The Impact of Intranational Trade Barriers on Exports : Evidence from a Nationwide Vat Rebate Reform in China

We exploit a nationwide VAT rebate reform in China to study the impact of intranational trade barriers on exports and exporting firms. As a result of shifting rebate burden, the reform leads to greater incentives of the provincial governments to block the domestic flow of non-local goods to local intermediaries. Consistent with the predictions from a heterogeneous firm model with multiple exporting technologies, we find that local protectionism leads to a reduction in interprovincial trade, more inward-looking sourcing behavior of the intermediaries, and a reduction in manufacturing exports. Private companies with greater baseline reliance on intermediaries are more adversely affected