Rebalancing and the Chinese VAT: Some numerical simulation results
AbstractThis paper presents numerical simulation results that suggest that China can both reduce its trade imbalance and receive welfare benefits by switching the value added tax (VAT) regime from the current destination principle to an origin principle. We modify the traditional general equilibrium tax model to capture endogenous trade imbalances along with endogenous factor supply, a fixed exchange rate and a non-accommodative monetary policy structure which supports the Chinese trade imbalance. We calibrate model parameters to 2008 data and simulate counterfactual equilibrium for VAT tax basis switches in which the trade imbalance changes. Our results suggest that given China's trade surplus VAT regime switching to an origin basis can decrease China's trade surplus by over 40%, and additionally increase Chinese and world welfare. This has implications for present G20 discussions on finding ways to adjust global trade imbalances.
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Bibliographic InfoArticle provided by Elsevier in its journal China Economic Review.
Volume (Year): 23 (2012)
Issue (Month): 2 ()
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Web page: http://www.elsevier.com/locate/chieco
Value added tax; Destination basis; Origin basis; Numerical simulation;
Other versions of this item:
- Chunding Li & John Whalley, 2011. "Rebalancing and the Chinese VAT: Some Numerical Simulation Results," NBER Working Papers 16686, National Bureau of Economic Research, Inc.
- F14 - International Economics - - Trade - - - Empirical Studies of Trade
- D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
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