Even though it's not making popular headlines yet, the recently announced export tax rebate changes in China are a huge deal for companies sourcing and exporting from the mainland. According to an article in the Wall Street Journal last week, "China's finance ministry announced that export-tax rebates will be scrapped or reduced on more than 2,000 goods, in the government's latest attempt to address the growing economic and political pressures brought by its massive trade surplus ... Rebates on exported goods of China's 17% value-added tax will be eliminated on 553 categories including aluminum products, salt, cement and fertilizers. The proportion of the VAT that is rebated will be cut on 2,268 types of products including shoes, clothing and plastic goods. The changes are likely to push up the final price of Chinese exports, and follow a similar reduction of tax rebates for steel products announced in May."
Why are these changes so dramatic for companies engaged in China sourcing? Many procurement organizations getting started in China -- or those who are not mired in China trade details -- don’t realize that much (and sometimes all) of the profit of their Chinese suppliers is tied up in the VAT rebate they get back from the government after each container ships. I know of a number of China sourcing deals at the moment which may make less -- or no -- financial sense after the rebate reduction / elimination goes into effect. It may also serve to make such near-shore options as Mexico and Brazil -- not to mention Central / Eastern Europe, India, Vietnam and other supply markets -- far more price competitive as well (though not as attractive as when the dollar was stronger 12-24 months ago).