Background
Before 1979 China's foreign trade was exclusively conducted through national foreign trade corporations under import and export plans assigned by the former Ministry of Foreign Trade. With the adoption of the "open door" policy in 1979 China began to reform its foreign trade sector, very gradually decentralising and deregulating control over its foreign trade. With China's WTO accession, China is revising many of the laws governing foreign trade to honour commitments made under the WTO protocol.

At present, the authorities in charge of imports and exports in China include the Ministry of Commerce (MOFCOM), the General Administration of Customs, the State Administration of Foreign Exchange (SAFE), the State Exit and Entrance Inspection and Quarantine Bureau (SEEIQB) and the Administration of Quality Supervision and Inspection and Quarantine (AQSIC).

Foreign trade dealers
The business activities of all enterprises and individuals involved in import and export trade are supervised by MOFCOM. Prior to July 2004, only enterprises approved by MOFCOM were allowed to engage in import and export trade; with the promulgation of the revised PRC Foreign Trade Law on 1 July 2004, such approval is no longer required. Enterprises or individuals wishing to import and export goods or technologies only need to register with MOFCOM (or its local delegates). Where foreign trade dealers fail to register as required, the customs authority may not carry out procedures such as declaration, examination and release of the imported or exported goods.

While foreign-invested manufacturing enterprises may conduct import and export transactions related to their production business (provided that the required registration is carried out with the relevant authority), China does not allow a wholly foreign-owned company specially engaged in import and export business to be set up in China - at least, not yet.

Sino-foreign equity joint venture companies specially engaged in import and export business can, however, be set up, provided that the stringent criteria prescribed by law are met: A foreign party to a proposed EJV specially engaged in foreign trading business must have an average annual volume of trade with China of over US$30 million in each of the preceding three years (or US$20 million if the EJV is to be set up in central or western China). The actual paid-up registered capital of the EJV must be no less than Yn50 million (or Yn30 million if the EJV is to be set up in central or western China). The establishment of an EJV specially engaged in import and export business also requires approval of MOFCOM.

Commodity imports administration
MOFCOM determines lists of goods and technologies subject to import prohibition. Goods with import restrictions are subject to import quotas and/or licence systems implemented by MOFCOM. Goods whose import is restricted on quantity are subject to a quota system. MOFCOM releases from time to time (normally on an annual basis) a list of goods that are subject to quota and/or licence control. Goods subject to quota and/or licence administration can only be imported after a quota and/or licence is obtained from the relevant authorities.

At present, several goods may only be imported by the state or by designated parties. Goods which may only be imported by state-owned trading companies include: grain, vegetable oil, sugar, tobacco, crude oil, processed oil, chemical fertiliser and cotton; and goods which are restricted to designated traders include: natural rubber, plywood, wool, acrylic and steel.

Commodity exports administration
MOFCOM also determines lists of goods and technologies subject to export prohibition. Goods whose export is restricted on quantity are subject to a quota system and some others can only be exported if a licence to do so is obtained. MOFCOM releases from time to time (normally on an annual basis) a list of goods that are subject to export quota and/or licence control.

China prohibits and restricts the export of certain goods and technologies on grounds of public policy or in order to comply with international treaties or agreements. Goods reserved for state trading include, for example, crude oil, processed oil, corn, rice, coal, cotton, silver and silk. Goods reserved for trading only by specially designated traders include tea (green tea, oolong tea) and certain cut steel sheets.

Where export of Chinese goods is subject to quota restrictions in other countries, a passive quota administration applies. The annual export amount of the commodities subject to passive quota management will be decided by the two countries each year in accordance with any bilateral agreements in force. The goods that are currently subject to passive quota management include textiles.

Customs
As a result of WTO accession, China now charges four import tariffs: general tariffs, Most-Favoured-Nation tariffs, preferential tariffs and a special preferential tariff.

China has in recent years made substantial tariff reductions in many sectors. Effective from 1st January 2004, the average import tariff is 10.4 per cent. China has committed to reduce its import tariff to an average of 10 per cent in the year of 2005.

There are special concessions covering tariffs on goods exported from Hong Kong and Macau to China.

