Debate: Luxury goods
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China Daily, July 11, 2011
Zhao Ping: Enough reason to reduce import duties
The existing import duty system has not kept pace with the changing consumption pattern of the Chinese people. Thanks to the country's rapid economic growth some medium- and even high-end goods are no longer luxuries; they have become almost necessities for some people. Today, many people from the middle-income group can afford products that not so long ago were considered luxuries.
It is thus important that the government see them as almost necessities or better quality consumer goods. Rather than imposing high import duty on them, the government should strike some of them off the duty list.
A reduction in the tax of some brands that a part of the middle class can afford would encourage more enterprises to import them, and help boost domestic sales. It is abnormal to see some products, which actually are common popular consumer goods overseas, treated as luxury products in China because of the high tax imposed on them.
For example, even though imported cosmetics are defined as luxury products, many people in China buy them and end up paying too high a price. The total tax on imported cosmetics is 57 percent - 30 percent consumption tax, 17 percent value-added tax and 10 percent tariff - which is very high according to international standards.
Besides, a reduction in tax would also attract companies that own some of the so-called luxury brands to open factories in China, which will expand domestic demand and create more jobs. The subsequent increase in their sales would offset the loss in government revenue. And if more foreign brands set up factories in the country, Chinese enterprises can learn from them product design, management and sales techniques, which will lead to a healthy and fair competition among domestic brands.
If the authorities continue with their high import tax policy, it will force some domestic consumers to buy the so-called luxury goods during their trips abroad or in duty free shops at airports.
The marketing and sale of some well-known brands face many problems in China. There are many tiers in the sales chain of a large number of medium- and high-end imported products. Usually, regional agents do not have strong bargaining powers, which allows their overseas manufacturers to keep their prices high to make maximum profit. Some hidden rules such as "slotting allowance" and "feedback", too, push up the prices of these so-called luxury goods.
The government should standardize the business of such goods by promoting a new marketing pattern, including chain stores or factory shops, to reduce the tiers in the sales chain and make them more affordable for consumers.
Some experts oppose any tax reduction on luxury products because they think domestic demand can be boosted only by increasing the sales of domestic goods. What they fail to see, however, is that such a move could harm the competitiveness of domestic corporations and the Chinese economy.
Most of the medium- and high-grade product makers follow the business model of "small profits and quick returns", few of them aim to make high profits through limited sales. So it makes sense to lower the tax on medium- and high-grade goods.
According to economics, every imported product has a "spill effect". Many luxury brands do have their production units in China, but their products are at the bottom end of the "smile curve". What we need, instead, are brands higher up in the curve.
The author is a research scholar with the Chinese Academy of International Trade and Economic Cooperation, affiliated to the Ministry of Commerce. The article first appeared in the People's Daily.
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