In what appears to be a victory for the US side, the NY Times is reporting that China has agreed to remove a dozen subsidies on WTO disputed products.

In reading the article though, and then reading Susan Schwab’s notes in PDF here, it appears to me that the USTR is looking at this on a much wider level and may try to use this ruling to push harder for more removals.

According to Schwab, this victory is significant in three ways:

This outcome represents a victory for U.S. manufacturers, producers and their workers.

First, it eliminates a set of widely- available subsidies that create significant disadvantages for U.S. products across many manufacturing sectors.

Second, it shows that Chinese policymakers understand the need to respect the strict WTO prohibitions on these kinds of subsidies in the future. It also demonstrates that our two nations can work together to resolve major differences.

Third, it shows that President Bush’s approach to resolving trade disputes with China – dialogue if possible, legal action when necessary, and working within the rules-based system – gets real results.

Interesting that she thinks that, but I am still wondering what the wider victory is here. Obviously, there was a small battle won, but will this ruling have a real impact on a wider scale?

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While the removal of the VAT rebate at the end of this year is purely rumor at this point, the fact is that at some point it will be removed.

For some that will mean the removal of a rebate for up to 17% of their material costs, and that could lead to signigicantly reduced profits for exporters.

So, the question is. what impact would the removal of the VAT rebate have on your operations? Would it take you out of the market? Would your customers absorb the cost? Is your market share big enough to hold pricing and wipe off a few competitors?

Let us know.

And if you don’t know… I suggest you clear the schedule of your accountant, CFO, Sales Manager, and production team. Because it isn’t a matter of if, it is a matter of when.

For those of you who were readers of All Roads earlier in the year, you will know that I beat the majority of news services to the punch when reporting the reduction of the VAT rebate for 3000 goods.

Well… if our sources are correct (same sources as last time), then we are about to see the end of the VAT rebate system for all or part of the goods still enjoying these rebates.

Update: I am not expecting a 100% across the board removal of the VAT rebate regime. I would expect goods in the 5-8% rebate category as highest risk, and while China will probably follow HK and other countries with some ongoing VAT rebates, there are certainly going to be changes in the near future for many categories.

Now, I am not suggesting anyone start ramping up production to beat the clock, but I am suggesting that readers begin factoring in the fact that VAT is going away.

It may not be tomorrow, it may not be at the end of the year (current rumor), it may not be next summer (my original expectation), but it is going to happen…. and when it does, it may sting exporters for anywhere between 5 and 13%.

That’s right.. 5 – 13% of your profit may go away at the end of the year!

Spend some time and figure out the impact.

If you are in a strong market position, are already in China, are exporting, and believe your customers do not have any alternative then to buy your products… go ahead and increase your prices accordingly.

Otherwise, it is time to get your sales and operations team into the same conference room to find ways to save money (no.. that does not mean you can switch out water based paint for lead) and understand what options exist on the pricing side as well.

2006 and 2007 have been two of the most interesting years in terms of regulation and policy. there have been a lot of both that have been put out by Beijing to force more mature market conditions, and if this rumor is true, it could potentially have a huge impact on exporters.

For the last 18 months, the daily news has been much the same.

China needs to reduce the RMB… that China is not playing fair… that SOMETHING NEEDS TO BE DONE.

yet.. the day after the Ministry of Commerce announced that they would reduce the VAT rebate on nearly 3000 products …. nothing.

Radio silence… actually, the only paper (I looked at WSJ, NYT, IHT, FT, and Washington Post) to have anything China trade related was WSJ in their article Paulson Appeals to Congress where the teaser was

U.S. Treasury Secretary Henry Paulson Wednesday assured members of Congress he is doing all he can to persuade China to speed up the pace of economic restructuring, and urged U.S. legislators to resist trade protectionism.

Uh.. maybe I missed something, but doesn’t reducing the VAT rebate on 3000 products constitute a MAJOR step in the right direction?

For those that don’t understand the nature of VAT, essentially what ha just happened is that export manufacturers will see their tax return on a per shipment basis get reduced. you know.. their COGS just went up… their COST ADVANTAGE reduced by 5-8%?

