The Impact of Intranational Trade Barriers on Exports: Evidence from a Nationwide VAT Rebate Reform in China

Jie Bai and Jiahua Liu
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Jie Bai: Center for International Development at Harvard University

No 373, CID Working Papers from Center for International Development at Harvard University

Abstract: It is well known that various forms of non-tariff trade barriers exist within a country. Empirically, it is difficult to measure these barriers as they can take many forms. We take advantage of a nationwide VAT rebate policy reform in China as a natural experiment to identify the existence of these intranational barriers due to local protectionism and study the impact on exports and exporting firms. As a result of shifting tax rebate burden, the reform leads to a greater incentive of the provincial governments to block the domestic flow of non-local goods to local export intermediaries. We develop an open-economy heterogenous firm model that incorporates multiple domestic regions and multiple exporting technologies, including the intermediary sector. Consistent with the model’s predictions, we find that rising local protectionism leads to a reduction in interprovincial trade, more “inward-looking” sourcing behavior of local intermediaries, and a reduction in manufacturing exports. Analysis using micro firm-level data further shows that private companies with greater baseline reliance on export intermediaries are more adversely affected.

Keywords: Trade; barriers (search for similar items in EconPapers)
Date: 2019-12
New Economics Papers: this item is included in nep-cna, nep-int and nep-tra
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:cid:wpfacu:373

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