BEIJING, China — China’s new plan to slash import tariffs on a wide range of consumer goods promises to boost the prospects of multinationals in the Chinese market, with everything from cashmere to beauty products becoming more affordable to local consumers.
The new policy, which takes effect on December 1, will include hefty cuts to tariffs on 187 imported consumer product categories including fashion and cosmetics. The tax for scarves and cashmere products will fall to 5 percent from 14 percent. Silk items will be 10 percent from 20 percent. Cosmetics, including lipsticks and eye makeup, will be 5 percent instead of 10 percent. On average, the tax rate across consumer goods will drop to 7.7 percent from 17.3 percent.
“People’s consumption demands are ever increasing. [The tariff cuts] will help upgrade the domestic supply system,” read a statement issued by China’s Ministry of Finance, citing the need to help shoppers access quality and specialist products that aren’t widely available locally. At the 19th Communist Party Congress that took place in October, Chinese president Xi Jinping said his government was focused on “the people’s ever-growing needs for a better life” and aimed to improve living standards in the world’s largest consumer market.
High taxes have traditionally pushed up the price of foreign fashion and luxury brands in China, causing consumers to spend less at home and more on trips overseas. This has also led to the rise of grey market “daigou” shopping agents, who purchase goods overseas and sell them back to customers in China, typically making a profit and saving the customer money by circumventing import duties.
“The biggest driver fuelling daigou is the price difference between imported luxury goods in China and luxury goods sold overseas. Lower import duties on luxury items will make the price difference less significant for customers, therefore the whole business will be less lucrative for agents,” said Alice Wong, president of ImagineX Group, a management and distribution group in China that represents luxury brands including Marc Jacobs and Salvatore Ferragamo. Some experts say the tax cuts will help the government curb such practices.
The import tariffs will open the domestic Chinese market to more international brands — which will be able to reduce their retail price in China.
For foreign brands, the move will surely prove a boon. “The import tariffs will open the domestic Chinese market to more international brands — which will be able to reduce their retail price in China. At the same time, this will bring more competition to local Chinese brands and will force them to up their ante,” said Luca Solca, head of luxury goods at Exane BNP Paribas. “Consumer brands are the ones to gain the most. The implication for the luxury and fashion sector is that the trend towards local consumption rising faster than purchases abroad will continue,” he added.
Certainly, increasing domestic consumption is important for the world’s second largest economy as it shifts away from an investment and export-led growth model. Domestic consumption contributed 65.4 percent of GDP in the first three quarters of 2017, according to the National Bureau of Statistics.
"High-end brands typically import their products from Europe and North America, and are therefore more reliant on imports than local competitors and fast-fashion brands like H&M, which have a significant manufacturing presence in China," explained Nainika Singh, consumer analyst at BMI Research. "Luxury brands with operations in China, such as Prada, Versace and those under the control of LVMH, stand to gain a lot from the tariff reduction on apparel."
BMI forecasts that clothing and footwear spend in China will grow strongly by an average of 9.5 percent from 2017 to 2021, from 1,845 billion RMB ($271 billion) to 2,662 billion RMB ($385 billion).
The move is also thought to be a signal to the world, especially the US, that China is opening up its economy. “One could see this as an olive branch that China is extending to the White House — among other things,” said Solca. Indeed, Trump has long complained of unfair trade practices in China and wants to reduce America’s deficit with the country.
The cuts “will help,” said Shane Oliver, head of investment strategy at AMP Capital Investors. “But the main driver of the trade imbalance is that the US spends more than it earns globally, and China does the opposite. Until this ends, the US will remain in deficit.” “The cut is not so much to rebalance trade, but a strategic move to reduce the likelihood of a trade war with the US, which accounted for 18.9 percent of China's total exports from January to September 2017,” added BMI analyst Josh Holmes.
For now, “increasing domestic consumption and improving the well-being of its citizens is a long-term goal of the Chinese leadership,” Solca noted, and foreign brands stand to benefit the most as China’s growing middle-class consumers continue to prioritise not just buying more, but also buying better.