This was a surgical strike aimed at reducing the trade gap, and for a lot of manufacturers in China, this is going to hurt. It is going to make many uncompetitive.. and may actually PREVENT manufacturers from U.S. or E.U. from offshoring in China.

Now, I am not saying that China deserves a medal, but a little credit is definitely deserved.

Call my cynical, but at some point I am sure this VAT rebate reduction will be the target of many stories once prices of “made in China” products goes up.

Maybe I have missed something here, but I think it is time that credit is given its due..

and I am not the only one who thinks so…

Maybe I am getting a little to creative with titles lately, but I am having a good week and have decided to not be so academic (not that that is a bad thing).

This week has been a great week for U.S. trade policy, and while it will not start showing for another 6-12 months fully… July 1 will be a turning point in trade.. and China (more on that later).

The good news for the U.S. is that China reduced the VAT rebate for nearly 3000 products (see our posts: Call Your Accountant QUICK! VAT is going DOWN and Rollin.. Rollin.. Rollin.. Get those Containers Floatin! and It’s Official. Call Your Accountant NOW), and with that effectively made the material inputs for those goods 5 – 8% more expensive for the manufacturer… now 1 of two things will happen:

1) Manufacturers will increase their prices across the board, and either the retailer or the consumer will bite the bullet (my bet is the consumer will pay the increase). this will of course INCREASE the dollar size of exports to the U.S overall, but more than likely these increases will be offset by the next option

2) The recent increase and reduction in foreign tax exemption, will reduce the draw of China as cost savings will be reduced. This will be particularly true in low margin commodity industries that require little labor, and as a result U.S. firms will take a second look at their China plans.

On the plus side for China, the domestic market will benefit as well as U.S. firms will no longer enjoy the rebate on their imported goods, and as such they will look to source Chinese materials as inputs.

Now, at this time … when champagne corks were hitting the oval office ceiling.. it is interesting that Washington then decided to release new rules on the export of dual-use technologies… sending the minister of commerce into a tirade.

By imposing restrictions on more categories, Washington has ignored China’s efforts at enlarging imports from the United States, which will negatively affect the process of balancing two-way trade, Yao Shenhong, a spokesman for the Ministry of Commerce, said yesterday.

I find it interesting from 2 sides:

1. The Chinese has just taken what will be seen as a huge step in reducing the trade gap… and then the U.S. goes out and reduces the ability of Chinese firms to purchase American goods… thus widening the trade gap
2. With GE, Rolls Royce, and Boeing all producing aircraft parts in China (and operating R&D centers).. and Microsoft, Nokia, IBM, and others already operating shops in china…. I am wondering what the use of this new regulation is as many of the core applications are already here…

so.. ups and downs this week, but as I alluded to earlier: This will be a week that defines the U.S. China trade…. more to come.

It was exactly one week ago that we broke the news that the VAT rebate was going down, and now… EVERYONE is reporting it.

WSJ: China Cuts Export-Tax Rebate

China Daily: China to adjust export rebate policy on 2,831 commodities

IHT: China cuts tax rebates on exports

I gave you a week’s head start. Hopefully you called your forwarder … because everyone is pushing out their containers to beat the July 1 deadline

Last week we told you to call your accountant, and now we are telling you to call your forwarder.

While I cannot take all the credit for breaking the news, we can report that others have caught wind and everyone is booking their containers in anticipation that July 1 will bring the VAT rebate reduction as rumored (Note: No official announcement has been made, however the attached spreadsheet was passed to several different suppliers by their local tax bureaus).

So, if you are hoping to book before July 1, I suggest getting on the phone with your favorite forwarder to make sure space is still available on your liner of choice (we prefer Maersk or Matson to LBC…FAST and RELIABLE).

Again, the VAT change is not 100% certain for July 1, but like last year our suppliers were given warnings that VAT rebates would be reduced. Last year, it was pushed for 6 months due to local manufacturer push back…. maybe the same will occur again… maybe it won’t.

Either way, anyone with aluminum products (ME) want to read this article in Russia Metallurgy as it appears our products have been singled out as going to 0% or 5% on July 1.

Incidentally (while I am thinking about it)… Matson recently announced a new China Director and the addition of a second route is on the way. Business is good for Matson!

