The Wall Street Journal, in its “China Real Time Report”, published an article yesterday that excoriated China for using yet another “trick” to boost its exports. Goodness knows, I don’t hesitate to criticize China – or anybody else – but Beijing isn’t doing anything wrong this time.

China’s crime, according to the WSJ, is that it selectively rebates taxes and duties paid on inputs that go into products that are eventually sold outside China. Some inputs get a full VAT rebate, some get a partial rebate, and some get no rebate. The Journal’s reporter chooses to characterize this as a (presumably unfair) subsidy to the industries that are allowed full rebates. The reporter apparently bases this on a report by Global Trade Alert. I’m not surprised at the reporting, but I am shocked if the folk at Global Trade Alert show such a lack of knowledge of trade law.

This amounts to export management on a grand scale and reinforces a long standing finding from economic history, namely that each major downturn results in governments finding new ways to beggar-thy-neighbor.
~ Global Trade Alert

Rebating a value-added tax is a subsidy, but it is one that is legal under the WTO, the GATT and the WTO agreement on subsidies. Rebates of indirect taxes (which a VAT is) are expressly allowed – at the strong insistance of the United States when the GATT was negotiated in 1947. Countries around the world have been merrily doing it ever since, including U.S. states who can rebate sales taxes on products sold out of state. As a national policy, the United States moved to relying on direct taxes (i.e., individual and corporate income taxes) which cannot legally be rebated for exports. That’s our problem, not China’s. And a good argument for U.S. tax reform.

Rebating of import duties on something that is subsequently re-exported, whether by itself or part of another product, is also legal under world trade law.

In fact, Beijing is unfairly penalizing its exporters – or at least the ones that don’t receive the full refund. The WSJ notes it, but the selective rebates are actually part of an industrial policy, not an export subsidy policy, and are used to encourage development of certain industries over others. This screws up China’s allocation of resources, weakening the Chinese economy, but is likely swamped by all the other industrial policies that China uses.

Beijing stands innocent on this charge. Rebates of customs duties or indirect taxes are not illegal subsidies. Period.