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Incomplete VAT rebates to exporters : how do they affect China's export performance?

  • Julien Gourdon
  • Stéphanie Monjon
  • Sandra Poncet

During the last decade, the Chinese government has frequently changed the value added tax (VAT) refund levels offered to exporters. Indeed, China's VAT system is not neutral, in particular because the exporters may not receive complete refund of the domestic VAT paid on their inputs. This paper investigates how changes in the VAT rebates affect export performance in China. Our empirical analysis relies on export volume data at the HS6 product level over the 2003-12 period. To address potential endogeneity, we exploit an eligibility rule that disqualifies processing trade with supplied materials from the rebates. We find that the adjustments to the VAT rebates have significant repercussions on the exported volume: a one percentage point increase in the VAT rebate can lead to a 7% increase in export volumes. This magnitude allows to better understand the strong resistance of China's exports amid the global recession.

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Paper provided by CEPII research center in its series Working Papers with number 2014-05.

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Date of creation: Feb 2014
Date of revision:
Handle: RePEc:cii:cepidt:2014-05
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  1. Fabrice Defever & Alejandro Riaño, 2012. "China's Pure Exporter Subsidies," CEP Discussion Papers dp1182, Centre for Economic Performance, LSE.
  2. Paul Krugman & Martin Feldstein, 1989. "International Trade Effects of Value Added Taxation," NBER Working Papers 3163, National Bureau of Economic Research, Inc.
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  7. Chen, Chien-Hsun & Mai, Chao-Cheng & Yu, Hui-Chuan, 2006. "The effect of export tax rebates on export performance: Theory and evidence from China," China Economic Review, Elsevier, vol. 17(2), pages 226-235.
  8. repec:wyi:journl:002196 is not listed on IDEAS
  9. Fisman, Raymond & Wei, Shang-Jin, 2001. "Tax Rates and Tax Evasion: Evidence from 'Missing Imports' in China," CEPR Discussion Papers 3089, C.E.P.R. Discussion Papers.
  10. Kalina Manova & Zhihong Yu, 2012. "How Firms Export: Processing vs. Ordinary Trade with Financial Frictions," NBER Working Papers 18561, National Bureau of Economic Research, Inc.
  11. Lohmar, Bryan & Gale, H. Frederick, Jr., 2008. "Who Will China Feed?," Amber Waves, United States Department of Agriculture, Economic Research Service, June.
  12. Chandra, Piyush & Long, Cheryl, 2013. "VAT rebates and export performance in China: Firm-level evidence," Journal of Public Economics, Elsevier, vol. 102(C), pages 13-22.
  13. Peter M. Morrow & Loren Brandt, 2013. "Tariffs and the Organization of Trade in China," Working Papers tecipa-491, University of Toronto, Department of Economics.
  14. Upward, Richard & Wang, Zheng & Zheng, Jinghai, 2013. "Weighing China’s export basket: The domestic content and technology intensity of Chinese exports," Journal of Comparative Economics, Elsevier, vol. 41(2), pages 527-543.
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