One of the nice things about being a consultant that also manufacturers is that we are privy to all the supplier gossip.

and in a first for All Roads… we have beaten out ALL news outlets in reporting this (Now, I only hope we are NOT wrong)

We hear about bankers driving up the price of metals (PLEASE STOP!!), we hear about power shortages, and … we also get the government notices.

For the last few weeks, everyone from our forwarder to our Aluminum supplier to the box guy were telling us that it was possible that our category of products may see a reduction in VAT rebates.

Well, apparently we are not the only ones (See excel spreadsheet).

If you are a manufacturer or are buying ANYTHING in China, call your accountant now because not only is the VAT going down for hand tools… it is going down for nearly every category of product that China exports.

AND IT IS HAPPENING ON JULY 1

and that means that in 2 weeks, your goods are about to get a lot more expensive!

For years, this was one of the tools that the U.S. congress has taken issue with and last year the first reduction was made. To reduce VAT is in my mind a more effective tool of not only limiting exports, but also moving China from the bottom end of manufacturing into the middle and high end categories.

My guess is that this time next year, VAT will be a thing of the past and that at that point, the cost of goods sold (assume the RMB stays the same) will have increased 25%+ for many operating here.

That should keep congress quiet for a while.

When the news first began to break that dogs and cats across America were getting sick from pet food made in China… I already knew what was coming.

and when articles began appearing in the popular press questioning “China’s” role in this, my fears were confirmed.

For me, supplier quality issues are always a problem.. and anyone in sourcing/ manufacturer takes on a firefighting/ crime prevention role. Projects always start off with a “what could go wrong” session, multiple suppliers are qualified “just in case”, and then the monitoring begins.

When something goes wrong there are only two reasons: (1) Our system for ensuring quality was not as sound as we thought it was or (2) we did not follow through.

It is not ALWAYS the suppliers fault

and it certainly isn’t China’s

The problem with this recent issue is that rather than focusing on the actors who were at fault (Chinese supplier,Chinese manufacturer, American buyer)… politics was allowed to enter the picture.

Industry groups who have seen jobs offshored, government agencies that have failed to address economic issues, and other organizations that have not achieved their goals otherwise all jumped on the bandwagon and turned a case of poor quality management into don’t buy anything Chinese goods.. because YOU NEVER KNOW…

In response, China publicly rejected a shipment of Evian… then the U.S. FDA publicly told everyone to throw away toothpaste made in China… then ATVs… and now, Chinese authorities have publicly rejected U.S. raisins and health supplements… getting the picture?

Were there a orchestrated effort by one government to supply tainted pet food, then politics can enter… but until then, it is a business issue plain and simple where a supply chain has been corrupted in some way and all parties need to work through the problems (potentially with the assistance of FDA or SFDA) .

Protecting citizens from harmful products is one of its critical roles. The U.S. has the FDA, China has the SFDA – State Food and Drug Administration, and there are a host of other groups like customs who support this role…. but by using the pet food as a political tool does little if anything to cure address the real issues..

And now it appears we are entering a phase of tit for tat public displays of poor quality products that are meant to do little more than sway public opinion through article titles like China goes on the offensive, singles out U.S. products that don’t ‘meet sanitary standards

For companies manufacturing in China, the recent politics could impact your bottom line as U.S. consumers grow wary of that Made in China sticker. IT won’t matter if your products are made in a wholly owned factory, or that your equipment was made in America, or that your management team is 100% expat.. all that will matter is that you manufacture in China, and your products may be unsafe..

For the last 2 years, Washington has been trying to get Beijing to reduce the deficit, revalue the currency, and open its markets to American goods & services.

Politically, it has not gone as plan…

The RMB has moved from 8.28 to 7.63 over this time, and while the trading band was recently widened, Washington remains publicly disappointed, frustrated, and the call for action is growing in Congress

Even worse, in the eyes of the administration, is the deficit. The USTR released their 90 page report on the first 5 years of WTO (see our coverage” Part I, II, III, IV, V, VI, VII, & VIII), Gonzalez has publicly stated on several occasions that American goods are not competitive in China because of high barriers to entry, and despite the stronger RMB… the deficit continues to get bigger… and bigger… and bigger.

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