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1 Implications of the Euro Sovereign Debt Crisis for China: A CGE Analysis 1 Qin Bao, Xiaoguang Yang (Academy of Mathematics and Systems Science, Chinese Academy of Sciences, Beijing, China, ) Research Highlights The on-going Euro sovereign debt crisis has brought a significant downturn to the European economy, greatly decreasing its growth rate and increasing its unemployment rate. With sharp declining domestic demands in countries in Euro zone or EU, other countries have been troubled through the channel of international trade. As a heavily export-oriented country, China is supposed to be greatly influenced by the debt crisis broken out in Europe who is amongst the largest trading partners. In this paper, a general equilibrium methodology is used to study the impacts of the Euro sovereign debt crisis on China s economy. A multi-sector computable general equilibrium (CGE) model of China is built, which contains 28 production sectors and commodities. The foreign sector is divided into 11 parts, including Germany, France, Italy, UK, other countries of EU, US, Canada, Australia, Hong Kong, Japan and rest of the world. The model is consisting of three main modules, i.e., international trade module, output and demand module and a closure module. In the international trade module, a double-level nested structure is applied following constant elasticity of substitute (CES) functions and constant elasticity transformation (CET) functions. The large-country assumption is used in the international trade module that China s domestic supply and demand will affect the world prices. The proposed model is calibrated based on the social accounting matrix (SAM) in the year The Euro sovereign debt crisis is captured by reducing a premium on exporting prices and importing prices with countries in crisis to reflect the declining of external output and demand in the proposed model. This treatment is in accordance with the basic 1 This study is supported by the National Natural Science Foundation of China under grant No and No Corresponding Author: Qin Bao, contacted information: 1

2 assumption for general equilibrium that prices are endogenously adjusted to achieve market equilibrium. Moreover, the on-going Euro sovereign debt crisis has affected China mainly through its direct influence on imports and exports with European countries as revealed by empirical studies. Taking different evolution paths of the Euro crisis into consideration, nine crisis scenarios are set for simulations, which assume different decreasing levels of the prices for different countries. The results indicate that the crisis will have a significantly negative shock on China s international trade, larger on exports than on imports, and the impacts will be increased with more countries involved in the crisis and more serious of the crisis. The impacts on trade by industrial sector are closely related with characteristics of the sector, i.e., sectors with intensive exports to Europe will have a larger shock. Moreover, the crisis will have a negative impact on China s overall economy and decrease the welfare. By taking a robust test on large-country and small-country assumptions and a simulation on the export rebate policy, the results also shed light on policies: On the one hand, the increasing of the pricing power determination will effectively reduce the negative effect of the crisis. On the other hand, a carefully designed export rebate rate adjustment policy will mitigate the shock of the crisis without greatly increasing the overall tax burden. 2

3 Implications of the Euro Sovereign Debt Crisis for China: A CGE Analysis Qin Bao, Xiaoguang Yang (Academy of Mathematics and Systems Science, Chinese Academy of Sciences, Beijing, China, ) Abstract: Based on a multi-sector computable general equilibrium (CGE) model of China, this paper studies the impacts of European sovereign debt crisis on China s economy under different scenarios, and simulates the effects of corresponding export debate adjustment policy. The results indicate that the crisis will have a significantly negative shock on China s macro economy from both supply and demand side. Moreover, the crisis will decrease China s international trade, more for exports than for imports, and the impacts will be increased with more countries involved in the crisis and more serious of the crisis. The impacts on trade by industrial sector are closely related with characteristics of the sector, i.e., sectors with intensive exports to Europe will have a larger shock. The results also shed light on policies: On the one hand, the increasing of the pricing power determination will effectively reduce the negative effect of the crisis. On the other hand, a carefully designed export rebate rate adjustment policy will mitigate the shock of the crisis without greatly increasing the overall tax burden. Keywords: European Sovereign Debt Crisis; International Trade; Computable General Equilibrium Model; Policy Analysis 1. Introduction The Euro sovereign debt crisis broke out in the late 2009, with downward of the sovereign debt rank of Greek. The crisis was caused by multiple factors, including the real-estate bubbles in U.S. and the subsequent global recession. The countries that are 3

