The latest State Council executive meeting focused on supporting the development of processing trade. What are the considerations, and what measures will be carried out? Thank you.
Thank you for your questions. Processing trade is a new trade type that has taken shape in the process of China's opening-up. Compared with general modes of trade, its main feature is "putting both ends of the production operation on the world market," which is an effective form of opening economy and international industrial cooperation. In our daily lives, a mass of industrial and consumer goods are the products of global processing trade cooperation. This is related to people's livelihood and employment.
Nowadays, the world economy has been hit hard by the global pandemic, and factors of destabilization and uncertainty have increased significantly. Facing a "two-way squeeze" between demand and supply, processing trade is more quickly and directly affected by the outbreak. On the one hand, export orders are falling. For now, almost all of our trading partners are suffering from the epidemic, international market demand has obviously shrunk, production in major economies has been largely shut down, enterprises' export orders have been delayed or canceled, and new orders have decreased year-on-year. On the other hand, it is difficult to import raw materials and spare parts due to the disrupted global supply chain. China's processing trade imports are mainly intermediate inputs, accounting for more than 80% of the total, coming primarily from neighboring Asian countries. Because of the pandemic, the supply capacity of parts and components in relevant countries has decreased dramatically, which affects the value-added re-export of China's processing trade.
To boost processing trade, the State Council executive meeting on April 7 issued four key measures in a timely manner:
First, we will temporarily waive interests of the deferred tax for domestic sales until the end of 2020. If processing trade companies sell bonded materials or finished products on the domestic market, then in addition to regular import-related taxes, they also need to pay tax-deferred interests. The temporary exemption from April to the end of this year will reduce the costs of enterprises' domestic sales and ease their financial pressure.
Second, we will extend the pilot program of selective taxes on domestic sales to all the comprehensive bonded zones. In special areas under customs supervision, processing trade companies are required to pay import value-added tax and consumption tax when applying for domestic sales. They can choose to pay tariffs for imported materials or finished products. Taking advantage of the policy, enterprises can reduce their taxes autonomously and reasonably. Now the policy has been implemented in 40 special customs supervision zones nationwide, including 24 comprehensive bonded zones. More enterprises will benefit from the expansion of the pilot program to 113 comprehensive bonded zones across China.
Third, we will optimize the structure of processing trade and accelerate the revision of the Catalogue of Encouraged Foreign Investment Industries. Foreign investment enterprises play a vital role in processing trade. At present, the National Development and Reform Commission (NDRC) and the Ministry of Commerce (MOC) have already begun the revision work. In the nationwide version of the catalog, a major change will be the addition of related items about boosting the high-quality development of the manufacturing industry, in order to optimize the industrial structure of processing trade. For the version applicable to the central and western regions, the revision will focus more on enhancing the capacity of the central and western regions and the northeast region to undertake industrial transfers, as well as on improving the regional structure of processing trade.
Fourth, we will shorten the list of prohibited goods in processing trade, and we will remove those no longer characterized as high-energy-consuming, high-polluting and resource-dependent products. Currently, the prohibited list includes products with relatively high energy consumption, pollution and regulatory risks in the production process, such as petrochemical, leather, steel, nonferrous metals and wood pulp with a total of 1,862 10-digit HS (Harmonized System) codes. On the premise of meeting the requirements of environmental regulation, we will narrow down the types of prohibited goods in processing trade and support enterprises in carrying out processing trade.
At present, and for some time in the future, processing trade is still an important way for our country to deeply integrate into economic globalization and utilize the resources of both domestic and international markets. With the most complete manufacturing industry system in the world, China is a fertile ground for the processing trade industry. Next, we will promote the high-quality development of processing trade in three aspects:
First is improving the technical content and added value of processing trade, extending the industrial chain from processing and assembly to technology and brand marketing and promoting the integrated development of manufacturing and service trade. Second, we will support the central and western regions and the northeast region in undertaking gradient transfers to achieve coordinated regional development. Third, we will encourage the processing trade companies in exploring the domestic market, strengthening the connections of production, as well as supply and marketing, and promoting the coordinated development of domestic and foreign trade.