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China Limits Labor Intensive Exports to Ease Trade Tensions, Poverty

The Chinese government plans to impose new restrictions to discourage investment in labor-intensive industries that produce cheap goods for export. Chinese commerce officials say the limits will help ease trade tensions, force factories to make higher end products, and encourage investment in China's poor central and western regions. But, as Daniel Schearf reports from Beijing, experts say the short-term results will be minimal and the new rules will hit hard at some companies, especially Hong Kong investors.

China's Ministry of Commerce new policy, unveiled last month, aims to reduce the growth of low-end, labor-intensive manufacturing.

Starting August 23, companies that import any of over 1,800 commodities including plastics, metals and textiles will have to pay at least a 50 percent deposit on their import taxes. Those products are raw materials for thousands of different types of low-cost manufactured items.

The new rules will add over $1 billion in costs to Chinese exporters and tie up cash that could have been used for making more toys, electronics, clothing and other cheap goods.

At a recent news briefing, Commerce Ministry industry director Wang Qinhua said the policy would likely be expanded later this year, because China must develop its manufacturing base to produce more expensive, high-technology products.

"This is one of the objectives of the adjustment policy," said Wang. "We hope these enterprises can follow the bigger situation and quicken their pace of adjusting their own product mix, increase their own intellectual property rights and develop the high end of their industry supply chain."

The new policy follows a series of restrictions aimed at cooling China's rapidly expanding exports, which have helped drive economic growth.

Goods processed from imported raw materials make up nearly half of China's trade. China's trade in such process goods rose in volume by 17.6 percent in the first half of this year to more than $440 billion.

Hong Kong companies invest in almost half of China's manufacturing and the new policy is likely to hurt them the most.

Jeffrey Lam is a Hong Kong legislative council member representing the General Chamber of Commerce. He says most Hong Kong investors in China will not be able pay the cash deposit required by the new policy.

"That means they have to tie up two, three months of extra cash flow," he said. "It will become an extra burden. And, we hope they can relax this a little bit for the time being, maybe postpone this new regulation until the end of the year, until peak season ends."

Lam says he is lobbying the Chinese government to delay imposing the new rule and to allow companies to use bank guarantees or letters of credit rather than cash deposits.

China's Ministry of Commerce says it will take unspecified measures to ease the transition to the new rules.

Most manufacturers can get exempted from the new rules by moving their operations to China's poor central and western regions.

Lam says some Hong Kong investors may be forced to relocate to cheaper production areas, perhaps even outside of China, but that would take two to three years.

Chinese commerce officials say the export restrictions will help to ease trade tensions over China's massive trade surplus. The surplus in the first six months of this year reached a record $112.5 billion, up more than 80 percent from a year earlier. Major trading partners, such as the United States and the European Union are increasingly frustrated by the surplus.

However, Tim Condon, chief economist for Asia at ING Financial Markets in Singapore, says the trade surplus is a long-term problem.

"The trade tensions are really almost a fact of life. China trade tensions will move from the labor intensive, foot-loose manufacturing kind of products up the value chain just as China's exports are moving up the value chain," he said.

The import of raw materials and export of finished goods employs more 30 million people in China and the new restrictions are likely to cause some job losses as companies tighten their belts to stay competitive.

Condon says that shows China is willing to allow its currency, the yuan, to further appreciate, which some economists say would substantially lower the trade surplus.

"The constraint on the appreciation of the yuan in the past has always been the fear of job loss, that these specific activities, labor-intensive activities, particularly along the eastern seaboard, would de-camp to other places and China would be faced with a lot of unemployment," added Condon. "They appear to have gained confidence that the economy is robust enough to withstand currency appreciation and not have the adverse employment consequences that they feared before."

Many economists and business people overseas say China keeps the yuan unfairly weak, which makes its goods cheap on international markets. After years of pressure from the United States and other trade partners, Beijing has allowed the yuan to gradually strengthen, it is about nine percent higher than it was two years ago.

However, many members of the U.S. Congress say that is not high enough and they have proposed legislation that would impose tariffs on Chinese goods unless the yuan strengthens further.