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Tariffs on imported food and cars
China is the second largest importer and America’s largest trade partner. Other partners include Japan, the European Union, South Korea, Taiwan, and ASEAN countries. Since the Chinese integration into the world economy, the amount of its imports has also increased significantly. Some of the major imported products in the country come from the energy sector and resource related products (Broughton and Walker 471).
In a bid to maintain the national economic stability, the government sets high tariff rate to prevent people from importing goods from other countries and instead rely on the locally manufactured products. Tariffs facilitate in protecting domestic industries.
When government imposes high tariffs on imported goods, the price of the products goes high, thus forcing the local consumers to turn to locally manufactured products, which are cheap (Broughton and Walker 473-475). By discouraging importation of products that wage competition on locally manufactured products, the government helps in developing the local industries.
In China, the government imposed high tariffs on both imported foodstuffs and vehicles. Currently, imported foodstuffs and vehicles are sold almost as twice the price as they are in their home countries.
Nevertheless, foodstuffs are still within the affordability to household purchase. As a way of protecting the local industries, China imposed tariffs on the importation of food products like rice, pork, and other grains (Broughton and Walker 477). In return, the tariffs cut down on the importation of these food products in the country.
On the other hand, the demand for the products continued swelling up thus leading to the increase in their prices. China is capable of supplying meat to its entire population. Hence, as a way of discouraging importation of meat from other countries, the Chinese custom officials impose huge tariffs on meat products (Broughton and Walker 478).
Besides the importation tariffs, China has also imposed other charges like value added tax (VAT) on all imported food products like vegetables oil. The current basic rate is at 17 per cent. This rate is high thus making it hard for the imported food products to sell at the same price as the locally manufactured food products. Increased tariffs on imported foodstuffs are making it hard for the Chinese to purchase the products.
Consequently, many people are now relying on locally manufactured food products. In a way, tariffs have helped the Chinese government to achieve its objective of protecting local industries from foreign competition. Many business people have ceased to import food products from other countries since they do not make substantial profits.
For many years, China has used tariffs as away of not only discouraging importation of food products from other countries, but also in curbing illegal trade in the country. The country is yet to do away with tariffs imposed of food products like milk powder and tea. Recently, the country raised the tariff imposed on these products by 10 per cent. The move aimed at controlling the amount of milk powder and tea entering into mainland China (Zhao, Tong, and Qiao 413-417).
To some extent, the government has succeeded in curbing illegal trade in the country. Nevertheless, the burden of the imposed tariffs shifted to the consumers. Normally, whenever the custom duty officials increase tariffs imposed on imported products, the business people in return increase the cost of the products to cover for the tariffs. This scenario is very evident in China. Currently, the prices of milk powder and tea are considerably high in the mainland China.
Despite the huge tariffs imposed on food products, the country is gradually cutting down on tariffs of some food products as a way of encouraging their importation. Besides, the country is entering into trade agreements with countries like New Zealand to encourage smooth flow of food products that are in high demand in the country (Zhao, Tong, and Qiao 419-424).
Demand for seafood products in China is gradually going up. Nevertheless, China does not produce seafood; hence, to encourage the importation of seafood products in China, the government has agreed to enter into trade agreements with New Zealand where New Zealand enjoys the privilege of exporting seafood to China at low or no tariffs (Zhao, Tong, and Qiao 427-433).
The automobile industry is another sector protected through tariffs in China. Nevertheless, China has significantly cut down on tariffs imposed on imported vehicles since its entry into the World Trade Organization. Today, China’s tariffs on imported cars stand at 25 per cent (Francois and Spinanger 85).
The high tariff forces all the imported cars to sell at high prices in China. Besides, all vehicles manufactured within China, but bearing foreign brands, are expensive relative to the local brands. For foreign automobile companies to make substantial sales in the Chinese market, they require to cut down on the cost of their vehicles (Francois and Spinanger 86-94). Nevertheless, it is hard for them to do this due to the high tariffs imposed on their vehicles.
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High tariffs imposed on imported cars have made it hard for foreign automobile companies to sell their cars in China. In a bid to ensure that they continue benefiting from the huge Chinese market; foreign companies have opted to enter into joint ventures with local automobile companies in China (Francois and Spinanger 97).
Currently, the top ten automobile companies in the country are mergers between foreign and local companies. Through the joint ventures, foreign companies sell their cars in China at competitive prices without bearing the burden brought about by the tariffs. For instance, in a bid to circumvent the tariffs, the Bavarian Motor Works, which is responsible for the development of BMW vehicles, entered into a joint venture with a Chinese auto company, Huachen (Francois and Spinanger 98-101).
Through the joint venture, the two companies can now manufacture the BMW models in China, and sell them at affordable prices in the local market. In spite of coming up with a joint venture with the Huachen company, it was hard for the Bavarian Motor Works Company to continue selling the BMW cars with their initial brand name (Francois and Spinanger 102-103).
