Thursday, July 26, 2007

Investors in Labor Intensive Goods: Where is Your Future?

China just made a move that puts Chinese exports of labor intensive goods in a bind. According to this report, “China will curb exports of cheap labor-intensive, low-value-added products to force manufacturers into making higher-quality goods, in a move to narrow the world's largest trade surplus and reduce environmental damage.” If you have invested, plan to invest in labor intensive manufacturing in China, you definitely need to be concerned, and should read this order by the Ministry of Commerce.

Due to spats with western countries over China’s uncomfortably large trade surplus, the Chinese government has started to take measures to ease concerns of the EU and the U.S. This order is ostensibly one of them.

Highlights of this order:

1. Imposed restrictions on more commodities in processing trade for export; the commodities include: plastic/plastic-based products, cloth, furniture, and metal processing

2. “Raise a levy on companies that import metals, plastic and textiles into China for use in products that will in turn be shipped abroad.”

3. “A total of 1,853 types of commodities including copper, lead, zinc and cloth will be added to the restricted category, requiring importers to deposit half of their payable levies including duty and value-added tax at the customs office, according to the trade ministry's statement.”

4. With respect to commodities restricted from import, the importer must pay "standing book deposit=import tariff and VAT of import link of all commodity restricted from import * 50%"

5. With respect to commodities restricted from export, the amount of standing book deposit due equals to the "registered sum of bonded imported materials * (registered sum of commodity restricted from export / registered sum of commodity restricted for processing trade)* composite tax rate * 50%"

6. This order applies to eastern regions /provinces/municipalities only, and they are: Beijing, Tianjin, Shanghai, Liaoning, Hebei, Shandong, Jiangsu, Zhejiang, Fujian, and Guangdong.

7. The order goes into effect on August 23, 2007, and those already acquired permission for processing prior to July 23, 2007 are grandfathered.

So what does this mean to companies in this business of manufacturing low-value-added commodities for export?

My thoughts are:

1. It is time to upgrade your technology so that you bypass the effect of this order.

2. It is time to move out of the statutory eastern region and go westward where the order offers an exception.

3. It is time to rethink your business strategy in light of this order and the new Chinese Corporate Tax Law, which levies a uniform corporate rate of 25% (with exceptions for high tech, alternative energy, or areas related to environmental protection).

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