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Import tariff cuts will lead to lower consumer prices

It’s been almost two months since China cut import tariffs further on nearly 200 consumer products as part of the continuing opening-up of its economy. With the country entering more free trade deals, experts say the new measures will diversify consumer demand but could put pressure on domestic products.

The lure of imported products

According to data published by research company Kantar Worldpanel, 93 percent of Chinese families have purchased imported products at one point or another.

“Across all fast-moving consumer categories, imported products could sometimes account for 15 to 20 percent of all categories,” said Jason Yu, general manager at Kantar Worldpanel Greater China.

Based on statistics released by the Ministry of Commerce, online retail sales reached 7.18 trillion yuan ($1.2 trillion) in 2017, up 6 percentage points from 2016. This, together with further reductions in tariffs, will expand the country’s spending sector even more, experts say.

“We do believe reduction of import tariffs will further encourage consumers to buy imported products because in the consumers’ mind, they are more high quality and have more premium values,” said Yu.

Competition set to increase

Recent reduction will lower the average import tax rate to 7.7 percent on 187 consumer items, ranging from wine, food, and pharmaceuticals to home appliances, clothing, cosmetics and baby products.

The tariffs on popular items such as infant formula has declined from 20 percent to zero; for baby diapers they’ve dropped from 7.5 percent to zero.

But some consumers say they have yet to feel the change.

A mother of two, Maggie Zhou said she often purchases imported products for her children and the family. “I buy a lot of imported baby diapers and wine. As of now, I haven’t seen much change in the prices. It’d be much easier to get the products in China,” said Maggie.

In addition to import taxes, foreign products coming into China are subjected to value added tax (VAT) and consumption tax. With a cut in import tax, the cost of the imports will decrease. But once the product is in circulation, the market will determine the final price.

“The reductions are still relatively recent. But with more products coming into China with lower customs duties and VAT, prices will eventually level off as there will be more choices for consumers and strong competition among importers,” said Professor Zhu Qing at the School of Finance at Renmin University.

Impact on domestic market

As costs for foreign goods decline, trade experts believe the measures can diversify domestic demand by offering more choices for consumers.

Wine consultant Zhao Kesai said the quantity of imported foreign wine has increased since the reduction. “With consumption rates climbing and importers boosting their profits as costs for imports decline, businesses are more capable and willing to import high-end brands. I think this will improve the quality of the imported goods and encourage domestic brands to improve the quality of their products,” said Zhao.

But such increased market access can also lead to challenges.

As an independent cosmetic distributor, Lisa Li said the reduction will have both short- and long-term effects on business.

“Most of my clients prefer foreign brand products. In the long run if prices are the same between foreign and domestic products, it would be harder to obtain new clients, because they could just get the product themselves,” said Li.

With more access to foreign products, expert said this will likely bring domestic brands under pressure to maintain competitiveness.

“Domestic consumers may, on the other hand, be producers who make the very product they later consume. So the customs duties can protect their jobs and protect small businesses from foreign competition,” said Zhu.

With China opening more of its market to the outside world, Zhu believes that in the long run, the inflow of foreign products can encourage domestic brands to improve product quality, thus increasing their competitiveness in the domestic and international markets.