Comparison Between Uniform Tariff and Progressive Consumption Tax in the Chinese Automobile Industry*

Abstract

This paper studies the protectionist effect of a non‐trade policy — a consumption tax — compared to that of a tariff on the Chinese automobile market. Our empirical findings suggest that both the consumption tax and the tariff can protect domestic automakers’ market shares, but they can only shift a small portion of demand from imported cars to domestic cars. This demand exclusion is caused by the weak substitution between imported cars and domestic cars, and it is the underlying reason for the welfare loss caused by both the tariff and the consumption tax. A change in the consumption tax favorable to domestic manufacturers is equivalent to an additional 28% tariff, beyond the explicit 25% tariff, in terms of its protective effect on domestic manufacturers’ market shares.

Welfare analysis of the subsidies in the Chinese electric vehicle industry*

“…Although China has used other policies, such as a consumption tax, to protect its auto industry (Shen et al . [2021]), the subsidy on EVs could not have served as an effective protectionist policy.…”

“…Our counterfactual analysis suggests that these alternative policies introduce competition to the domestic industry and promote the diffusion of high-quality products. Second, this paper also contributes to the currently sparse literature on the protectionist effect of domestic policy (Miravete et al [2018]; Shen et al [2021]). As the US-China trade war has accelerated, both countries have deployed more concealed protectionist policies to avoid retaliation.…”

“…[2017]; Shen et al . [2021]), we also assume that the annual vehicle driving distance is 17,988 km for all vehiclesand then calculate the externality for a vehicle lifetime of 15 years.…”

“…[2018]; Shen et al . [2021]). As the US‐China trade war has accelerated, both countries have deployed more concealed protectionist policies to avoid retaliation.…”

“…Bai et al [2021] studied environmental policy in different cities of China and found protectionist effects for local brand cars. Shen et al [2021] studied the protectionist effects of a consumption tax in the Chinese auto market that was designed as an abatement policy, and found that the policy protected domestic automakers' market share. Our paper contributes to the empirical evidence in the literature on the protective effects of a non-trade policy on the largest emerging market for EVs.…”