High import tariffs

A clash of opinions over the need to cut import duties on “luxury” goods has broken out between China’s financial officials and commercial policymakers.

Spectacular as it is, the ongoing debate has so far done little to boost domestic consumption, a desirable goal that both sides agree on.

Responding to loud public calls for lower taxes on imported goods, the Ministry of Commerce recently told the press that reducing import duties on luxury goods is only “a matter of time” as key ministries have reached general agreement on the issue.

However, no sooner were Chinese consumers celebrating that news than the Ministry of Finance bluntly denied it had agreed to cut the duties on luxury goods.

Citing concerns over its impact on the national coffers as well as the already huge wealth gap in the country, some people from the finance ministry even suggested that such import tariffs should be raised instead.

There is definitely merit in the argument against tariff cuts.

China’s import duty, value-added tax and consumption tax on imported goods, including luxury items, reached more than 1.25 trillion yuan ($193 billion) last year, accounting for 30 percent of the central government’s fiscal income. The finance officials are obliged to ensure that any change in import tariffs will not make too big a dent in the central government’s fiscal revenues.

Besides, tax cuts for imported luxury goods, which, more often than not, are associated with conspicuous consumption, do not sell well in a country facing such huge income disparities.

In theory, financial officials’ concerns are fairly justified. Yet, in reality, they have ostensibly failed to take the bigger picture of the national economy into consideration.

The fiscal health of the central government is certainly of vital importance in itself and to the economy. But by no means should it be an excuse to prevent or put off reforms crucial to the country’s balanced and sustainable development.

Further cutting import tariffs, including those on luxury goods, is not only about the country’s membership of the World Trade Organization, it is also about China’s growth strategy of increasing imports to balance trade and easing pressure on yuan appreciation resulting from its large trade surplus.

Though there is much media fanfare predicting that China will soon surpass Japan as the world’s largest luxury consumer market, with an estimated value of $14.6 billion, Chinese policymakers should bear in mind that what really lies behind the demand for lower import tariffs is a trillion-dollar domestic market boasting the world’s largest group of middle-income consumers.

Even a back-of-an-envelop calculation will show that the benefits from a reduction in import tariffs will far outweigh the costs.

If China is to inevitably wean its economy off long-term dependence on investment and exports for growth, the two ministries must bridge their differences as fast as possible and lift the unnecessarily heavy taxes on imports, be they luxury products or not, so as to boost consumer-led growth in this country.

Source: China Daily

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