Trump miscasts impact on trade of Chinese taxes

Donald Trump loves to tell voters he’s all about getting a better deal for America. It’s a theme he invokes repeatedly when it comes to trade.

In a recent interview with two New York Times reporters, Trump called for a different mind set.

"I do know my subject, and I do know that our country cannot continue to do what it’s doing," Trump said. "It’s very hard for us to do business in China, it’s very easy for China to do business with us. Plus with us, there’s a tremendous tax that we pay when we go into China, whereas when China sells to us, there’s no tax. I mean, it’s a whole double standard."

We wondered, is there a hefty tax when American firms sell in China, while there’s no tax that Chinese firms face when they sell here?

We asked the Trump campaign for background information on this and didn’t hear back.

The trade experts we reached told us there two possible ways to interpret what Trump means by a "tax that we pay when we go into China." He might have meant China’s value-added tax, or VAT, or he might have meant China’s import tariffs. We’ll explore both.

Value Added Tax

This tax is collected at each stage in the production or distribution of a product or service, but with a refund mechanism for VAT paid on purchased units so the final burden falls on the final buyer or consumer. So for example, when a clothing wholesaler sells some shirts to a retailer, the tax is booked on the wholesaler’s mark-up. When the retailer sells the shirt to a customer, the tax is booked again. But the retailer gets a credit back for the tax paid by the wholesaler.

China, along with about 160 other countries including Euro Zone members, has a VAT. The United States does not.

China’s basic VAT is 17 percent, but some items, such as agricultural products, are not taxed at all, and some products face a lower rate of 13 percent.

So in terms of a VAT, Trump has a point. But it isn’t one that has to do with a tax that uniquely raises the price of American goods and services sold in China. By and large, the VAT applies to all sales, regardless of where the product was made. It raises the costs for everybody.

"VAT or not doesn’t make much difference," said John Graham, a professor of international business at the UC Irvine Paul Merage School of Business.

An analysis of challenges in U.S.-China trade relations by the Congressional Research Service, the policy think tank of Congress, makes no mention of China’s value-added tax.

The Office of U.S. Trade Representative’s 2015 report on China does mention China’s VAT, but only in the way the government used VAT rebates to reduce costs for Chinese exporters.

"These practices have caused tremendous disruption, uncertainty, and unfairness in the global markets for some products," the report says, especially for products where China is a leading world producer, such as steel, aluminum and soda ash.

While that allows Chinese manufacturers to sell more cheaply overseas, it doesn’t make it more expensive for any foreign company to compete for sales in China.

For the record, it is worth putting China’s VAT into context. With one exception, countries in the European Union charge a higher rate. Luxembourg’s is the same as China’s, but Germany’s is 19 percent, France’s is 20 percent and Italy’s is 22 percent.

Tariffs

Tariffs are essentially a tax on imports. On this front, China imposes higher rates than does the United States.

Here’s how it breaks down, according to the World Trade Organization:

 

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Agricultural Products

Non-Agricultural Products

US tariffs on Chinese goods sold in the United States

2.5%

2.9%

Chinese tariffs on U.S. goods sold in China

9.7%

5.0%

There are different ways to summarize tariffs. The table above is adjusted for the volume of trade of different goods in each broad category, but regardless of how you cut it, China has higher tariffs than the United States.

However, Trump said Chinese goods faced no tax in the United States. That’s inaccurate. For agricultural goods, the tax is 2.5 percent. For non-agricultural goods, it is 2.9 percent.

"If Trump was referring to tariffs, which are a kind of tax, then it is clearly incorrect that Chinese products come into the U.S. tariff-free," said Joel Trachtman, a trade law specialist at the Fletcher School of Law and Diplomacy at Tufts University.

It’s also worth noting that as a member of the World Trade Organization, China treats all importers the same, except if it has a separate free-trade deal. So, all things being equal, every WTO trading partner pays the same import tariff as the United States. China does have a number of free-trade treaties with many Asian countries, plus ones with Australia, Chile and others.

Julia Ya Qin, professor of law at Wayne State University, told us that it’s not unusual for the United States to have lower rates than China.

"Industrialized countries generally have lower tariffs than developing countries," Qin said. "Hence, countries such as India, Turkey, Argentina have much higher average tariffs than the United States, the EU, Canada, Japan on industrial products. China is somewhere in between the two groups."

Overall, while the United States and others have had trade disputes with China, they don’t hinge on tariffs or taxes.

"Generally, they are not major problems even in most cases worldwide," said Stuart Malawer, professor of law and international trade at George Mason University. Malawer served on the Virginia governor’s trade mission to China. "The real problem are non-tariff barriers. China has a significant number of them. These are primarily regulatory."

A leading example on the regulatory side has to do with beef. In 2014, China used food safety rules to block beef imports.

Malawer reviewed the history of trade disputes between the United States and China and told us that tariffs and taxes "are not an issue between the U.S. and China."

Our ruling

Trump said "there’s a tremendous tax that we pay when we go into China, whereas when China sells to us, there’s no tax." If Trump was thinking of China’s value-added tax, he has something of a point. China has a basic VAT of 17 percent, while the United States has none. However, the VAT applies to most goods sold in China, regardless of where they are made. And the VAT affects domestic producers the same as foreign ones.

If Trump was thinking of import tariffs, he has a different problem. Yes, China’s tariffs are higher than those imposed by the United States, but the Chinese exporters do face a tax when they sell in this country. So in terms of tariffs, Trump is wrong.

No expert or report we found from impartial sources suggested that taxes of any sort presented a challenge to American firms that sell in China. There are problems, but they stem from other things China does.

Whatever tax or tariff Trump had in mind, he either exaggerated the impact on trade or got the U.S. rate wrong. We rate this claim Mostly False.