Key Points:

  • Catalogue lists 2,247 commodity codes, mainly in labor-intensive industry
  • Management institution of processing trade of restricted exports reformed

On July 23, 2007 China’s Ministry of Commerce (“MOFCOM”) and China Customs jointly released a restricted commodities catalogue for the processing trade industry (the “Catalogue”), effective on August 23, 2007. The Catalogue is aimed at lowering export levels for low-value-added products to lessen trade friction and to upgrade the export products structure.

The Catalogue lists 2,247 commodity codes, 1,853 of which are new. These new restricted commodities are mainly in labor-intensive industries, such as plastic materials and products, textile yarn, furniture and piece goods.

More important, the management of processing trade of restricted exports was reformed under the Catalogue. Before the issuance of the Catalogue, companies in the processing trade industry were not required to pay tariff and value-added taxes (“VAT”) when importing raw materials for processing trade. The companies have been required to pay a deposit to be returned after their final products are exported. In actual practice, these deposits have not been paid by all A-type and Btype companies (companies in compliance with laws and regulations concerning export and import).

However, according to the Catalogue, all A-type and B-type companies in Eastern China must pay a deposit if they process trade in restricted products.

Until their final products are exported, these deposits need not be returned. This imposes great pressure on the rotation of funds for these companies, which is intended to control rapidly increasing exports of low-value-added products. Additionally, as of July 23, 2007 MOFCOM is no longer approving any applications for processing trade of restricted products in Eastern China.

Observers believe the Catalogue may be only a beginning of a series of processing trade policies. The government appears likely to make more such moves sooner or later.