As consumers in China shift to the three O’s (overseas, online, and outlets), high prices for domestically-sold goods have often been blamed. One of the key contributors to high prices has been taxation, and specifically, the combined effect of import duty, VAT, and consumption tax. Observers have patiently waited for tax reductions as a means of boosting domestic demand for retail goods.

On June 1st, new import tariffs went into effect, on a trial basis, for a small set of imported goods categories, including skincare, western style apparel, footwear, and diapers. The rates were, in most cases, cut by half. For apparel, the list was limited to fur coats, cashmere sweaters, wool coats, and tailored suits.

The reason these product categories were targeted is because they have been purchased in rising amounts overseas in recent years. Large price gaps existed with areas outside the mainland. At the same time, consumer awareness and expectations on product quality and safety were rising. The price gap led to basic arbitrage and the formation of a huge grey market where enterprising individuals purchased foreign goods and re-sold them in the China market via Taobao (China’s eBay) or via independent stores on Wechat (China’s What’sapp) at lower prices than charged in mainland stores.

What is the effect of the new rule on China’s shopping centres? In our view it will be limited. Firstly, most of what is available for sale in China’s shopping centres is made in China. Secondly, this tariff adjustment is only on a select group of imported goods. Only a few product categories are affected, which form only a tiny percentage of the overall sales of most retail stores, with the exception of some high-end boutiques.

Import tariffs (duties) are levied only on dutiable value when the goods reach port of entry. This price is much lower than retail value because domestic transportation and distribution costs, as well as wholesale and retail markups, are not included in dutiable value. Meanwhile, other taxes, such as consumption tax and VAT, are levied at a later stage on the final retail price. Therefore, the final effect of a lower import duty is diluted to only a few percent of the final retail price. The effects can be summarised as:

• For skincare products, dutiable value is much lower than retail value. There is little net effect on retail price for this category.
• For diapers, the top priority is safety and quality rather than price. Buyers are likely to continue purchasing these from overseas sources. Some foreign brands are simply not available in the domestic market.
• Most clothing and shoes are made in China.

A change in VAT or consumption tax would have a greater effect on shopping centres than an adjustment to import duties, as would price adjustments made by the retailers themselves. In sum, the effect on China’s shopping centres will be small except for those which have a high proportion of imported, high end-apparel which appear on the tariff reduction list.

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