Trade Diversion effects of China`s Vat Export Rebates

The utilization of value-added tax (VAT) export rebates serves as a key component of Chinese trade policy. While existing literature extensively demonstrates the positive impact of these rebates on Chinese exports, the potential negative repercussions for global trade, widely debated in the media, have remained relatively unexplored. This study assesses the trade diversion effects of China's VAT rebates within a "four-way" fixed effects Poisson Pseudo-Maximum Likelihood structural gravity framework spanning 75 countries over the period 2004–2018. The results indicate that, on average, a 1% increase in the rebate leads to a 2.62% reduction in third-country exports. The impact varies significantly at the country level. Wealthier nations with greater trade liberalization and diversified exports at the intensive margin are less susceptible to the effects of China’s export rebate policy. Additionally, there is evidence that countries exporting higher-quality goods experience more significant negative effects. Finally, the negative effects are driven by machinery and equipment sector and intensive margin.