High trade barriers coupled with stringent tax policies and subsidies that form more protection for Chinese investors are some reasons why exporters in the Latin America and Caribbean (LAC) region continue to find it hard to penetrate the Chinese market and promote trade liberalization.
Although the LAC region is known for its natural resource-intensive sectors, it faces difficulties in diversifying its exports to China as a result of low investments in education and science and technology.
According to an Inter-American Development Bank (IDB) report titled 'Uncovering the Barriers of the China-LAC Trade', "That does not mean, however, that trade barriers do not play a role in these difficulties or that trade policy is powerless... Even more worrying is the fact that the relevance of these barriers often increases with the levels of processing and sophistication of the exports."
The report noted that LAC exporters still face significant barriers to penetrating the Chinese market, which are particularly binding for natural resource-intensive sectors, where LAC has strong comparative advantages and where diversification is more likely to occur. But, the report said the troubles LAC exporters face when accessing the Chinese market go well beyond tariffs and involve other forms of protection in the form of tax policies and subsidies. These two variables are some of the less visible but no less effective barriers, particularly for agricultural goods, the report said.
"Taxation stands out in terms of both its low visibility and its impact on exports."
The report also pointed out that China's median tariff is approximately twice that of the Organisation for Economic Co-operation and Development (OECD) for agricultural goods and more than three times for manufactured goods. Therefore, high tariffs imposed by China have led to foregone revenue in such industries.
In addition, the Chinese imposed other forms of protection along with high trade barriers.
"The extra protection arises mostly from the way the value-added tax (VAT) is levied on local and imported goods, a practice that has its roots in fiscal reform implemented in the early 1990s," the report noted.
And, this extra protection can easily translate into billions of dollars of foregone revenue for exporters, given that the demand for commodities are generally very price sensitive.
"Since, despite WTO regulations pointing to the contrary, this exemption was not extended to imports, exporters face a significantly higher tax burden -- a VAT wedge -- which varies according to the peculiarities of the product's value chain and the level of processing.
"Even though the VAT wedge is about foregone revenue and not expenditure, it falls under the category of agricultural subsidies as defined by the World Trade Organization (WTO) Agreement on Agriculture. It is not, however, the only agricultural subsidy LAC exporters should be worried about.
"The OECD, for instance, listed 24 active programs in China, ranging from payments based on input use to payments based on area, animals or income. They are estimated to have reached US$54.2 billion, or four percent of the country's agricultural output, in 2014. This is substantial but considerably less than the revenue foregone under the VAT exemption, which may be as high as US$1.1 trillion or 13 percent of the agricultural output, assuming it is being fully implemented.
"These figures are particularly worrying given that part of China's WTO accession commitment was to keep trade distorting (or "amber box") agricultural subsidies under 8.5 percent of the output value," the report said.
Xian Smith, Guardian Business Reporter
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