China Urged to Cut Export Tax Rebates as Surplus Hits Record

Chinese researchers and policy advisers are calling for targeted cuts to export tax rebates after the country’s trade surplus reached a record $1.2 trillion in 2025, arguing the fiscal savings could be redirected to households and rural incomes. The proposals highlight a growing debate over whether China should continue using broad-based tax relief to support exporters as manufacturing competitiveness strengthens and trade tensions intensify.

Context

China’s export tax rebate system, introduced in 1985 and expanded after the nationwide rollout of value-added tax in 1994, refunds VAT and consumption tax paid by exporters during production and distribution. The system has been a cornerstone of China’s trade policy, with rates raised seven times during the 2008-2009 financial crisis and again during the 2018-2019 trade war with the US to support exporters.

However, the scale of the program has grown dramatically. Export tax rebates totaled 2.1 trillion yuan ($309 billion) in 2025, equivalent to 12.1% of annual tax revenue — the highest share on record, according to Caixin Global.

Key Developments

Zhang Yu, chief economist at Huachuang Securities Co. Ltd., argued that China’s export rebate policy should be reassessed during the 15th Five-Year Plan period (2026-2030) due to shifting industrial competitiveness, suggesting targeted adjustments to create fiscal space for domestic spending.

Beijing has already begun phasing out rebates in key sectors. In December 2024, export rebates for aluminum and copper processing products were eliminated, while rebates for photovoltaic (PV) products and batteries were cut from 13% to 9%. Further reductions followed: PV product rebates were fully eliminated in April 2026, and battery product rebates were lowered to 6%, with complete elimination scheduled for January 2027, as China.org.cn reported.

Bai Ming, a researcher at the Chinese Academy of International Trade and Economic Cooperation, told China.org.cn that the adjustments respond to international concerns about Chinese photovoltaic products, noting that many countries have imposed tariffs. “Canceling export tax rebates helps ease the situation we face in the international market,” Bai said. He added that the policy will phase out unviable enterprises that rely solely on export tax rebates for survival, while supporting competitive firms that can boost added value through innovation.

Luo Weijie, associate professor of economics at Beijing International Studies University, said the changes demonstrate China’s confidence in its photovoltaic and battery companies. “It shows that they can compete independently in the market, considering their significant global share,” Luo explained.

Trade Tensions and Imbalances

China’s record trade surplus has intensified scrutiny from trading partners. The US share of Chinese exports fell to 11.1% in 2025, down from 14.7% in 2024, though transshipments via Vietnam and other Southeast Asian countries have surged. Meanwhile, exports to the EU rose 8.4%, and the EU’s trade deficit with China reached €359.9 billion in 2025.

Eswar Prasad, professor of economics at Cornell University, told ZeroHedge that “China’s staggering trade surplus is simultaneously a symbol of its exporting prowess and the weaknesses in its growth model.”

China has pushed back against criticism. Wang Jun, vice-minister of the General Administration of Customs, said some countries politicize economic and trade issues by restricting exports of high-tech products to China. “Otherwise, we would import more. There is vast room for import growth,” Wang stated.

Analysis and Implications

Cutting export rebates could free up significant fiscal resources — the 2.1 trillion yuan spent on rebates in 2025 represents over 12% of tax revenue. Redirecting even a portion to households could provide meaningful stimulus to domestic consumption, which has remained weak amid a prolonged property sector slowdown.

However, the policy shift carries risks. Exporters, particularly smaller firms, rely on rebates for profitability, and domestic consumption has not yet proven strong enough to replace export demand. As China Briefing noted, the reduced rebates will increase export costs for products like aluminum and copper, potentially reducing their competitiveness in international markets.

Wang Bohua, a consultant at the China Photovoltaic Industry Association, described the shift as a transition “from export tax rebates to a market-driven phase, from involution-style competition to high-quality competition.”

What’s Next

The debate reflects a broader tension in China’s economic model: whether to continue relying on export-led growth or pivot toward domestic consumption. The 15th Five-Year Plan period will be critical in determining this direction. Further rebate cuts are expected, with battery product rebates set for full elimination in January 2027. How trading partners respond — and whether domestic consumption can fill the gap — will shape the outcome of this significant policy recalibration.