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China's Pure Exporter Subsidies

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  • Fabrice Defever
  • Alejandro Riaño

Abstract

One third of Chinese exporters sell more than ninety percent of their production abroad. We argue that this distinctive pattern is attributable to a wide range of subsidies that provide incentives to these “pure exporters.” We propose a heterogeneous-firm model in which firms exporting all their output receive an ad-valorem sales subsidy. Using microdata on manufacturing firms matched with custom transactions for the years 2000-2006, we measure sizable differences in productivity and paid taxes between pure exporters and domestic firms and between pure and regular exporters, in line with the predictions of our model. Embedding a pure-exporter subsidy in a two-country general equilibrium environment, we show that this instrument is worse from a welfare standpoint than a standard export subsidy, partly because it increases protection of the domestic market. A counterfactual analysis suggests that eliminating these subsidies would result in a welfare gain for China comparable to halving its trade costs.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 4054.

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Date of creation: 2012
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Handle: RePEc:ces:ceswps:_4054

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Keywords: trade policy; export subsidies; heterogeneous firms; China;

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Cited by:
  1. Natasha Agarwal & Chris Milner & Alejandro Riaño, . "Credit Constraints and FDI Spillovers in China," Discussion Papers 11/21, University of Nottingham, GEP.
  2. Gourdon, Julien & Monjon, Stéphanie & Poncet, Sandra, 2014. "Incomplete VAT rebates to exporters : how do they affect China's export performance?," Economics Papers from University Paris Dauphine, Paris Dauphine University 123456789/13784, Paris Dauphine University.
  3. Theresa M. Greaney & Yao Li, 2013. "Trade, Foreign Direct Investment and Wage Inequality in China: A Heterogeneous Firms Approach," Working Papers, University of Hawaii at Manoa, Department of Economics 201306, University of Hawaii at Manoa, Department of Economics.

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