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The Stagnant Export Upgrading in Northeast China: Evidence from Value‐added Tax Reform

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Listed:
  • Yan Du
  • Mengkai Yang
  • Jing Li
  • Yunong Li

Abstract

China's 2004 value‐added tax (VAT) pilot reform in the Northeast region, which changed the VAT from production type to consumption type, introduced a sizable tax credit for fixed investment in manufacturing industries, leading to more investment and higher productivity at firm level. This paper, however, uses difference‐in‐difference estimation and finds a negative structural effect; that is, the VAT pilot reform leads to a reduction in the export sophistication of Northeast cities relative to other cities in China, and the results hold for a battery of robustness checks. It is found that resources are reallocated towards less‐sophisticated industries. As the products with higher export sophistication are more skill and research and development (R&D) intensive, the shortfalls of skilled labor and R&D spending hinder the upgrading process. With a new round of revitalization plans in the Northeast, policymakers should be cautious with similar structural effects and focus on increasing skilled labor supply and R&D investment.

Suggested Citation

  • Yan Du & Mengkai Yang & Jing Li & Yunong Li, 2020. "The Stagnant Export Upgrading in Northeast China: Evidence from Value‐added Tax Reform," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 28(4), pages 101-126, July.
    • Handle: RePEc:bla:chinae:v:28:y:2020:i:4:p:101-126
    DOI: 10.1111/cwe.12341
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    References listed on IDEAS

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    1. Guo, Yue Mei & Shi, Yun Rui, 2021. "Impact of the VAT reduction policy on local fiscal pressure in China in light of the COVID-19 pandemic: A measurement based on a computable general equilibrium model," Economic Analysis and Policy, Elsevier, vol. 69(C), pages 253-264.
    2. Jiancai Pi & Daqiang Song, 2020. "The Threshold Effect of Factor Price Distortion on Technological Content of Exports: Evidence from China," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 28(6), pages 51-77, November.

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