Working Paper: NBER ID: w26581
Authors: Jie Bai; Jiahua Liu
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; VAT rebate; China; local protectionism; exports
JEL Codes: F14; F15; O14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| rising local protectionism (F52) | reduction in interprovincial trade (F14) |
| VAT rebate reform (H25) | rising local protectionism (F52) |
| reduction in interprovincial trade (F14) | adverse effects on manufacturing exports (F14) |
| greater exposure to the reform (E69) | reductions in indirect and total exports (F14) |
| political barriers (F55) | hinder domestic trade (F10) |
| increased rebate burden on provincial governments (H23) | block nonlocal goods (H49) |