China VAT cuts boost exports to US despite tariff wars

China’s lowering of VAT in May on aluminium exports to the US and rest of the world has helped contribute to a 37% growth sales (source: Chinese Customs, June 2018). This comes despite the US imposing heavy tariffs on aluminium in March, and a spiralling trade war with China and the European Union.

Since May 2018, the VAT rate on Chinese aluminium production was cut from 17% to 16%. China’s VAT reforms, to boost exports, provide a tax advantage not available to US producers. It has a similar effect to currency manipulation – countries artificially devaluing their currencies to make their exports cheap.

VAT offers exporters to US with fiscal subsidy

Over 160 countries have implemented VAT, a tax on consumers but charged through the production chain. Exports are free from VAT – meaning exporters from VAT countries to the US have a tax advantage over domestic US companies who must pay full corporate income tax.  In 2018, the Trump administration had considered a Border Adjustment Tax (also called a Destination-Based Cash Flow Tax) to counter this benefit. But the risk of falling foul of international tax treaties meant this did not progress.

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