China’s export tax on textiles — a good idea
We wrote about this idea previously, when it was proposed by Lawrence Lau and Joseph Stiglitz. Here’s what they said:
If China were to contemplate a revaluation, it should consider as an alternative the imposition of a tax on its exports. Export taxes are generally permitted under WTO rules. Indeed, China has already moved in a limited way in this direction on textiles. There are several reasons voluntary imposition of a tax on its exports may be preferable to a renminbi revaluation. Both would have similar effects on Chinese exports – they would make them appear more expensive to the rest of the world. Because of this similarity, an export tax would provide an empirical answer to the question of whether a revaluation would work. But it would do this without some of the significant costs attendant on revaluation.
One of the advantages of an export tax is that, unlike a revaluation, it would not lead to financial losses for Chinese holders of dollar-denominated assets, such as the People’s Bank of China or commercial banks and enterprises. China’s central bank currently holds about $640bn in foreign exchange reserves. Assume that only 75 per cent is held in dollar-denominated assets. A renminbi revaluation of 10 per cent would result in a loss of $48bn or about 400bn yuan for the central bank.
Another cost of revaluation would be possible further deterioration in the distribution of income, in cluding increasing the already large rural-urban wage gap. Revaluation would put downward pressure on domestic Chinese agricultural prices; an export tax would not. An export tax, by contrast, would have a beneficial side effect: it could generate substantial government revenue for China. Given the high import content of Chinese exports to the US, a 5 per cent export duty would be equivalent to a currency revaluation of some 15-25 per cent, generating about $30bn-$42bn a year.
Now it has happened, at least in part. WSJ:
The new Chinese charges take effect June 1 and could increase export tariffs for most goods by up to 400%, the official Xinhua news agency reported. It didn’t give any details, but said China now imposes export tariffs of between 2% and 4% on 148 categories of textile and clothing exports. The order by China’s Customs Tariff Commission also cuts the tax for knitted garment accessories and three varieties of briefs and shorts, Xinhua said. The U.S. Commerce Department says imports from China this year are running at a rate 54% above the same period of 2004.
From reports on CNBC, it appears the tax, or tariff, at the low end, is one yuan or twelve cents per piece, a significant number. (Does “piece” mean sock or pair of socks?)
We find ourselves agreeing rather enthusiastically with the economists we quoted above, as well as with the Chinese government’s actions. We think the approach to development economics of former Clinton advisor Stiglitz is sound and less fraught with risk than the China bashing in the Bush Treasury Department to force a big revaluation of the renminbi.
However, no matter which side of that debate you find yourself on, there is no question that China is on a runaway train of hypergrowth, stoked by pretty unbelievable capital flows — numbers like 26% and 43% annual increases in investment in a country are almost unheard of, and are themselves fraught with risk. WSJ:
January-April investment in fixed assets in urban areas, including property, electricity, gas and water production, along with oil and gas exploration and coal, rose 25.7% from a year earlier to 1.4 trillion yuan ($169.15 billion), the National Statistics Bureau said. The January-April rise compares with 42.8% growth a year earlier. Fixed-asset investment growth is “still too strong” for the government to meet its economic-growth target of between 8% to 9% this year, said Tim Condon, an economist at ING Financial markets.
Most alarming of all, Ian Bremmer suggests in the IHT, is the notion that the central government in China has limited control in reining in the wild spending because of its limited control of the purses of provincial government officials.
May 21st, 2005 at 8:23 am
[...] n really is, but it sounds pretty bad. You would think with capital investment increasing 25-45% a year in China, the government would have the reso [...]