Compared to most countries, China’s value-added tax (VAT) system is not neutral and makes it less advantageous to export a product than to sell it domestically. However, the large and frequent changes to the VAT refunds which are offered to exporters have led China to be accused of providing its firms with an unfair advantage in global trade. We use city-specific export-quantity data at the HS6-product level over the 2003-12 period to assess how changes in the VAT export tax have affected Chinese export performance. We find that eligible export quantity for a given city-HS6 pair declines by 7% following a one percent rise in the VAT export tax. We show that the efficiency of this export tax policy is magnified when it applies to products with denser links with the local productive structure. Hence export benefits from VAT rebates are greater for activities for which the necessary capabilities and resources are available.

(Joint with J. Gourdon, S. Monjon and S. Poncet.)