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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 University of Nottingham, GEP in its series Discussion Papers with number 12/11.

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Handle: RePEc:not:notgep:12/11

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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, 2013. "Credit Constraints and FDI Spillovers in China," CESifo Working Paper Series, CESifo Group Munich 4313, CESifo Group Munich.
  2. Julien Gourdon & Stéphanie Monjon & Sandra Poncet, 2014. "Incomplete VAT rebates to exporters : how do they affect China's export performance?," Working Papers, CEPII research center 2014-05, CEPII research center.
  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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