Highlights :

• We investigate how changes in the VAT rebates affect export performance in China.
• We provide evidence of significant repercussions of adjustments in export VAT rebates on China’s export performance.
• The results suggest that the repercussions of a one percentage point change in the VAT rebate are identical whether it corresponds to a positive or a negative change.

 Abstract :
During the last decade, the Chinese government has frequently changed the value added tax (VAT) refund levels offered to exporters. Indeed, China’s VAT system is not neutral, in particular because the exporters may not receive complete refund of the domestic VAT paid on their inputs. This paper investigates how changes in the VAT rebates affect export performance in China. Our empirical analysis relies on export volume data at the HS6 product level over the 2003-12 period. To address potential endogeneity, we exploit an eligibility rule that disqualifies processing trade with supplied materials from the rebates. We find that the adjustments to the VAT rebates have significant repercussions on the exported volume: a one percentage point increase in the VAT rebate can lead to a 7% increase in export volumes. This magnitude allows to better understand the strong resistance of China’s exports amid the global recession.

 Keywords : VAT system | Export tax | Export performance | China

 JEL : F10, F14, O14