It looks like China will be making further changes to its export rebate structure by the start of the new year, according to Susan Schwab, U.S. trade representative, after trade talks with Chinese authorities. At this stage, the extent to which these changes will apply to export subsidies and VAT rebates is still unclear. Amid mixed support from the home crowd, Schwab claims that this agreement, just two weeks ahead of the Bush administration’s twice yearly trade talks in Beijing, was forced through threats of WTO sanctions. Schwab’s assertion that these rebates are unfair has a slightly hypocritical ring coming from a country which provides massive subsidies to its farming community and consequently distorts the international market for a range of commodities, making life particularly difficult for some developing countries. (The U.S. is not alone in this, since the EEC is just as bad — but as committed free marketers, we are opposed in principal to all forms of subsidization.)
Manufacturers in many countries — the EEC block being typical — are VAT neutral, being able to both claim back VAT they pay on purchases and collecting VAT for the revenue service on sales. When it comes to exports, these companies are not required to charge any VAT, yet they can claim back the VAT on their raw materials. In China, this is not possible without the VAT rebate structure manufacturers pay VAT on domestic purchases, and it’s next to impossible to claim it back if they export finished goods. At present, most commodities have a partial VAT rebate structure, but this has been systematically reduced over the last 18 months under pressure from the U.S. and EEC trading blocks. Combined with a gradually appreciating currency, this has choked off exports of some products, notably steel and certain non-ferrous metals, although clearly not enough for the AFL-CIO, a federation of 54 unions representing 10 million U.S. workers who have demanded stronger action to reduce the rising trade deficit. Whatever your politico-economic position on this subject, the fact remains that steel products in particular are set to become more expensive from the turn of the year, just as massive steel manufacturing investments in China begin to come on stream increasing capacity. Expect the rollercoaster ride for the steel markets to continue in 2008 as supply and demand in different product sectors drive price increases and decreases between markets.