percent per year, putting net Chinese labor rates for manufacturing on par with US rates by 2015. (And “products that require less labor and are churned out in modest volumes, such as household appliances and construction equipment, are most likely to shift to U.S. production,” according to the BCG report, which could mean good news for metals.) With wage inflation coupled with a tougher-to-navigate Chinese regulatory environment, at what point do manufacturers say, “Enough is enough it’s no longer cheaper in China? Of course, none of this is a given…

Tell us what you think.

–Taras Berezowsky




Comment (1)

  1. Since the tax only applies to foreign nationals, I suspect the result will be fewer foreign nationals at company owned facilities and more outsourcing to Chinese owned companies. A more important issue that could drive reshoring is how to convince companies to calculate their total cost of offshoring. Currently, most companies’ calculations are rudimentary, rather than complete, mainly comparing prices rather than the entire costs of offshoring. As a result, companies have offshored more than is in their own self interest.
    To help these companies make better sourcing decisions the non-profit Reshoring Initiative, http://www.reshorenow.org, provides for free a Total Cost of Ownership (TCO) software that helps them calculate the real offshoring impact on their P&L. With clear evidence of the fragility of global supply chains, Chinese and other LLCC (Low Labor Cost Country) wages rising rapidly, the U.S. $ declining and oil soaring, this is the perfect time for U.S. companies to reevaluate their offshoring strategies and bring some of the sourcing home.
    Readers can help bring back jobs by asking their companies to reevaluate offshoring decisions. Suppliers can use the TCO software to convince their customers to reshore.
    You can reach me at harry.moser@comcast.net.

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