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Introduction
Companies engaged in processing trade (bonded manufacturing) might see their operations affected by the newly-published 2007 Prohibited Catalogue of Processing Trade.
The new list contains a number of products that have been added to the catalogue and are now prohibited from production under processing trade. The 2007 Catalogue, published on April 5 by several Chinese government agencies in Circular No. 17 [2007], will come into effect on 26 April 2007.
This new Catalogue has integrated the previous 3 catalogues (published in Circular No. 105 [2005], Circular No. 63 [2006] and Circular No. 82 [2006]) into a comprehensive, unified whole and will be the only Catalogue in use once taking effect.
Major changes
Over 184 products have been added to the new catalogue including certain types of fertilizers, chemicals, shoes, furs, and stone materials. Certain chemicals, furniture, and other items that were previously prohibited have also been removed from the new catalogue.
Processing trade contracts involving products that have been added to the 2007 catalogue that are approved by the Commerce Department prior to 26 April 2007 are allowed to continue processing trade operations within the contract validity period. Affected processing trade enterprises utilizing the online supervision system may complete their processing trade contracts before 5 April 2008. Enterprises failing to complete the contract before these deadlines will not be granted any time extension.
The new catalogue also applies to processing trade manufacturing in special customs-supervised districts such as bonded areas and export processing zones. However, enterprises established within these zones before 5 April 2007 may be exempted.
Options
The new Catalogue is aimed at managing China's trade surplus with other countries and discouraging industries that are consuming precious natural resources and/or hazardous to the environment. With the view to mitigating the impact of the new prohibitions some companies may wish to review the HS Code used. The Catalogue is based on the 10 digit Harmonized Tariff System (HS) code number of the products. It is important that processing trade companies are employing the correct HS code for their products to avoid any possible unnecessary impact. If economically viable supply-chain re-engineering could be considered this may also result in an HS Code change.
Rule change through lobbying the officials is difficult, as the new Catalogue was jointly issued by several agencies and is not without merit. Customs duty refund on duty-paid imported raw materials is unlikely as there are no implementing provisions and it would contradict the intent of the new prohibition. Companies located inside and outside of bonded zones are impacted, so a manufacturing location move is not a solution to the new rule.
Outlook
China is increasingly using processing trade prohibitions, export VAT refund rates, and export duties to ease frictions with trading partners and to implement domestic economic policies. Changes in processing trade prohibitions, export VAT refund rates and export duties are likely to continue to take place at short notice and they may be imposed on a temporary or permanent basis.
As China moves towards its development goals, companies should expect that processing trade prohibitions, export VAT refund rates and export duties will continue to be used to help steer that development. If sourcing or producing lower technology products, which consume important resources or sensitive items for overseas trading partners, expect to see unfavourable changes. Conversely, if sourcing or producing higher technology goods, including electrical machinery, current policies may well be improved.
Get Your Copy Here
Download our China Customs & Trade Alert: 2007 Prohibited catalogue under processing trade published (pdf file, 347KB) for your reference.
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