China's 12th Five-Year Plan (5YP) will address a critical period in the country's history, as it aims to develop into a balanced economy in which wealth is more evenly spread among the people and growth is achieved on a sustainable basis. Beijing's new policy objectives are aimed at shifting away from a predominantly export-driven economy to a model in which growth is powered by domestic production and consumption, increased investments are made by Chinese enterprises in strategic sectors overseas in the venturing out push, and smart foreign capital is absorbed into China to develop priority industries at home.
Application of customs duty rates
Import and export duty collection is one of the four fundamental functions of China customs. China's customs duty policy moderates national economy and foreign trade, catalyses structural shifts in the economy, and raises national financial revenue. In accordance with China's commitments to the World Trade Organisation (WTO), China has made great progress in lowering customs duty rates and eliminating non-trade barriers. In 2010, China fulfilled one of its primary WTO commitments to reduce its import duty rates. The average import duty rate is 9.8%. During the 12th 5YP, China will implement customs and trade policies to serve the national economy and social development plan through tariff quotas, interim rates, and free trade agreements. Below are prospective changes that will impact international trade and customs.
Under the 11th 5YP, China established import duty and VAT exemption policies to target necessary basic raw materials and key components used in assembly and production equipment (such as big capacity generator units). These policies will continue in the 12th 5YP. Additionally, ships, automobiles, construction materials, textile, and other key supported manufacturing industries may be granted the aforementioned import duty and VAT exemption policy in respect of raw materials and key components in the 12th 5YP. Basic raw materials and key components needed in energy conservation, next generation information technology, bio technology, and new energy and other strategic emerging industries may also get support through import duty and VAT exemption policies. Machines and equipment needed for strategic emerging industries that are still not available for domestic production may get transitional support in import duty and VAT exemptions.
China may offer import customs duty and VAT exemptions on equipment and machines needed for R&D activities, international service outsourcing, and high and new technology industries.
China may use interim rates to collect export duties on coal, crude oil, fertiliser, and other high energy consumption, high pollution, and resource-related products.
Jewellery, watches, and other luxury goods may see lower import customs duty rates in the future.
Further development of domestic consumption and balancing of the flow of imports and exports will be the main objectives of the 12th 5YP. To increase imports, mitigate trade surpluses and concomitant pressure for the Chinese currency to appreciate, China's import duty rates and consumption tax (CT) rate will likely be reduced on selected products. This will most likely affect luxury goods and other high-value imports. To world renowned brands, this presents not only an opportunity, but also a challenge. With import duty rates and CT rates being reduced, the customs authority will step up its efforts to protect its revenue base by increasing its examination on valuation of imports, particularly those in transactions between related parties, and paying closer attention to royalties related to patent, trademark and other intellectual property.
Modernising of processing trade policy
The Processing Trade Regime accounts for half the volume of China's foreign trade. During more than 30 years of reform and opening up of the Chinese market to the rest of the world, processing trade grew enormously. In 2010, imports and exports under China's processing trades amount to $1.157 billion, representing a year on year increase of 27.3%. This included $740.33 billion in exports – an increase of 26.2%, and $417.43 billion in imports – an increase of 29.5%. The processing trade surplus was $322.9 billion, representing a year on year increase of 22.2% and accounting for approximately 1.76 times of the year's surplus. These figures are extracted from information released by the office of the Central People's Government of China.
Under the 12th 5YP, to accommodate shifts in national industrial structure, the direction of processing trade policy will change. China will refine its policy to stimulate processing trade to expand from assembly processing to more advanced activities such as research and development (R&D), design, core component production and logistics. In the future, single function and simple assembly operations may not get further support through favourable customs duty and VAT exemptions. Re-evaluation and planning ahead on supply chain arrangement will be necessary for processing trade industries.
There should be some amendments and refinement to the current foreign investment industries guides and directories as well as the restricted and prohibited catalogues that pertain to the processing trade regime. China will optimise industrial structures and guide foreign capital to further engage in modern agriculture, high and new technology, advance manufacturing, energy saving, green energy and modern service sectors. The central and western regions of China will see increased investment, which will be driven in part through the amendment of processing trade guides and directories. Accordingly, regionally promoted industries will be adjusted to realise these strategic goals.
Coastal regions will concentrate on stimulating global processing and assembly bases to perform R&D advanced production and service-related functions. Promoting the opening of the service sector, developing international trade in services and attracting international service entities will be of utmost importance to these regions.
The inland regions of China will use different development zones as platforms, use comparative advantages associated with certain resources and labour forces to expand foreign investment industries and actively absorb the migration of international and coastal industries.
China has encouraged processing trade entities to be concentrated in special customs zones. In the future, China may make reforms to increase customs clearance efficiency, optimise the customs regulatory environment to allow reasonable management in special customs zones, and, in general, create a more harmonised trade and customs environment to attract entities into special customs zones.
Special customs zones
Special customs zone integration and development will be a central point to China's opening up and achieving a balanced import/export environment during the 12th 5YP. At present, China has a three level special customs zone system: (1) bonded ports and comprehensive bonded zones at the top; (2) free trade zones (FTZ), export processing zones, bonded logistics centres, and bonded logistics parks as its backbone, and, (3)export supervised warehouses and bonded warehouses as its base and network. These functions and policy facilities are different. Therefore, they have influenced the development of the relevant industries.