4 most influenced by the crisis are called PIIGS, including Portugal, Ireland, Italy, Greek and Spain. The on-going Euro sovereign debt crisis has brought a significant downturn to the European economy, greatly decreasing its growth rate and increasing its unemployment rate. The two largest economy, i.e., German and France have shown an obvious slowdown. The solution for the Euro crisis has been discussed and policies have been undertaken to solve the crisis. The solution will be a lasting process and it will take a long time for the Europe to recover from the recessions. With sharp declining domestic demands in countries of Euro zone or Europe, other countries in the world have been troubled through the channel of international trade. As a heavily export-oriented country, China is supposed to be greatly influenced by the debt crisis broken out in Europe. Since Europe has been China s largest trading partner, the crisis has brought significant influence on China s economy. For example, the ratio of export to European to the total export has shown an obvious decrease. The lasting crisis will cut down more the European demand, and the solution of the crisis, i.e., a tighter fiscal policy will further decrease the economic demand. Thus it is both important and urgent to study how the Euro crisis will affect China s economy and the possible mitigation policies. In this paper, a general equilibrium methodology is used to study the impacts of the Euro sovereign debt crisis on China s economy. A multi-sector computable general equilibrium (CGE) model of China is built, which contains 28 sectors and 11 foreign accounts. The Euro sovereign debt crisis is captured by a negative premium on exporting prices and importing prices with countries in crisis to reflect the declining of external output and demand in the proposed model. Three crisis scenarios and each with three assumptions for different evolutionary paths of the Euro crisis are set for simulations, which assume different decreasing levels of the prices for different countries. The results indicate that the crisis will have a significantly negative shock on China s whole economy as well as its international trade. The impact will be larger on exports than on imports, and the impacts will be increased with more countries involved in the crisis and more serious of the crisis. Sectors are affected differently, 4

5 and those with intensive exports to Europe will have a larger negative shock in sectoral exports. By taking a robust test on large-country and small-country assumptions and a simulation on the export rebate policy, the results also shed light on policies: On the one hand, the increasing of the pricing power determination will effectively reduce the negative effect of the crisis. On the other hand, a carefully designed export rebate rate adjustment policy will mitigate the shock of the crisis without greatly increasing the overall tax burden. This paper is organized as follows: The literature review is provided in Section 2. The model and the data and scenarios are described in Section 3. The results are presented in Section 4. Section 5 provides the conclusion. 2. Literature Review Ever since the US financial crisis, researchers have been studied the facts and reasons of the crisis. However, since the crisis can be better reflected in financial market, data for stock market, bond market and so on are used to study the transmission and influence of the crisis. For example, Arghyrou and Kontonikas (2012) analyzed the fundamentals and contagion of the EMU sovereign-debt crisis by using the euro area government bond yield data. Chudik and Fratzscher (2012) studied the global transmission of the crisis base on a VAR method. Grammatikos and Vermeulen (2012) studied the transmission of financial and sovereign debt crisis to fifteen EMU countries by using the data of stock prices, CDS spreads and exchange rates. Long et al (2012) studied the impact of U.S. finaical crisis based on the method of functional analysis of variance. These researches provide insights on the contagion process of the Euro sovereign debt crisis, however, the empirical method is not applicable for study the impacts of the crisis on the whole economy. Ziesemer (2010) studied the impact of the credit crisis on developing countries by using an error-correction model. Tagkalakis (2013) used the econometric analysis to study the effects of U.S. financial crisis on fiscal debt in OECD countries. However, as for the Euro crisis, there isn t enough data. Although the Euro crisis has been extensively studied, there are recently few 5

