China’s tariff-free economy proposal ‘not feasible’, analysts say

Cissy Zhou

A suggestion from a prominent Chinese political figure that China should scrap all import tariffs to unleash the country’s economic potential is not possible because it is still necessary to protect infant industries that are critical to national security, analysts said.

However, within the context of free trade agreements, like the Regional Comprehensive Economic Partnership (RCEP) - the outlines of which negotiators from 15 Asian-Pacific nations agreed on Monday - China could lower tariffs to zero for many sectors given its ability to compensate with direct subsidies and other means of support, experts said.

President Xi Jinping vowed at the second annual China International Import Expo on Tuesday that Beijing, in general, would continue to “lower tariffs and institutional costs” for foreign firms seeking to do business in China.

But some prominent reformist figures have urged the central government to go further. Huang Qifan, the former mayor of Chongqing in southwest China, is the chief proponent of the idea that Beijing should implement a system of “zero tariffs, zero subsidies, and zero non-tariff barriers”.

China has already cut by more than 30 percentage points, what’s the big deal if we cut more

Huang Qifan

Eliminating all tariffs would create an economic breakthrough for China similar to the one it experienced after the country’s accession to the World Trade Organisation in 2001, said Huang, who is now vice-chairman of the government-backed China Centre for International Economic Exchanges think tank.

“All I’m talking about is a global trend … Over the past 30 years, tariffs have been gradually cut, so zero tariffs are just a matter of time,” Huang said at a recent economic summit in Shanghai. “China’s weighted average tariff rate in 1990 was around 40 per cent, falling to 15 per cent in early 2000, then 7.5 per cent last year. China has already cut by more than 30 percentage points, what’s the big deal if we cut more?”

He added the United States had an average tariff rate of 2.5 per cent.

Huang’s proposal has sparked heated debate among Chinese officials and scholars over its benefits and risks, but his reputation means the idea is being taken seriously. Huang served as mayor of Chongqing municipality between 2010 and 2016 and is credited with engineering an economic boom that saw the city’s gross domestic product (GDP) outperform any other city in the country in his final two years in office.

While two of his bosses, party secretaries Bo Xilai and Sun Zhengcai, were jailed on corruption charges, he went on to serve on the Chinese legislature’s Financial and Economic Affairs Committee before taking his current position.

Tariffs fluctuate all the time but zero tariffs are not feasible at this stage. A lot of domestic companies still need tariffs to protect them

Yu Yongding

Yu Yongding, a fellow at the Chinese Academy of Social Sciences and a former adviser to the People's Bank of China, said Huang’s plan was “idealistic” and “difficult to implement in reality”.

“Tariffs fluctuate all the time but zero tariffs are not feasible at this stage. A lot of domestic companies still need tariffs to protect them, as the primary purpose of a tariff is to protect a country’s infant industries,” Yu said.

Yu’s remarks were echoed by Deborah Elms, executive director at the Singapore-based Asian Trade Centre, who said that certain industries would be unavoidably exposed to foreign competition if tariffs were to drop to zero, making it “really hard” for them to operate successfully.

However, if China were to explore the idea of eliminating all tariffs, the risk would be much lower by doing so in the RCEP context than in the World Trade Organisation context, Elms said.

Fifteen nations from the Asia-Pacific region – the 10 Asean nations plus Japan, China, South Korea, Australia and New Zealand – agreed on the outline of the trade pact on Monday. Full details of the deal, including tariff rates, have not yet been disclosed, but if signed early next year it will be the world’s largest free trade agreement.

India pulled out of the deal at the last minute because it felt concerns related to protecting domestic industries were not adequately addressed.

“It is feasible for China to implement zero tariffs within the context of free trade agreements, as there are a certain proportion of imports with zero tariffs [included in them],” said Su Qingyi, who also a research fellow at the Chinese Academy of Social Sciences.

“But there will be difficulties in implementing it in the agriculture and food processing industries, as these industries are less competitive and [zero tariffs] would have a huge impact on employment.”

Elms said a transition to a tariff-free economy was possible if it was supported by other measures.

“Do you need to have tariffs to protect [domestic industries]? Not necessarily. China is quite good, for example, at subsidies,” she said. “You can subsidise and provide all sorts of things including training capacity and cheap land, some of which are easier to provide than others under existing rules.”

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