Views on China | Blame the trade war for China’s luxury swoop

China just dealt a blow to the global luxury goods industry. You can blame the trade war for that. The crackdown on the daigou trade — in which tourists, friends and relatives buy high-value products overseas and send them back into the country to avoid China’s hefty sales and import taxes — has sent shares in luxury houses tumbling. After LVMH Moet Hennessy Louis Vuitton SE told investors last week that officials were inspecting such grey imports at Chinese airports, stocks in a host of high-end companies fell by 5 percent or more. The announcement crystallized swirling fears in the industry by putting official confirmation on something that’s been the subject of rumor on Chinese social media for the past week or so.

China now accounts for about a third of luxury sales, and contributed about three-quarters of spending growth in the sector in the eight years through 2016. The question is: Why would officials choose this moment to antagonize its aspirational citizens? The best explanation relates to two aspects of China’s trade tensions with the U.S. 

Firstly, there’s the fact that the daigou trade is vast. Chinese tourists spent about USD762 a head on shopping while overseas in 2017, according to Nielsen Holdings. While that’s just a quarter of their total outlays on holiday, when spread across 131 million trips, it represents about $100 billion of foreign goods being brought in under the counter. If anything, that possibly understates things: A great deal of the daigou trade is done by non-tourists, such as Chinese students in Melbourne buying vitamins and baby formula to send by post to contacts back home.

Even before the current clashes with Washington, President Xi Jinping had made increasing the quantity of goods coming into the country a key objective, with an import expo scheduled in Shanghai next month. Encouraging Chinese consumers to buy more from overseas serves a dual purpose, further narrowing the country’s $350 billion trade surplus with the world and simultaneously nudging it along the road to rebalancing from industrial-led to consumption-led growth.

Of course, searching bags and imposing swingeing sales taxes on people trying to bring whisky, cosmetics and bags through Shanghai airport isn’t going to make that trade disappear overnight. Even after pruning its dizzying list of 1,500 import tariffs in July, China still levies a 17 percent sales tax that’s far higher than rates elsewhere in Asia, as well as special consumption taxes for a range of “sinful” products such as alcohol, tobacco, high-end goods and cars.

Still, any shift in that $100 billion shopping bill from off-the-books daigou imports to official transactions in Chinese shops will serve to narrow the trade surplus. If just a third of the annual total could be made official, the surplus would shrink by 10 percent.

There’s a second-order benefit too. Like the U.S., China has been cutting income taxes to butter up its population for the fight ahead. That’s left it facing an impossible trilemma as it tries simultaneously to increase spending and reduce its deficit against the backdrop of a slowing economy. The reduction in import tariffs makes that worse, cutting a further 60 billion yuan from the budget, according to Deloitte.

If China’s luxury spending could only be brought onshore and formalized, that black hole could be much more easily filled. Sales taxes alone on half of the daigou trade would be sufficient to cover the reduction in import tariffs; add on consumption taxes, which have an array of different rates as high as 56 percent, and the government will be well ahead.

Trying to plug imbalances in China’s fiscal and trade balances by heavy-handed inspections of returning tourists is a clumsy way of doing public policy, and it’s more likely to fail than succeed. While luxury goods are famously inelastic in price — meaning that raising their cost by bringing the trade onshore shouldn’t reduce demand by much — Chinese consumers often favor products brought in from overseas because of perceptions about quality and counterfeiting. That means locally bought equivalents aren’t a perfect substitute for imports.

That’s little consolation to the luxury boutiques of Tokyo, Seoul, Paris, Milan and Hong Kong. David Fickling, Bloomberg