6 studies about the impacts of Euro crisis on China s economy. Strutt and Walmsley (2009, 2011) used a dynamic global CGE model GDyn to study the impacts of the global financial crisis for China. Tuan et al.(2010) studied the impact of global financial crisis on China s energy consumption absed on an input-output model. Huang et al.(2011) studied the impacts of the global financial crisis on off-farm employment and earnings in rural China. However, these researches didn t specify the Euro sovereign debt crisis and lacks a complete analysis of the impacts on the whole economy. Some related literature studied the impacts of other crisis, like the U.S. financial crisis, for example, Glodstein and Xie (2009) studied the spillover effect of the U.S. credit crisis on Asia, however, the analysis wasn t based on models. Fidermuc and Korhonen (2010) analyzed the transmission of global financial crisis in China and India from the perspective of business cycles. The computable general equilibrium (CGE) method has been widely used in economic simulations and policy analysis for China. For example, Liang et al. (2007) used a CGE model to study the carbon taxation policy in China. Diao et al.(2012) studied the global recession and China s stimulus package policy based on a CGE model. Bao et al.(2013) used CGE method to study the impacts of border carbon adjustments on China. In this paper, the CGE method is also used to study the impacts of the crisis on China s economy. Moreover, the export rebate policy of China is analyzed also based on the proposed CGE model. By employing the CGE method to study the impacts of the Euro sovereign debt crisis on China s economy, this paper makes contributions in several aspects: Firstly, this paper studied the Euro crisis based on a CGE method. Considering the Euro crisis is still on-going and there is not enough data for econometric models. Secondly, this paper depicts a whole picture of how the crisis will affect China, including its macro economy, total international trade and sectoral international trade, which provide more policy insights. Finally, the export rebate policy is studied based on the proposed model, which suggests a proper policy undertaken will effectively mitigate the negative impacts of Euro crisis on China. 6

7 3. Model 3.1 Modules of the Model A multi-sector CGE model is built to study the impacts of the Euro sovereign debt crisis on China s economy. There are three main modules in the model, which are described below International Trade Module The impacts of the Euro sovereign debt crisis on China will be transmitted mainly through the international trade channel. To capture the different scenarios of the crisis, the foreign accounts in the international trade module are divided into 11 regions, i.e., Germany, France, Italy, UK, other countries of EU, US, Canada, Australia, Hong Kong, Japan and rest of the world. The structure of international trade module is illustrated in Fig.1, which contains a double nested structure for both exports and imports. Armington assumption (1969) is used which assumes imperfect substitutability between domestic goods and foreign goods. Similarly, the substitutability between foreign goods from different regions is assumed to be imperfect. CHINA Output X Demand Q Total export E Domestic sales D Total import M regional export EE regional import MM FOREIGN ACCOUNTS Fig. 1: Structure of international trade module The international trade module includes both exports and imports. For exports, as shown in Eq. (1), the sectoral output X i is used for export Ei and domestic sales Di following a constant elasticity transformation (CET) function. 7

8 X = ( a E + a D ) ρe ρe 1/ ρe i ei, i dei, i (1) a, where ei a, and de i are the share parameters of exports and domestic goods with a ei, adei, 1 + =. σ = 1 / ( ρ 1) e e is the elasticity between exports and domestic goods. The optimal strategy for export is derived from maximizing output sales PE E + PD D i i i i under the constraint described by Eq. (1), whereas PEi and PDi are the export price and domestic price for commodity i, respectively For import, the sectoral demand Qi is used for import M i and domestic sales Di following a constant elasticity of substitute (CES) function as shown in Eq. (2). Q = ( a M + a D ) ρm ρm 1/ ρm i mi, i dmi, i (2) a, where mi a, and dm i are the share parameters of imports and domestic goods with a mi, admi, 1 + =. σ = 1 / (1 ρ ) m m is the Armington elasticity between the imports and domestic goods. The optimal solution for import is obtained by minimizing the demand expenditures PM im i + PDiDi under the constraint described by Eq. (2), whereas respectively. PM i and PDi are the import price and domestic price for commodity i, EE, The sectoral export is MM is, and import from region s are similarly determined by CET functions and CES functions, respectively. The optimal regional export and import are derived from maximization of the total export sales and minimization of the total import expenditures, respectively. The export prices and import prices are assumed to be determined following a large-country assumption, i.e., China s supply and demand will influence the world PWEis, PWM prices. Formally, sectoral world export price and import price, is for commodity i from region s are determined by Eq. (3) and Eq.(4), and sectoral export price PEEi,s and import price i,s PMM are determined by Eq.(5) and Eq.(6). 8

