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VAT Rebate Policy and Export Performance: A Case Study of China’s Mechanical Goods Industry

ABSTRACT Value-added tax (VAT) rebate policy plays an important role in China’s export growth strategy. In this paper, we extended the existing model by introducing the micro-mechanism of VAT rebates into their original framework. This extended model allows us to investigate the economic effect of VAT rebate policy. Our theoretical model suggests that, in the short term, raising the VAT rebate rate may decrease the price as well as the quantity of exports. To empirically examine our conclusions based on the theoretical model, we employ the provincial-level panel data on China covering the period 2012–2017 to analyze the role of VAT policy on exports from China’s mechanical goods industry. To address the issue of potential endogeneity, we adopt a propensity score matching (PSM) technique. Our empirical findings based on the panel data confirm that VAT rebates had a significantly negative effect on China’s mechanical goods exports. In particular, on average, a one-percentage-point increase in the VAT rebate rate decreases exports by 2.07%. Our results are robust to alternative bandwidths. Areas for future research are also identified.