Female workers work in a sock factory in Yiwu, in east China's Zhejiang province. Alarmed by falling trade, Beijing is trying to boost exports and avert more job losses by giving companies tax breaks and other aid, a tactic that could anger Washington and other trading partners.
BEIJING – Alarmed by falling trade, Beijing is trying to boost exports and avert more job losses by giving companies tax breaks and other aid — a tactic that could anger Washington and other trading partners.
Beijing wants to increase exports or encourage companies to use more Chinese goods instead of imported products in industries including textiles, steel and petrochemicals. That could pump more goods into glutted markets and hurt U.S., European and Asian competitors at a time when economists are warning against one-sided measures and say demand is so weak that price cuts alone cannot boost sales.
“There are some protectionist tendencies out there, so if China is seen as trying too hard to manipulate the competitiveness of its exports, it could fuel those tensions without much gain in terms of export growth,” said Claire Innes, an economist for consulting firm IHS Global Insight.
The moves come as Beijing strikes an increasingly assertive stance ahead of this week’s G-20 summit in London on the global financial crisis. Governments of major countries — including China — have warned against responding to the crisis by trying to raise trade barriers, which would worsen the slowdown.
Since November, Beijing has cut taxes on exporters, giving them room to reduce prices abroad on shoes, textiles, toys and other goods by up to 15 percent. It has repealed an export tax on steel and fertilizer. Steel, petrochemicals and other industries have been promised aid to improve technology and boost output. Authorities scrapped a tax break on machinery imports by foreign-financed ventures to encourage factories and textile mills to switch to locally made equipment.
The United States, Europe and others are dismayed at steps that might curb Chinese demand for imports, according to diplomats. But they say they see no grounds yet to challenge them as a violation of China’s trade commitments.
A Chinese Commerce Ministry spokesman acknowledged the moves have “aroused some worries.” But he defended them as permitted by World Trade Organization rules and said they are urgently needed to curb rising Chinese job losses.
China has to “further strengthen support to raise exporters’ competitiveness and keep export growth stable,” said the spokesman, Yao Jian. “The most important thing is to ensure a fairly good level of employment.”
Beijing rolled out aid plans to help individual industries maintain sales and avoid more layoffs after exports fell in November for the first time in seven years. At least 20 million migrant laborers have been thrown out of work, and the trade decline in accelerating, with exports plunging 25.7 percent in February from a year earlier. Communist leaders worry about unrest if job losses rise.
The packages are part of Beijing’s 4 trillion yuan ($586 billion) stimulus plan announced in November. That aims to reduce reliance on exports and pump up the economy through higher public works spending.
“I think they’ve been quite shocked at the speed of deterioration in exports,” Innes said. “The Chinese authorities are now concerned about a much more prolonged and deeper downturn in global demand than they thought.”
Still, economists say foreign demand is so weak that price-cutting alone is unlikely to boost Chinese exports until the global economy rebounds.
“No matter what they do in terms of rebates or other measures, unless demand starts to firm, then the impact is going to be minimal,” Innes said.
Beijing also has held down export prices by stopping the rise of its currency, the yuan, against the dollar in trading controlled by China’s central bank. The yuan is only traded in China, so the central bank can dictate the exchange rate because it allows only a small amount of yuan to change hands every day and can flood the market with dollars if demand rises too sharply. The yuan increased in value by about 20 percent against the dollar between mid-2005 and mid-2008, but has been stable at about 6.85 to the dollar since September.
The United States and others say the yuan is kept undervalued, giving Chinese exporters an unfair price advantage. Some American lawmakers are demanding punitive tariffs on Chinese imports if Beijing fails to end its currency controls.
Beijing has accused Washington of protectionism in its own $789 billion stimulus, which includes measures that favor American steel, iron and manufactured goods for government projects. The official Xinhua News Agency in February called the measures “poison” that will hurt efforts to resolve the financial crisis.
On Dec. 1, Beijing raised rebates of value-added taxes — which add 17 percent to the price of goods. The rebates affect 3,770 types of exports, or 28 percent of the total. It scrapped taxes imposed earlier on exports of steel, fertilizer and grain to discourage production deemed too dirty or energy-intensive and to conserve local supplies.
Last week, the government announced it will raise rebates of such taxes still further on April 1, though it gave no details.
In petrochemicals, where China is the world’s biggest importer, Beijing is giving producers billions of dollars in aid to improve technology and raise output of petroleum products such as polyethylene, an ingredient in plastics.
China buys about half of its raw materials for plastics from U.S., Japanese and Korean suppliers and higher domestic production would hurt their sales.
“China indeed is going to build a lot of new petrochemical complexes. The capacity growth is tremendous,” said Paul Pang, China managing director for Chemical Market Associates, Inc., a chemical consulting firm based in Houston.
Even though China should remain a major petrochemicals importer, its American, Japanese and Korean suppliers “will gradually be squeezed out” by cheaper domestic or Middle Eastern rivals, Pang said.
Taiwan’s petrochemical industry will be battered by the change, Taiwanese lawmaker Lin Cho-shui wrote this month in the Taipei Times newspaper.
“Taiwan will not be the only one affected,” Lin wrote. “Japan, South Korea and the rest of the world will suffer as a result.”
Associated Press researcher Bonnie Cao in Beijing contributed to this report.
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ON THE WEB
Chinese Ministry of Commerce (in Chinese): mofcom.gov.cn
Chemical Market Associates, Inc.: cmaiglobal.com
IHS Global Insight: globalinsight.com