This aspect would have made them to appear foreign thus subjecting them to taxation. Hence, the two companies decided to change the brand name of their cars to Huachen BMW. The cars have all the features of the original BMW car manufactured in Germany, but their name changed to make them to appear as locally manufactured autos. The joint venture between the two companies helped BMW Company to continue selling its cars in China and circumvent the huge tariffs imposed on foreign cars.
Demand for cars in china continues to go up (Francois and Spinanger 89). In the process, many people have developed a taste for the BMW model. It would have been hard for many Chinese to afford the BMW car had the company not entered into a joint venture with Huachen Company.
The joint venture between BMW and Huachen made it possible for companies to sell the Huachen BMW at lower costs thus increasing the profit margin of the BMW Company in China. Currently, the two companies are continuously investing in the development of the car and opening new branches across the country as the demand for Huachen BMW continues to escalate in the country.
Subsidies offered to manufacturing companies
China is the world’s largest exporter. Exports income is an important component of Gross Domestic Production (GDP).The Chinese government carries out several policies to boost exports (Haley and Haley Para.2). Firstly, the Chinese government put subsidized trade practice in effect to support the manufacturing industries such as the Chinese automobile and auto parts industry.
This move helps the local companies to manufacture their products in large quantities and sell them at lower prices relative to those from other countries. Subsidies extended to manufacturing companies in China are behind the stiff competition waged by Chinese products in the global market.
Some pundits claim that the reason behind the low cost of a majority of the Chinese products is cheap labor, which is readily available in the country. Nevertheless, a study carried out in the Chinese growing steel industry proved that the Chinese government extends huge energy subsidies on the steel industry leading to low prices of the Chinese cars (Haley and Haley Para. 4). Steel is one of the materials used in the automobile industry.
Hence, when the government gives subsidies to the steel industry, the industry on the other hand sells the material at low prices to the automobile industry. Consequently, the cost of manufacturing cars in China is lower relative to other countries. The figure below shows the trend in energy subsidies in the steel industry.
Besides selling the steel products to the automobile industry at lower costs, the energy sector benefits from the subsidies extended to the steel industry thus allowing the sector to lower the energy charges for other industries. The Chinese motor industry benefits from the reduced energy costs thus it can pass the benefit also to customers by selling its cars at reduced prices (Haley and Haley Para. 6).
The United States filed a complaint to the World Trade Organization accusing China of illegally subsidizing automobiles and auto parts. Such conduct has already cost the United States $350 billion in its automobile and auto parts manufacturing sector. In the United States, the tire and auto parts manufacturing companies offer over 1.6 million jobs to the Americans. Currently, the industry is the second largest employer in the United States.
Nevertheless, as the Chinese government continues to give subsidies to its auto parts and automobile industry, the move is affecting the American industry negatively (Dominguez and Tesar 188-193). Between 2000 and 2011, over 400, 000 people lost their jobs in the tire and auto parts manufacturing industry in the United States.
Most of the subsidies offered to the Chinese industries go against the responsibilities bestowed on China under the World Trade Organization agreements. The Obama administration has called on the World Trade Organization to address the issue of Chinese subsidies before the matter degenerates to a crisis.
According to a study carried out in the United States’ auto parts industry, it was realized that the trade deficit in the industry went up from $9.5 billion to $31.2 billion between 2000 and 2010 (Dominguez and Tesar 190). Most of the American consumers opted to purchase their auto parts from china since they were offered at lower prices.
In return, the local manufacturing companies in the United States lost their market, which pushed most of them to embark on downsizing in a desperate move to reduce operation costs. Trade deficit translates to increase in unemployment (Dominguez and Tesar 197). Whenever companies realize that they are underperforming, they stop hiring more employees. Besides, some companies lay off their employees as one of the cost-cutting strategies.
Due to the subsidies given to the Chinese auto parts industry, the Americans started relying on tires imported from china, thus affecting the local tire industry in the US. It implied that the American tire manufacturing companies could no longer continue with their initial volume of tire manufacture and to cover for the incurred costs, the companies stopped hiring more employees, hence increased unemployment rates in the US (Francois and Spinanger 96).
The Chinese government provides preferential loans and loan guarantees, favorable tax incentives, and the provision of various inputs (such as steel and electricity) for exporting firms to conduct business smoothly (Francois and Spinanger 99).
Currently, the provisional and central governments have offered approximately $27.5 billion to the automobile industry in the form of direct loans. Besides, the government has spent over $10.9 billion in research and development as well as in restructuring over 25,000 companies, which are responsible for the manufacture of auto parts in the country (Francois and Spinanger 103).
Among the direct subsidies that auto parts industries receive from the government include tax subsidies, cash grants, research and development funding, and interest-free loans. These subsidies have allowed China to stop importing most of its auto parts from the United States. In fact, today, the United States relies heavily on China for most of its auto parts (Francois and Spinanger 104).
