Tariffs & Value Added Tax

Although the Chinese government has changed many policies and regulations that have historically restricted trade, there are still many barriers that exist. Improvements in lowering tariffs have been achieved, yet on the whole they still remain relatively high. This is due to the state's reluctance to reduce domestic protectionism across the board. For example, large motorcycles that are currently imposed a 60% tariff rate will only drop to 45%, video and audio players and recorders are subject to a 30% duty, and by 2005 passenger vehicle tariffs will only be reduced to 25%.

China Customs calculates, charges, and collects tariffs based on three categories: general rates, most-favored-nation (MFN) rates, and Bangkok Agreement rates. Most-favored-nation rates apply to imports from the U.S. although special duty discounts or exemptions might be obtained through business with the 5 Special Economic Zones, open cities, and foreign trade zones within cities.

Also, rates that fall way below the MFN rates are sometimes applicable to goods recognized by the State as being critical to the growth of important industries. According the WTO regulations, fair valuations of all imports are to be assessed when determining the dutiable value of an imported good. Since China Customs only uses an 8-digit harmonized system of tariff codes as opposed to the more comprehensive 10-digit system, customs officers are granted a great deal of discretion when it comes to classifying goods that determine what tariff will be applied.

China imposes a value-added tax (VAT) and business taxes on top of tariffs to both domestic and foreign enterprises. The VAT is assessed on imports coming into the PRC and goods sold within the country. Conversely, business taxes are collected for providers of services or the transfer of intangible assets. Although WTO regulations stipulate that equal taxes are to be imposed on both domestic and foreign goods and services, it's widely observed that domestic enterprises are overlooked when it comes to collecting taxes.

Similar to tariff duties, discounts and exemptions on VAT rates apply in certain instances. For example if a good is considered a necessity such as fuel, agricultural goods, or a utility, the VAT rate may be reduced from the normal 17% to13%. In addition, small business falling under a certain dollar value in annual sales might only be required to pay a VAT rate of 4 to 6%. Eventually the dual system for VAT will have to be eliminated according to WTO rules.

Imports & Exports

In 2003 rapid growth was registered in foreign trade. The total value of both imports and exports reached $851.2 billion, which marks a 37.1% increase over 2002 figures. The value of imports was $412.8 billion, up 39.9 percent and the value of exports was $438.4 billion, up 34.6 percent. Significant growth was also recorded in imports and exports with China's leading trading partners who include Japan, the United States, the European Union, the Association of Southeast Asian Nations, the Republic of Korea, and Russia, which are listed in order of rank for total dollar value of trade. The following graph illustrates China's imports and exports over the last decade.

Primary exports from China include clothing, accessories, and footwear; textiles; petroleum and petroleum products; and telecommunications and audio equipment. Conversely, chief imports to the PRC include machinery, steel products and other metals, automobiles, synthetics, agricultural chemicals, rubber, wheat, and ships. China's accession to the WTO will make future trade more desirable and less cumbersome. As a result, exports and imports with the PRC are expected to continue to grow.

Foreign Investment

The initial foreign investment policy for China began in 1979 and by 1980 the first Sino-foreign joint venture was established. With the advent of relaxed trade restrictions, foreign direct investment in China has experienced significant growth. China has received the most foreign direct investment the world over for the last 2 years and has experienced essentially nothing of the declining trend in investment since 2000, which affected so many other countries.

The high levels of FDI in China are a direct result of the countries enormous market potential, low labor cost, and abundant supply of natural resources. In 2003, roughly 41,000 foreign investment enterprises (FIE) were approved and established. Contracted foreign capital through FDI stood at $115.1 billion, whereas the utilized foreign capital was $53.5 billion.

Among all the sectors, manufacturing remains the prominent investment industry with the real estate development and social services following. Within the manufacturing sector, electronics and communications facilities manufacturing, oil processing and coke making, and garment and other fiber products manufacturing typically consume a majority of the foreign investment funds. The following chart illustrates foreign direct investment by sector for 2003