For import tariffs, value-added tax (VAT) and consumption tax (but only for some products) are charged. All importers of goods into China must pay value-added tax. The normal VAT rate is 17 per cent, except for certain goods (e.g. cereal and edible vegetable oils, books, newspapers and magazines, tap water, heaters, air-conditioning, hot water, coal gas, liquefied petroleum gas, natural gas, biogas and coal products for residential use) whose import is subject to a 13 per cent rate). All importers of certain selected consumer goods (including tobacco, liquour, cosmetics, skin and hair-care products, expensive jewellery, pearls, jewels and jade, motor cars, fireworks, petrol, diesel oil and motor vehicle tyres) must pay consumption tax. The consumption tax rate varies from 5 per cent to 40 per cent.

Free Trade Zones
In China there are currently 15 free trade zones (FTZs). FTZs are special zones which were established with State Council approval and in which the Customs Office permits special policies involving exceptions to the usual customs procedures. In the FTZs no licences or quotas are required (except for passive quotas) and preferential treatment for import duty and import-related taxes is usually offered.

All kinds of trade and commercial activities conducted between enterprises in FTZs and enterprises outside the zones (but within China) are regarded as foreign trade. The normal import and export rules apply.

Commodity inspection and quarantine
Certain imported or exported commodities are subject to compulsory inspection by state-certified authorities. The State Exit and Entrance Inspection and Quarantine Bureau (or authorised local delegates) carry out such compulsory inspections. Commodities which need not be inspected may nevertheless be inspected upon application by the consignee or the end user.

Export processing trade
Special import and export rules apply to goods imported and exported under export processing trade arrangements involving manufacturing contracts where all of the manufactured goods will be sold outside China. Processing trade involves certain limited manufacturing activities carried out in China using materials supplied from abroad or from elsewhere in China. Processing may be conducted with materials supplied from elsewhere in China (ordinary commission processing) or processing with imported materials (import processing). All processing and assembly contracts signed with foreign companies must be approved by MOFCOM or its local offices.

Generally, no import quota and/or licence is required either for the import of raw materials or for the import of equipment necessary for production under a processing contract if all of the output will be exported. If the finished products are commodities which require an export quota or an export licence, the raw materials or equipment will be released by customs only if evidence of the requisite export quota and/or licence can be produced.

Anti-dumping
Dumping happens when the price of the products exported to a foreign country is less than the price charged for an identical or similar product in the country where the product was manufactured. To determine if a product is being dumped on a foreign market at a price below cost, its price to foreign customers (export price) is compared to its cost or to prices of similar goods in its market of manufacture (domestic price). If the export price is less than the domestic price, the product is being dumped.

Products made cheaply in China and sold cheaply in the UK may be liable for anti-dumping duties. This is also true if a British company sets up a joint venture with a Chinese partner to make a product in China for sale in Europe.

It is expected that there will be a sharp increase in the number of new anti-dumping investigations initiated by the Chinese authorities because of China's accession to the WTO. There are three reasons for the increase:

• as a condition for joining the WTO, China has promised to significantly reduce its levels of tariff protection for imported products which means many Chinese industries will be exposed, perhaps for the first time, to the forces of international competition;

• the urgent need for restructuring of many Chinese state-owned enterprises means that some of these industries may try to seek protection from international competition in order to enhance possibilities for their continued survival;

• Chinese exporters, including for this purpose foreign investors in Chinese industry, have historically been the main targets for anti-dumping actions by the European Union, the United States, Canada and other WTO Member countries.

VAT refund for exporters
Normally only exporters or suppliers for international purchase projects (tender projects financed by international financial institutions such as world bank or foreign government's aids) are eligible to reclaim VAT. However, the relevant regulations are not as straightforward as they seem and not every eligible exporter or supplier can reclaim the 17 per cent VAT. Whether and to what extent VAT can be reclaimed will depend on the type of products they supply or export and only those who export or supply under government-labelled categories of machinery and electronic products can reclaim the full 17 per cent from the tax authorities.

For most of exportable products, eligible exporters or suppliers can only reclaim 13 per cent VAT. For petrol, a 11 per cent VAT can be reclaimed. For other commodities like coal, only a 5 per cent VAT can be reclaimed.

The procedures for reclaiming VAT are very complicated. Most import and export companies hire financial specialists to process the application which is made to designated tax authorities.

Written by DLA. For further information, contact: Janine.Canham@dla.com or tel: (852) 2103 0683 or Christopher.Clarke@dla.com or tel (852) 2103 0688.