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Price Hikes From China Coming?

...on musical instruments exported from China. Under the previous regime, the 17% value added tax (VAT) that the Chinese government collects on all purchases was not applied to goods destined for export. However, with the passage of new Convention on International Trade in Endangered Species (CITES) rosewood restrictions, exports of products containing rosewood, which includes the vast majority of fretted instruments, will be eligible for only a 4% VAT rebate. As one importer explained, "There's no way the manufacturers in China can absorb this added cost; they have no choice but to pass it on. If the policy stands, expect 10% across-the-board price hikes."

Given China's role as the leading supplier of fretted instruments, the implications of this new tax policy for U.S. retailers and consumers would be significant. Last year, Chinese factories exported more than one million guitars to the U.S., and an additional 600,000 ukuleles, 70% of which contained rosewood. In addition, most Chinese-made pianos contain some rosewood, either in the action mechanism or as decorative veneer.

CITES delegates gathered in South Africa last October, where they voted to significantly tighten regulations on the use of rosewood. The new regulations were prompted by concern that soaring demand for rosewood furniture in China was leading to the decimation of rosewood forests worldwide. Under the new regulatory regime, in order to export, manufacturers must comprehensively document the chain of custody on all raw rosewood lumber, from the stump to their factory, and produce similar verification for all finished goods containing even a tiny amount of rosewood. Guitar makers have been hit hard by the new regulations, given that widespread use of rosewood. Clarinet makers are also challenged, since grenadilla, the only material used for wooden-bodied models, is a rosewood species.

There has been little objection in the music industry to better stewardship of rosewood forests. The implementation of the new rules, however, has drawn sharp criticism. Just 90 days elapsed between the time CITES delegates voted, and 100-plus countries bound by the treaty were tasked with putting the new rules into practice, giving them little time to create appropriate forms and import procedures. The result has been widespread chaos. In the absence of forms or procedures, millions of dollars of raw materials and finished goods have been stranded on loading docks around the world as companies and government officials struggle to determine what constitutes a "legal" rosewood export.

Describing the experience of many instrument makers, C.F. Martin & Co. CEO Chris Martin said, "We have spent countless hours trying to understand the poorly defined and constantly changing requirements generated by this hastily drafted and ill-defined regulation. We have heard the same story from companies and CITES management authorities around the world."

The abrupt shift in China's VAT policy has only added to the confusion. Fender Musical Instruments CEO Andy Mooney commented, "Just as we were seeing the light at the end of the tunnel, mastering the CITES regulations, we get surprised by the new VAT policy." For the near term, Mooney said that Fender would hold the line on pricing of its entry-level Chinese instruments, while exploring alternatives to rosewood, including pau ferro. He added, "Stevie Ray Vaughn's guitar had a pau ferro fingerboard, so it is definitely a viable alternative."

Finding an appropriate substitute for rosewood is still difficult. Rosewood has been a staple raw material for centuries, and tradition-conscious guitar buyers are skeptical of alternative woods like walnut or blackwood. As one instrument maker put it, "We've been using rosewood for a reason. It's a superior material."

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