Moreover, this move has forced a majority of the United States’ suppliers to opt to shift their producing companies to China. According to the Office of the United States Trade Representative, these aid policies have benefited 60 per cent of Chinese car parts exporters. Besides, China has used these policies to make at least $1 billion in exporting, and subsidies are available to manufacturers from 2009 to 2011 (Francois and Spinanger 100).
China’s currency policy
China deliberately came up with measures to curb the appreciation of its currency, the Yuan, or the renminbi (RMB) against other currencies. This deliberate move has led to an intense tension between china and its trading partners like the United States. Some analysts posit that China advertently “controls” its currency to ensure that it always has an upper hand in trade (Dominguez and Tesar 188). For decades, China’s currency has been undervalued.
Surprisingly, the Chinese government has never come up with measures to correct this aspect. The undervaluation of the Chinese currency has led to huge job losses in the United States as well as increase in the trade deficit. In 2010, President Obama requested China to embark on an initiative to come up with a market-driven system for its currency. Moreover, numerous countries have worked together with the US to come up with bills to force China to work on changing its currency policy.
In 2005, the Chinese government altered the currency policy to allow the flexibility of the RMB’s exchange rate. The government aimed at ensuring that the exchange rate varied depending on demand and supply of other currencies in the market. Besides, they adjusted the exchange rate of RMB against the United States’ dollar to 8.11 (Dominguez and Tesar 189-197). After these changes, the Chinese government allowed its currency to appreciate constantly, but at a slow pace (Morrison and Labonte 1-4).
By 2008, the RMB-dollar exchange rate was at 6.83. Nevertheless, the government embarked on numerous market interventions to interfere with the rate of appreciation. In mid July 2008, China suspended its currency appreciation policy. At this time, the demand for Chinese products had gone down across the globe due to the 2008 financial crisis.
The Chinese government claimed that the country had closed down most of its export-oriented companies. In 2010, the country resumed on an appreciation trend, but made numerous reforms to improve the RMB exchange rate elasticity (Morrison and Labonte 3-5). The figure below shows the ostensible RMB/Dollar exchange rate between January 2008 and May 2010.
The majority of the United States’ policymakers and labor representatives claim that the Chinese government deliberately undervalues its currency to ensure that it makes significant exports to the United States and other global markets (Dominguez and Tesar 193-214). Through this aspect, the government makes its exports to the United States cheap and at the same time makes the imports from the United States expensive.
This scenario discourages the importation of products from the US thus promoting the local industries. The current level of trade deficit between the US and China is due to the existing Chinese currency policy. By 2010, the deficit stood at $273 billion and the figure was expected to increase.
Some economists claim that the Chinese currency policy is behind the current currency policies that most of the East Asian countries are adopting (Garcia-Herrero and Tuuli 53-67). East Asian countries are deliberately undervaluing their currencies as a way of ensuring that their products compete well in the global market.
Most of the currencies in East Asia are weaker relative to the United States dollar. One of the American economists claims that the Chinese currency policy is responsible for the current slow pace of economic recovery (Garcia-Herrero and Tuuli 67-71). Some commentators call the Chinese policy a “beggar thy neighbor” policy aimed at benefiting the Chinese economy at the expense of other economies (Garcia-Herrero and Tuuli 74).
A substantial appreciation of the Chinese currency would facilitate in alleviating the current mutual trade disparity between the US and China. RMB appreciation would lead to the appreciation of other currencies thus allowing American products to be competitive in the global market. This move would be the ultimate way of addressing the current trade deficit affecting the United States (Garcia-Herrero and Tuuli 77-92).
In a quest to compel China to do away with its currency policy, the US has come up with numerous bills. For instance, during the 108th Congress meeting, Senator Schumer introduced a bill that aimed at reducing the volume of Chinese exports to the United States by imposing a 27.5 per cent import duty on all Chinese products (Morrison and Labonte 10).
Besides, the US has tried to use anti-dumping tariffs to deal with the Chinese currency. Nevertheless, most of these measures contravene the United States’ obligations in the World Trade Organization. Hence, it is hard for the US to influence the currency policies that China has adopted.
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Francois, Joseph, and Dean Spinanger. “Regulated efficiency, World Trade Organization accession, and the motor vehicle sector in China.” World Bank Economic Review 18.1 (2007): 85-104. Print.
Garcia-Herrero, Alicia, and Koivu Tuuli. “China’s Exchange Rate Policy and Asian Trade.” Economie Internationale 116.4 (2009): 53-92. Print.
Haley, Usha, and George Haley. Subsidies and the China price, 2008. Web.
Morrison, Wayne, and Marc Labonte 2011, China’s currency policy: An analysis of the economic issues. PDF File. Web.
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