9 EE is, EEis, MM where and, ( 1+preex ) PWSE * = econ σ ex i s i PWE is, (3) σim PWM is, MM is, = iconi PWSM i * ( 1 +preim s) (4) ( 1 ) PWSE region s, i and PWSM i PEE * -esub = PWE *ER i,s i i,s ( 1 ) PMM = PWM *ER* +mtax is i,s i,s i are the regional export and import for commodity i from (5) (6) are the fixed world export prices and import prices. econi and iconi are the transforming parameters for exports and imports, and σ ex and σ im are the elasticity parameters for exports and imports. ER denotes the foreign exchange rate, while esubi and mtaxi are used to define export rebate rate and import tariff rate. To capture the impacts of different developing scenarios of Euro sovereign debt crisis, parameters preexs and preims are used to define the relative price change for the world fixed prices. It is assumed that the crisis will cause the downturn of global demand, which will increase the prices Production and Final Demand Module The production and final demand module describes the domestic output and demand as shown in Fig. 2. The domestic output function is assumed to be a double-nested production function. At the top level, the output for each sector is composed by different intermediate inputs and value-added composite. The Leontief function is used to assume no substitution amongst different inputs. At the second level, the value-added composite is composed by capital and labor following a CES function. As illustrate by Fig.2, the domestic demand is composed by a linear sum of intermediate input, consumption of households and government as well as capital formation. 9

10 Output X Demand Q Capital CAP Value-added VAD Labor LAB Intermediate input INT Household consumption CD Government consumption GD Capital formation ID Fig. 2: Structure of production and final demand module In the proposed model, there are three types of domestic agents, i.e., households, enterprises and government. Each agent holds equilibrium between their income and expenditure. For households, they get their income from the production factors they possessed, i.e., labor and capital. They also get transfer income from enterprises, government and foreign accounts. The disposable income after taxation will be allocated to consumption and saving according to a fixed marginal prosperity of savings. The households consumption for different commodity i will be determined by an extended linear expenditure system (ELES) function. For enterprises, they gain income from capital returns and government transfers. Their expenditure includes income tax to government, transferring to households and savings. For government, the income sources from various taxes, including production tax, income tax and tariff. The expenditure of government includes transferring, export rebate, consumption and saving. The government consumption on different commodity will also be determined through an ELES function. The gross economy status will be captured by both real and nominal gross domestic product (GDP). The real GDP is calculated from the expenditure side, i.e., the sum of domestic consumption, capital formation and net export. The nominal GDP is calculated from the income side, i.e., the sum of labor income, capital returns and net taxes Closure Module 10

11 The closure module includes the equilibrium of factor markets and commodity markets, as well as the choice of closure conditions. For the two factor market, i.e., labor and capital, it is assumed that both are clear. In the labor market, the total labor is assumed to be fixed, while the wage can be adjusted. In the capital market, it s assumed that the capital return is fixed while the capital using can be adjusted. For commodities, it s assumed that the supply and the demand equals. The closure condition for foreign accounts includes endogenous foreign savings as well as exogenous exchange rate. The foreign savings are the net income of foreign regions considering their exports, imports and transfers with China. For government, the closure condition includes endogenous government surplus or deficit, and exogenous tax rates. Moreover, the neoclassical closure condition is hold in the model whereas the total investment equals the total savings. 3.2 Database and Calibration The proposed CGE model is calibrated based on a social accounting matrix (SAM) of the year The SAM provides a uniform data base for economic activities and allocations. The data sources includes China national input-output (IO) table for 2007 (135 sectors), National Bureau of Statistics of 2008 and General Administration of Customs of P.R. China. The production sectors and commodities are disaggregated into 28 sectors as shown in Table 1. The regional imports and exports data for different sectors are aggregated from the HS classification codes with references of IO table s categories. Table 1 Definitions of sectors and commodities Codes Definitions AGR Agriculture M_C Mining and washing of coal P_G Extraction of petroleum and natural gas MIN Other mining and processing FOD Manufacture of food, beverages and tobacco products TEX Manufacture of textiles FUR Manufacture of textile-apparel, leather, fur, and related products WOD Processing of timber; manufacture of wood, bamboo, rattan, palm and straw products; manufacture of furniture 11

12 PAP Manufacture of paper products and printings OIL Processing of petroleum and nuclear fuel COK Processing of coke RCM Manufacture of raw chemical materials and chemical products MCM Manufacture of medicines CMF Manufacture of chemical fibers RUB Manufacture of rubber and plastics NMM Manufacture of non-metallic mineral products MET Manufacture of metal products EQP Manufacture of general and special purpose machinery TRM Manufacture of transport equipment EEQ Manufacture of electrical and electronic equipment CCO Manufacture of communication equipment, computers and other electronic equipment MEA Manufacture of measuring instruments and machinery for cultural activity and office work OTM Other manufacture ELE Production and supply of electric power and heat power GAS Production and supply of gas WTR Production and supply of water CNS Construction TRP Transportation, storage, post telecommunication and other information-transmission services OSR Wholesale and retail trades The calibration of scale parameters, transform parameters and share parameters are based on the SAM. The parameters of elasticity of substitution in international trade module and production module are shown in Table 2. Table 2 Substitution parameters Sectors/Commodities Between labor and capital Imports Exports AGR M_C,P_G,MIN FOD ELE CNS TRP OSR others Scenarios 12

