The Impact of Intranational Trade Barriers on Exports: Evidence from a Nationwide VAT Rebate Reform in China
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.
We thank Nikhil Agarwal, Pol Antras, Abhijit Banerjee, Panle Jia Barwick, Arnaud Costinot, Dave Donaldson, Jack Feng, James Harrigan, Marc Melitz, Benjamin Olken, Gerard Padro, Robert Townsend, Jeffery Wang, and lunch, seminar and conference participants at ASSA annual meeting, Cornell, Harvard, MIT, and NEUDC for helpful discussions and comments. All errors are our own. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.