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.
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We thank Daniel Xu, Mian Dai, and two anonymous reviewers for their insightful comments and suggestions on this paper. All of the remaining errors are ours. Caixia Shen (the New Type Key Think Tank of Zhejiang Province, China Research Institute of Regulation and Public Policy, Zhejiang University of Finance and Economics) is funded by a significant project of the National Social Science Foundation of China (No. 18ZDA111). Junji Xiao acknowledges support from the Major Project of Key Research Base of Humanities and Social Sciences of Ministry of Education (#18JD790002), during his visit to the Center for Industrial and Business Organization at the Dongbei University of Finance & Economics. Xiaolan Zhou is grateful for the support from the National Natural Science Foundation of China (grant #71603159). The corresponding author's email is email@example.com .
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