The Surprisingly Stagnant Export Upgrading in Northeast China: Evidence from VAT Reform

15:30-17:30, Friday, October 25, 2019

I-206, Boxue Building, DUFE

Dr. Yunong LI is an Associate Professor, School of International Business, Southwest University of Finance and Economics. He obtained his Ph.D. in economics from National University of Singapore in 2016. Dr. Li has published more than a dozen of work in Management World, Economic Research Journal, World Economy , among others. His research interests include International Finance, International Trade and Chinese Economy.

China's 2004 value-added tax (VAT) pilot reform introduces a permanent 17% tax credit for fixed investment in manufacturing industries in the Northeast region. Previous studies find the tax credit has positive effects at firm level, e.g., more fixed investment and higher productivity. This paper, however, finds a negative structural effect, i.e., the VAT pilot reform leads to a reduction in export sophistication of Northeast cities relative to other cities in China with a difference-in-difference estimation and the result holds for a battery of robustness checks. The reduction in export sophistication occurs mostly in intensive margin and processing trade and it is more significant for domestic non-SOEs. The paper also confirms a resource-reallocation effect, i.e., capital, labor, and intermediate inputs are directed towards relatively less sophisticated industries. Our findings imply that a general tax credit for fixed investment may have undesirable structural effect and it should be accompanied with more consultation and guidance.