During the 12th 5YP, China will further promote the integration, rationalisation and upgrade of special customs zones. Export processing zones have already been granted trade and logistics functions. As such, existing low level special customs zones such as FTZs, export processing zones and bonded logistics parks will have the opportunity to be upgraded to high level special customs zones (such as bonded ports and comprehensive bonded zones). Finally, current restraints on R&D, testing and maintenance business in special customs zones may be open.
Moreover, in the next five years, the approval of the opening of special customs zones may lean towards the central and western region to match the regional development of the promoted industries.
Expansion of free trade agreement network
China has separately signed free trade agreements (FTAs) with Pakistan, New Zealand, Chile, Hong Kong and Macau, Taiwan, Singapore, and Association of Southeast Asian Nations (ASEAN). China is engaging Australia, Peru, Norway, and the Southern African Customs Union (SACU) in talks regarding new FTAs. During the 12th 5YP, China will speed up its FTA strategy, further strengthening economic relationships will major trading partners and intensifying co-operation between countries in the emerging market and developed countries.
Under the 12th 5YP, China will likely remain committed to a strategy of attracting inbound and outbound investing and trading with major trading partners. For various industries and sectors, how to fully utilize benefits from different FTAs, especially tariff concessions, will be of significant importance.
Anti-dumping and countervailing duties
Under the 12th 5YP, China's domestic economy will continue to develop and its home-grown industrial and technological base will expand. An increasingly strong Chinese currency will make the importation of key materials, components and goods more attractive to certain sectors. As such, nascent domestic industries may be threatened or pressured by imports from overseas competitors.
This will lead to an increase in anti-dumping duty and countervailing duty, as well as an increase in non-tariff barriers, which, among other things, take the form of licensing and inspection requirements. Furthermore, as general duty rates continue to fall both as a result of WTO tariff reductions and the implementation of FTAs, Chinese authorities will turn more to antidumping duty and countervailing duty.
Enhancing of export controls and licensing
As China's domestic high technology and R&D capabilities develop and expand in the coming five years, there will be an increase in special licensing around exports of sensitive technology, software, hardware and items with military applications. What will make this development unique is that an increasing number of these restrictions will be home-grown Chinese export controls pertaining to Chinese products and intellectual property.
At present, in 2011, the majority of export controls are of the US or Waseenaar variety. This number of export controls is also likely to increase, as competition between Chinese technology companies increases with other non-Chinese entities.
Upgrade and modernise
As China's economy advances to its next stage of development, there is a greater need to upgrade and modernise its traditional processing trade model, and the related trade and customs policies will have to adapt accordingly. The decrease in reliance on exports, the encouragement of domestic consumption and the moving of domestic Chinese companies up the value chain mean that China will have to rationalise its special customs zone structure, utilise its import duty regime in a strategic manner. To protect its revenue base, it is expected that the Chinese customs authority will strengthen the enforcement of the customs rules. Areas such as valuation and intellectual properties in connection with imports will receive special attention. All these changes will bring both risks and opportunities to businesses.
Key trends of China customs policies |
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Alex Capri KPMG 8th Floor, Prince’s Building 10 Chater Road Central, Hong Kong Tel: +852 2826 7223 Fax: +852 2845 2588 Email: alex.capri@kpmg.com Alex Capri has more than 19 years of international trade related experience, both as a government official and a consultant. Before becoming a customs consultant in 1998, Alex was an import specialist and an executive manager with the Bureau of Customs & Border Protection, in the US. In Asia, he has worked extensively on matters involving customs valuation, tariff classification, free trade agreements (FTA), anti-dumping and countervailing duties and more. In addition, Alex has worked on complex global projects for fortune 100 companies where he coordinated customs planning needs with international tax and transfer pricing strategies. Alex was an adjunct professor in the School of Business and Management at Pepperdine University, in Los Angeles, for five years. He is also the author of Importing into the USA: The Complete Guide to Customs Procedures and has authored numerous articles. He writes for the China Economic Review. |
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Melsson Yang KPMG 38th Floor, Teem Tower 208 Tianhe Road Guangzhou 510620, China Tel: +86 (20) 3813 8612 Fax: +86 (20) 3813 7000 Email: melsson.yang@kpmg.com Melsson Yang handles customs related matters for KPMG Southern China. After graduating from the University of International Business and Economics, Melsson started his career as an officer with China customs. He then moved to the private field, and was responsible for customs operations in one of the well-known telecommunication manufacturers. He also served at leading logistics and supply chain management companies as the regional customs & brokerage manager for Southern China. Melsson advises multinational clients on processing trade, tariff engineering, bonded logistics and supply chain management. His client portfolio includes foreign investment enterprises in industries such as manufacturing, bonded logistics, global sourcing and trading. |
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Cheng Dong KPMG 50th Floor, Plaza 66 1266 Nanjing West Road Shanghai 200040, China Tel: +86 (21) 2212 3410 Fax: +86 (21) 6288 1889 Email: cheng.dong@kpmg.com Cheng is a senior manager of KPMG’s trade and customs practice in Shanghai. Before joining KPMG, Cheng served as the Director of Policy Research in the Shanghai Customs from September 1991 to December 2003. Cheng has extensive knowledge and experience in all major areas of custom duty activities, such as valuation, classification, duty reduction and exemption, duty collection methodology and customs policy implementation study. Since joining KPMG, Cheng has been integrally involved in the analysis and development of resolution strategies for multiple trade and customs issues. The services delivered by him comprise strategic planning, duty saving and industry-specific analysis. Cheng holds a bachelor degree of China University of Politics and Law. |
