China's New Export Tariffs

Today’s BNA Daily Tax Report includes a story on China’s efforts to reduce its foreign trade surplus. In this case, rather than opening up opportunities for more imported goods, China chose instead to impose an export tariff on steel and steel products. An export tariff, in this case, will likely have the effect of increasing the price of goods manufactured by Chinese teel producers destined for export. Instead of the producer making a free choice to raise the price (if it can), the government makes that choice through imposing and collecting a tax.

Thus, an export tariff has a direct and negative effect on the domestic industry engaged in export activities. The story characterizes this new measure as an attempt to “cool” the Chinese economy. Of course, a government can impose higher taxes on income and do the same thing. However, this measure does not affect all income earners, as only exporters are affected. Domestic sellers are not directly affected, though there may be indirect effects from reduced foreign markets. In the short run, if you have foreign customers, you are suddenly out of luck. You must either raise prices (if you can) or you must accept a lower share of the selling price, ceding the tax to your “government partner”.

This kind of power is problematic for a government. How would you like for the government to have the power to raise your prices to foreign customers? It is important to recognize that our U.S. constitution does not allow it. The Export clause provides: "No Tax or Duty shall be laid on Articles exported from any State." U. S. Const., Art. I, §9, cl. 5. Similarly, the Import/Export clause precludes the states from imposing duties on imports or exports: "No State shall . . . lay any Imposts or Duties on Imports or Exports." U. S. Const., Art. I, §10, cl. 2. Thus, while the Federal government may impose duties on imported goods, neither the federal government nor the states may impose tariffs on exports per se.

We can thank our Southern brothers for the Export Clause. As the Supreme Court explained in United States v. IBM, 517 U.S. 843 (1996),
“As a purely historical matter, the Export Clause was originally proposed by delegates to the Federal Convention from the Southern States, who feared that the Northern States would control Congress and would use taxes and duties on exports to raise a disproportionate share of federal revenues from the South. See 2 M. Farrand, The Records of the Federal Convention of 1787, pp. 95, 305-308, 359-363 (rev. ed. 1966).”

Thus, although the Federal government may cut off your foreign supplies by imposing high duties, it may not cut you off from foreign customers through imposing taxes or tariffs on exports. (It may, however, embargo trade to certain countries, or embargo certain kinds of goods altogether, such as war goods or high technology goods that can be used as a weapon of war. National security is often an exception to the general rules.)

It will be interesting to follow how this proposed measure, which takes effect next month, will have on the volume of steel exports. If higher prices are to result, U.S. steel customers will feel the pinch. But assuming the tax does not produce a sufficient decline in sales to cut the overall revenues, the Chinese government may still be laughing all the way to the bank.

EAM