Economics, Politics, Social Commentary and occasionally Superstring Theory.

Sunday, December 12, 2004

China Slaps Export Tax on Textiles

China has announced that it will put an export duty on textile imports to compensate for the dismantling of textile import quotas under the WTO, Yahoo is reporting here. The duty will be on a quantity, rather than value, basis.

Why is China doing this? They've had no qualms about undercutting other countries on manufacturing, so why should textiles be any different? I have a couple of theories.

First, they're probably trying to avoid a flurry of anti-dumping actions in the U.S. Companies in the U.S. can file anti-dumping actions if they believe a foreign company is charging monopoly profits in its home market to subsidize lower cost exports into the U.S. market. It normally works by finding the ex ante price out of the warehouse, and comparing price in the home market and the U.S. market. However, because China is a non-market economy (NME), the Department of Commerce (DOC) will use prices in a surrogate country (Japan is normally substituted for China.) So, if comparable textiles that are produced in Japan are being sold to Japanese consumers for more than what Chinese companies are charging the U.S. for its textile imports, the Chinese company will get slapped with a duty to compensate for the difference. Even worse, under the Byrd Amendment, the proceeds from the duty put on the Chinese imports will go to the company who brought the anti-dumping petition. This effectively subsidizes inefficiency, but that's a subject for a different day. My take: the Chinese figured the anti-dumping duties were inevitable, so instead of having the money flow to U.S. competitors, the Chinese government decides they'd rather just keep it themselves. This is evident by how the tax is structured: quantity, not quality. This will encourage higher-end textile exports because they'll face less of a real duty compared to the value of the export. My worry is that other countries will catch onto this, and start their own export duties to raise their prices enough to get around a positive dumping determination. This will have the effect of raising world-wide prices, mostly on lower-cost goods. Another reason why the U.S. needs to get rid of the Byrd Amendment.

My second theory is that the Chinese probably don't want to get sucked into low-end textile manufacturing. Given enough latitude, China could easily become the entire world's textile producer. I don't think that's what China wants. Instead, they'd like to branch into more capital-intensive manufacturing and build enough infrastructure to compete as a first world power. The road to doing so does not lead through textiles. They get an added benefit of earning themselves some elbow room on their currency undervaluation, too.

UPDATE: New York Times (registration required) has a somewhat more expansive article here.

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