13 To capture the Euro sovereign debt crisis in China s single-country multi-sector CGE model, it is assumed that the world prices will be shocked as a result of the global demands decreases due to the crisis. By a negative price premium, this assumption will enable to make the crisis endogenously captured and transmitted. This settings well considers the feature of CGE model, i.e., the equilibrium is brought about by the adjustment of prices. Furthermore, it well depicts the transmission channel of Euro crisis to China s economy by its influence in international trade. Three scenarios are set to assumed different evolutionary paths of the crisis, and each with three different influence scales, as shown in Table 3. The assumptions are referred to the actual decreases of export and import prices in both U.S. financial crisis and in the early time of the Euro crisis. Table 3 Scenarios of Euro sovereign debt crisis Scenarios Descriptions A1 preex = -3% and preim = - 1% for Euro zone countries Scenario A A2 preex = -5% and preim = - 3% for Euro zone countries A3 preex = -8% and preim = - 5% for Euro zone countries B1 preex = -3% and preim = - 1% for European countries Scenario B B2 preex = -5% and preim = - 3% for European countries B3 preex = -8% and preim = - 5% for European countries C1 preex = -3% and preim = - 1% for European countries and U.S. Scenario C C2 preex = -5% and preim = - 3% for European countries and U.S. C3 preex = -8% and preim = - 5% for European countries and U.S. 4. Results and Analysis 4.1 Macro economy The impacts of Euro sovereign debt crisis on China s macro economy is illustrated in Fig. 3. In general, the crisis will bring down China s overall economy, with real GDP decreasing from 0.876% to 3.936% in different scenarios. Another obvious impact is that a larger and wider effect of the crisis on global demand will cause a more severe effect. For example, with the same influence scale, i.e., the same decrease in prices, when only Euro zone countries are affected, the impacts on China s GDP is smaller than if European countries are affected, and if both European countries and U.S. are affected, the negative impacts will be the largest. 13

14 0.000 A1 A2 A3 B1 B2 B3 C1 C2 C Fig.3 Impacts of Euro crisis on China s real GDP (%) The impacts of the Euro crisis on China s demand and output are further shown in Fig. 4. The impacts for scenario B and scenario C are similar as shown in Fig. 3, so only impacts for scenario A is illustrated. It can be seen that both total output and total demand will be decreased by the crisis, and the impacts are smaller than on GDP. Both households consumption and government consumption will be decreased, and the formal will be decreased more. However, total investment will be influence a little, which can be omitted. The social welfare will also be influenced by the crisis, under a Hick measurement, the welfare for rural households and urban households will be cut down 44.3 and billion RMB Yuan in scenario A2. 14

15 0.000 total demand total output households government consumption consumption real GDP total investment A1 A2 A Fig.4 Impacts of Euro crisis on China s macroeconomy in scenario A (%) 4.2 International Trade Total Imports and Exports As the Euro sovereign debt crisis affects China s economy mainly through the channel of international trade, the imports and exports will be directly influenced as prices change as shown in Eq. (3) to Eq. (6). The impacts of the crisis on China s international trade are illustrated in Fig. 5. It can be seen that the crisis will cut down China s total export and import, and the negative impacts will be larger on exports than on imports. For different scenarios, the impacts are similar with that on GDP, i.e., a greater and wider evolution of the crisis will cause a larger effect. For example, in scenario A2, B2 and C2, the impacts on total exports will be %, % and %, while on total imports will be %, % and %. It can be seen that when the crisis will transmit to U.S. and affect its demand, the negative effects on China will be much more increased. This is because both EU and U.S. are amongst China s largest trading partners. 15

