Taking another road

tauringhuang.

Aug 21st 2008
From The Economist print edition

China finds a way to cut car imports without offending the WTO


LESS than a month after losing its first legal dispute with the World Trade Organisation (WTO), China has introduced a new tax that will achieve much of what it originally wanted, only by another route. Moreover, it is a “green” tax. Who could object to that?

For the past few years China has imposed a special 25% tariff on imported car parts, rather than the usual 10%, if the parts made up more than half of the value of a vehicle. (Imported new cars are also subject to a 25% tariff.) This was to encourage foreign carmakers to use more local suppliers and reduce imports. But America, the European Union and Canada argued that the tariff was against WTO rules. In July the WTO, based in Geneva, agreed.

China may yet appeal. In the meantime, the government has found another way to reduce the flow of expensive automotive imports. On August 13th the government announced a new “green” tax that will come into effect on September 1st. The new tax is meant to reduce fuel consumption and fight pollution. Rather than further raising the tax on fuel, which increased by almost 20% in June, the government is taxing gas-guzzling cars. By an amazing coincidence, most such cars are foreign-made.

Cars with engine capacities larger than 4.1 litres will now incur a 40% sales tax—twice the previous level. Cars with engines between 3 and 4.1 litres will be taxed at 25%, up from 15%. The tax on the smallest cars, with engines smaller than 1 litre, will fall from 3% to 1%. The 8% and 10% taxes on other cars will not change.

The government says the new tax will encourage a shift to more fuel-efficient cars. It will also help Chinese carmakers, as they tend to make cars with engines smaller than 2.5 litres. Foreign carmakers, which make most of the cars with larger engines, will suffer. Imported large-engine cars achieved record sales-growth in the first half of 2008, increasing by 26%, to 80,700 units. Imports of cars with 3-litre engines grew by more than 50%, and imports of sport-utility vehicles were up 79%.

But there were signs of a slowdown even before the new tax. Although the Chinese car market bucked the global trend in the first half, higher fuel costs and tumbling stockmarkets are now putting buyers off. Overall sales are still expected to rise this year by 8-10%, but this is half the level predicted at the start of the year, and far less than struggling foreign carmakers were hoping for.

China’s new tax is canny. It cuts fuel use, reduces imports, benefits local carmakers and may help to improve air quality. It also prevents any more pesky calls from Geneva.