Trade policy repercussions: the role of local product space – Evidence from China

Mardi | 2018-02-27
Salle des thèses 16h – 17h20

Laura HERING – Julien GOURDON – Stéphanie MONJON – Sandra PONCET

Compared to most countries, China’s value-added tax (VAT) system is not neutral and makes it less advantageous to export a product than to sell it domestically. However, the large and frequent changes to the VAT refunds which are offered to exporters have led China to be accused of providing its firms with an unfair advantage in global trade. We use city-specific export-quantity data at the HS6-product level over the 2003-12 period to assess how changes in the VAT export tax have affected China’s export performance. Our identification strategy exploits an eligibility rule disqualifying a specific trade regime from the rebates. We find that the VAT rebate system is indeed an effective industrial policy and can improve China’s international competitiveness. Eligible export quantity for a given city-HS6 pair declines by 7% relative to non-eligible exports following a one percent rise in the VAT export tax. We show that the efficiency of this export tax policy is magnified when it applies to products with denser links with the local productive structure. Hence export benefits from VAT rebates are greater for activities for which the necessary capabilities and resources are available.