Rebates: Congress giveth, China taketh away?

Many Americans believe any rebates from tax stimulus will benefit Beijing more than Baltimore and Bakersfield. Here's what some experts say.

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By Parija B. Kavilanz, CNNMoney.com senior writer

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Will China benefit more than the United States from tax rebates given to American consumers?
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The stimulus plan is supposed to help the U.S. economy but many plan on spending it in ways that would send that money overseas.

NEW YORK (CNNMoney.com) -- Some critics are convinced that any tax rebate checks from Congress will go straight to China if Americans take the extra money and splurge at the mall.

But trade experts dismiss that idea as a narrow-minded characterization of the global marketplace.

"To say that the money you spend at the register will go to China ignores all the other segments of the U.S. economy that [the rebates] will benefit," said J. Craig Shearman, with the National Retail Federation (NRF).

Goods from China, which is America's largest source of imports, accounted for a sizeable 14% of all U.S. imports last year, mostly consumer goods that included toys, clothing, footwear and electronics.

Those Chinese-made items are probably what consumers will buy more of with their rebate money.

The proposed $146 billion stimulus package - so far approved only by the House - is designed to stave off a possible recession by lifting consumer spending at home, partly by giving some taxpayers rebates of between $600 to $1,200.

One fair trade proponent - Alan Tonelson, with the U.S. Business and Industry Council - said in a recently published article that Americans should "accept that many of the stimulus' benefits will leak overseas."

That sentiment is echoed by many Americans. Just last seek, one CNNMoney.com reader wrote, "The refund checks [are] a great way to provide stimulus for the Chinese economy. Everybody will run to Wal-Mart or other big box stores and spend their extra cash on products made in China or elsewhere."

But other trade experts take issue with the premise that the rebates are a boon for the Chinese.

"For every dollar spent on a Chinese-made product, only 3 cents goes back to China. The rest stays in the U.S.," said NRF's Shearman.

Shearman said the money is spread out along the supply chain and helps to sustain domestic industries and services such as product research and development, marketing, and distribution.

Since manufacturing represents a much smaller part of overall economic activity, more purchases of imported goods eventually helps supports these service-sector jobs, said Dan Ikenson, associate director with Washington-based Cato Institute's Center for Trade Policy Studies, a libertarian think tank.

"All these are the higher-paying U.S. jobs along the production process, jobs that are good for the economy," he said.

"People who are concerned that China or other countries benefit more than the U.S. from the rebates reflect a myopic view of how the world works," said Ikenson.

Actually, Ikenson said he doesn't believe the stimulus package, in its present form, would even spark economic activity in a meaningful way.

Even if Americans only bought more domestically made products with their rebate checks, it still wouldn't prompt U.S. companies to increase their output and investment, he said.

According to Ikenson, That's because "suppliers know that the uptick in demand is just a short-term response by consumers."

To his point, similar rebates doled out to consumers in 2001 provided only a short-term lift in consumer spending that year.

However, the refunds gave absolutely no boost to retail sales the following year.

Instead, Ikenson believes permanent tax cuts to businesses and consumers would spur economic activity in the longer term.

Shearman of the NRF is more optimistic, thinking the stimulus from the rebates could provide a long-term boost to the retail sector.

He said the product on the shelf is only the end of the pipeline in the economy. As retailers order more products from their suppliers to meet increased consumer demand, wholesalers and distributors will also see their business rev up.

"This effect will go all the way back to the raw materials supplier," Shearman said. "All the workers along the supply chain will have their paycheck guaranteed in the pocket." To top of page

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2014 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2014. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.