Do demand curves slope down? China's government will soon offer us another test of econ 101 by increases its taxes on energy and resource consumption. Wooden chopsticks will face a 5% higher tax! What will people substitute to?
Free market environmentalits should be excited about this opportunity to study how consumers and producers respond to these higher taxes. Do these economic actors economize on "natural capital" as its price goes up? Peak Oilers should pay close attention to the short term and medium term effects of this tax.
Will a higher Chinese tax encourage U.S exporting firms (who hope to sell to Chinese consumers) to innovate so that their products economize on resource consumption? If this is the case and there is learning by doing within U.S firms, then the Chinese tax could help green our economy! Perhaps globalization does offer some environmental benefits?
March 23, 2006
China Raises Taxes to Curb Use of Energy and Timber
By KEITH BRADSHER
HONG KONG, Thursday, March 23 — The Chinese government announced plans on Wednesday to increase existing taxes and impose new ones on April 1 for everything from gas-guzzling vehicles to chopsticks in a move to rein in rising use of energy and timber and the widening gap between rich and poor.
New or higher taxes will fall on vehicles with engines larger than two liters, disposable wooden chopsticks, planks for wood floors, luxury watches, golf clubs, golf balls and certain oil products.
China's finance ministry disclosed the higher taxes Tuesday night in a statement that was reported Wednesday morning by the official New China News Agency. The statement offered another sign that some senior Chinese officials may be having second thoughts about the rapid growth of privately owned family vehicles, whose sales rose to 3.1 million last year from just 640,000 in 2000.
"In recent years, car ownership in China has grown rapidly and fuel consumption has risen considerably, and this highlights the conflict between supply and demand of oil resources," the statement said. "At the same time, pollution caused by motor cars has become the main source of pollution in big and medium-size cities."
The finance ministry is imposing a 5 percent tax on chopsticks and floor planks, citing a need to conserve timber. Environmentalists around the world have been warning that China's voracious demand for wood was contributing to the clear-cutting of many forests, especially in Southeast Asia.
The production of disposable wooden chopsticks consumes two million cubic meters (70.6 million cubic feet) of timber each year, the ministry said. Plastic chopsticks, which can be washed and reused, will not be subject to the new tax.
A new tax of 10 percent on yachts, golf clubs and golf balls, and a 20 percent tax on luxury watches, is squarely aimed at China's emerging elite of wealthy industrialists and well-connected Communist officials.
China's yacht market is still in its infancy, as military restrictions on ocean traffic and commercial restrictions on river traffic have limited yachts to lakes — although a few entrepreneurs have been able to get around the rules to cruise on the Yangtze River near Shanghai.
Chinese officials have periodically assailed golf, especially when villages and farms are demolished with little compensation to make way for new golf courses.
The biggest commercial effect of the new taxes is likely to fall on sport utility vehicles and luxury sedans. China is reducing its tax on vehicles with engines of 1 to 1.5 liters to 3 percent from 5 percent, while leaving the rate unchanged for slightly more powerful engines. The tax rate will rise to 20 percent, from 8 percent now, for vehicles with engines larger than four liters.
The taxes are likely to affect foreign automakers, especially American manufacturers, more than Chinese companies, which tend to make models with smaller engines.
The big question for automakers is how much of the tax to pass on to consumers, since the tax is collected from the manufacturers. With a week and a half remaining until the new tax takes effect, marketing executives scrambled on Wednesday to assess the impact and no automaker immediately raised prices.
"We are doing the calculations and assessing the impact, and on the other hand watching the actions of our competitors," said Kenneth Hsu, a spokesman for the China operations of Ford Motor, which sell everything from compact cars with 1.6-liter engines to Lincoln Navigator full-size S.U.V.'s with 5.4-liter engines.
Trevor Hale, a DaimlerChrysler spokesman, said the company offered fuel-efficient engines; many Mercedes sedans sold in China have considerably smaller engines than models sold in the United States.
Chinese officials considered and rejected a tax system based on gas mileage instead of engine displacement. That approach would have benefited foreign automakers who possess better technology that permits them to squeeze more power out of the same size engine than purely Chinese manufacturers can.
General Motors China welcomed the new taxes on Thursday but voiced a reservation: "While we believe the new measure will be more environmentally friendly and help lower energy consumption in China, we think it would be more reasonable to base the tax rate on the actual fuel consumption of a vehicle instead of the size of its engine displacement, which is a widely accepted practice worldwide."
Yale Zhang, an analyst in the Shanghai office of CSM Worldwide, a big automotive consulting firm based in the Detroit suburbs, said that Chinese automakers had growing influence in policy debates and that the new rules might lead to a proliferation of vehicles with engines a hundredth of a liter below the thresholds for higher taxes.
Chinese regulators have already imposed stringent fuel-economy regulations that take effect for all vehicles sold after July 1, and have said that they are considering a separate gas-guzzler tax for models that do not comply. The finance ministry's statement on the tax increases on April 1 made no mention of such a gas-guzzler tax, however, and finance ministry officials could not be reached for elaboration.
The finance ministry also announced a modest new tax of a penny (0.1 yuan) a liter for aviation fuel and 2 cents (0.2 yuan) a liter for naptha, solvents and lubricants, but said it would not collect the new aviation fuel tax for now and would collect only 30 percent of the new tax on naptha, solvents and lubricants.
Applying taxes on oil products but not collecting them while prices are high could set a precedent for how China handles taxes on gasoline and diesel. Chinese officials have said repeatedly that they would like to raise fuel taxes to encourage conservation, but do not want to act while world oil prices are close to record levels.
On April 1, China will also lower its tax on motorcycles with engines under 250 cubic centimeters to 3 percent from 10 percent, while leaving the tax unchanged at 10 percent for motorcycles with larger engines.
Western manufacturers like Harley-Davidson are trying to break into the Chinese market with powerful bikes, while Chinese manufacturers like Lifan mainly produce less powerful models.