China’s Christmas announcement that it would introduce a round of tariff reductions on Chinese imports and exports has caused a stir in the community of China watchers. And that’s especially so given the background of tension in China-U.S. trade relations.

China’s formal legal instrument putting a wide range tariff changes into effect was released a few days ago although the changes were flagged by China’s Ministry of Finance just before Christmas.

Beijing declared that it would change import tariffs on over 700 lines of goods. The aim of the changes is to promote the Chinese economy and grow its import and export trade, according to the Ministry of Finance. Tax rates on 94 exports from China will also be abolished, the statement added.

Then, on Christmas Eve, China’s national Customs Department elaborated on the tariff move.  Zero rates are now in effect on miscellaneous items, as well as some pharmaceutical materials. Rates were cancelled on the import of different kinds of solid wastes, such as manganese slag. Provisional tax rates for the import of lithium ion cells, thionyl chloride and new energy vehicles were also cancelled. Lower import tax rates are applied on advanced equipment such as aviation engines and welding robots for automobile production lines.

Export duties on 94 items such as chemical fertilizers, apatites, iron ore, slag, coal tar, wood pulp and various other materials have been cancelled in order to promote reform of the national export management system and efficiency improvement in the energy resources industry.

The tax rates on eight commodities, including wheat, will be unchanged; tariff rates for urea, compound fertilizer and ammonium hydrogen phosphate will be subject to a 1% import tax rate. A sliding tax on the import of cotton will continue.

To support the construction of the “Belt and Road” initiative, tax rates will be implemented on goods originating in 23 countries/regions, including Australia, the Customs Department explained. Meanwhile, there are preferential rates for Bangladesh and Laos under the Asia-Pacific Trade Agreement. Reductions in tariffs on 298 information technology products are due to take place beginning July 1.

The Customs Department said these adjustments are meant to help China make “full use of domestic and international markets and resources. [They are] conducive to the overall coordination of the balanced development of relevant domestic industries and [are] conducive to promoting open cooperation, sharing development results and promoting the steady growth of China’s foreign trade”.

Tension in the Beijing-Washington Relationship

Regular readers of FreightWaves will be well aware that there has been considerable tension in the Beijing-Washington relationship ever since President Trump was sworn into office. Washington unveiled 25 percent tariffs on a list of Chinese products in April 2018 and, of course, China immediately retaliated with a similar list of tariffs. Both sides then agreed to substantially reduce the trade deficit between the two.

In early December, President Trump and President Xi announced a 90-day ceasefire on implementing tariffs and China agreed to buy a variety of goods from the U.S. to reduce the trade imbalance. Now there is a report of a forthcoming trip of a U.S. trade team to China.

However, the interpretation of Beijing’s motives diverges among professional China-watchers.

One academic commentator argued that China has “considerably more economic incentive” than the U.S. to adjust its tariffs in order to resolve the dispute. However, the commentator added, “authoritarian regimes like hostility from abroad, since it justifies their existence, and this one might be calculating the minimum placation required given expectations as to how long the DT [Donald Trump] regime will survive in the U.S. and the composition of the current U.S. negotiating team.”

Opening up the Chinese Economy

Other commentators have different views. Dr. Yixiao Zhou is a Lecturer of Economics at the Curtin Business School in Perth, Western Australia. She recently returned from a research trip to China. In her view, there are two main reasons for the most recent round of tariff reforms. Firstly, they are in line with President Xi Jinping’s stated aim of opening up the Chinese economy. And, secondly, the tariff cuts reflect the current economic and development needs of China.

“The tariff cuts are mostly on imports. This is consistent with the first of the two visions and the first of the five policy proposals [that] President Xi provided in the speech – ‘it is important for all countries to open wider and expand the space for mutually beneficial cooperation,’ and ‘to broaden its opening-up, China will step up efforts [by stimulating] the potential for increased imports’. Tariff cuts on the export side could be viewed as support for exports and the  competitiveness of Chinese firms in the world market. Tariff cuts on the import side are more clearly a signal of deepening market access and opening up the Chinese market.

“Another thing worth noticing is that the list of goods experiencing tariff cuts reflects the current economic and development need of China, and also that of countries impacted by the One-Belt-One-Road Initiative. For example, tariff rates on high-tech intermediate goods and final goods, raw materials for high-tech goods, and resources goods are lowered. This is consistent with both of the two visions in President Xi’s speech that ‘It is important for all countries to open wider and expand the space for mutually beneficial cooperation,’ and that ‘It is important for all countries to pursue innovative growth and speed up the transformation of growth drivers.’ Therefore, the tariff cuts are meant to mutually benefit both China and other countries.”

While Dr. Zhou acknowledges that the Chinese tariffs were initially raised in retaliation for the imposition of U.S. tariffs, she nonetheless notes that the lowering of tariffs is on goods that are beneficial to the economic growth of China. She also notes that the goods upon which tariffs have been lowered are those from countries subject to bilateral free trade agreements. “This suggests the use of bilateral trading mechanism to lower tariffs, while the multilateral trading mechanism is being weakened.”

Hans Hendrischke is the Professor of Chinese Business and Management at the University of Sydney Business School. He has a different view on China’s motivations.

“Yes, it’s very clearly related to the China/U.S. dispute. The Chinese have announced counter tariffs, but it’s counter-functional or counter-productive as they need to import U.S. goods in agriculture, industry, energy and services. China will try to increase imports. This will be a step-by-step process of increases.”

China is Australia’s Biggest Trade Partner

China is a critically important trade partner for Australia. China accounts for A$174,451 million (US$120,846 million) total merchandise trade with Australia – that’s 28.2 percent of all Australian trade. China is the biggest destination market for Australian exports at A$106,330 million. China is also the biggest supplier of imports to Australia with a total value of A$68,121 million.

Commentators have mixed views on what the future U.S./China trading environment might mean for Australia.

Dr. Zhou notes that Australia’s free trade agreement with China is due to be fully implemented this year, which is favorable for bilateral trade between Australia and China. But there are downside risks. “If China’s economic growth slows down and global trade contracts, Australia will be faced with headwinds in exports of some resource goods that are important raw materials of production,” she commented.

Professor Hendrischke foresees that some sectors, particularly agri-sectors, will be more trade-exposed than the major dry bulks.

“For Australia, it’s hard to say. It is possible that if China’s actions impact more on U.S. agricultural goods then it could affect Australian exports. But it will not affect iron ore, coal or energy as China’s demand is so great. So it will not have a major impact on the bulk volume exports but on some of Australia’s more sensitive agricultural goods… consumer products, wine, milk, berries, cheese. It could affect refrigerated or cool transport but we don’t really know. But there is likely to be an impact.”