China's Pure Exporter Subsidies

FIW – Working Paper
FIW Working Paper N° 121 April 2013

China 's Pure Exporter Subsidies
Fabrice Defever1 and Alejandro Riaño2

Abstract
One third of Chinese exporters sell more than ninety percent of their production abroad. We argue that this distinctive pattern is attributable to the widespread use of subsidies that require firms to export the vast majority of their output. We study this type of subsidy in the context of a heterogeneousfirm model, and show that it is worse from a welfare standpoint than a regular export subsidy, partly because it increases protection of the domestic market. A counterfactual analysis suggests that eliminating these subsidies would result in a welfare gain for China comparable to that of halving its trade costs. JEL: Keywords: F12, F13, O47 Trade Policy; Export Subsidies; Heterogeneous Firms; China

Authors
University of Nottingham, GEP, CESifo and CEP/LSE. Email: [e-mail] 2 University of Nottingham, GEP, CFCM and CESifo. Email: [e-mail]
1

FIW, a collaboration of WIFO (www.wifo.ac.at), wiiw (www.wiiw.ac.at) and WSR (www.wsr.ac.at)

China’s Pure Exporter Subsidies∗

Fabrice Defever†, Alejandro Ria˜o‡ n December 22, 2012

Abstract One third of Chinese exporters sell more than ninety percent of their production abroad. We argue that this distinctive pattern is attributable to the widespread use of subsidies that require firms to export the vast majority of their output. We study this type of subsidy in the context of a heterogeneous-firm model, and show that it is worse from a welfare standpoint than a regular export subsidy, partly because it increases protection of the domestic market. A counterfactual analysis suggests that eliminating these subsidies would result in a welfare gain for China comparable to that of halving its trade costs. Keywords: Trade Policy; Export Subsidies; Heterogeneous Firms; China. JEL classification: F12, F13, O47.

We thank Daniel

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