16 0.000 A1 A2 A3 B1 B2 B3 C1 C2 C total export total import Fig.5 Impacts of Euro crisis on China s international trade (%) The crisis will be transmitted to international trade through prices. The price changes as a result of the crisis are illustrated in Fig. 6 for scenario A2. It can be found that when Euro sovereign debt crisis broke out and cut down Eurozone countries demand, the trade prices between China and Eurozone countries will firstly be decreased. Therefore the average world export price and import price will be reduced by 0.819% and 0.712%, respectively. Under the large-country assumption, China s supply and demand will affect the world prices, and the average export and import prices faced by China s enterprises will be decreased by 0.823% and 0.724%. In this way, the final export price and import price will be cut down by 0.429% and 0.416% respectively. Since the relative decrease of the trade prices are more than domestic prices (-0.212%), the enterprises will choose to substitute domestic sales rather than export, while the domestic demand will prefer more import goods. This explains why the crisis will have a larger negative impact on export than on import. 16

17 0.000 average PWE average PWM average PEE average PMM average PE average PM average PD Fig.6 Impacts of Euro crisis on China s prices in scenario A2 (%) Sectoral Imports and Exports The impacts of the Euro crisis on sectoral imports and exports are similar with the total trade, i.e., the influence will be increased with a wider and larger evolutionary path. Moreover, the impacts will be different for different sectors, as illustrated in Fig. 7. For sector WOD, EQP, OTM, EEQ and CCO, the export will be seriously affected by the Euro crisis, decreasing 3.528%, 3.445%, 3.161%, 3.123% and 3.054% respectively. For sector MIN, M_G and OIL, the import will be greatly hurt by the crisis, at about %, % and %, respectively. 17

18 import export OSR TRP CNS ELE OTM MEA CCO EEQ TRM EQP MET NMM RUB CMF MCM RCM COK OIL PAP WOD FUR TEX FOD MIN P_G M_C AGR Fig.7 Impacts of Euro crisis on China s sectoral export and import in scenario A2 (%) The sectoral characteristics are further analyzed to study the reason why some sectors will be more affected. For exports, sectors with a higher ratio of export to output and a higher ratio of export to Eurozone area to total export will be more influenced. For imports, the influence will be opposite. As illustrated in Fig. 8 and Fig. 9, it can be observed obviously a positive relationship and a negative relationship. In Fig.9, some sectors with a larger import to Euro countries are affected negatively, such as MEA and CCO, this is because these sectors are processing trade and their exports are greatly hurt by the crisis. 18

19 0.000 exports to Eurozone countries/output (%) changes of exports (%) TEX EEQ FUR MEA OTM cco EQP WOD Fig. 8 Impacts of crisis on sectoral export and sector characteristics in scenario A imports to Eurozone countries / demand (%) changes of imports (%) OTM EQP RCM cco TRM MEA MIN Fig. 9 Impacts of crisis on sectoral import and sector characteristics in scenario A2 5. Robust Tests and Policy Implications 5.1 The Large- and Small- Country Assumptions To testify the robustness of the results, the large-country assumption is altered, which is the most important assumption for our model. The assumption is employed considering China s importance in global market to influence the prices. For comparison purpose, three other scenarios are designed as shown in Table 4. Table 4 Scenarios for large- and small- country assumption under crisis scenario A2 19

20 Scenario China s Exports China s Imports A2-BAU Large country assumption Large country assumption A2-T1 Small country assumption Small country assumption A2-T2 Small country assumption Large country assumption A2-T3 Large country assumption Small country assumption The impacts of Euro crisis on China s total exports and imports in different scenarios are compared in Table 5. From the result it can be seen that the assumptions will significantly affect the result. On the one hand, if the small-country assumption is assumed for import, China will play as the import price taker, which means a more decrease in import prices and a positive effect on import. On the other hand, if the small-country assumption is made for export, as a price taker in export, China will face a much more decrease in export prices, which will enlarge the negative impacts of Euro crisis on China s export. Therefore, for scenario A2-T1, i.e., small-country assumption in both export and import, the crisis will have the most negative impact on export and the most positive impact on import. Furthermore the worst case is that when China is a price taker in export and a price determinant in import, as shown in scenario A2-T2. Table 5 Impacts of crisis under different scenarios (%) Scenarios total export total import A2-BAU A2-T A2-T A2-T Export Rebate Policy To mitigate the negative impact of the Euro sovereign debt crisis on China, especially China s export, the export rebate policy is studied. The export rebate policy is flexible and easy to commit, and has been used as the usual tool to coordinate international trade. Three policy scenarios are assumed as shown in Table 6. Table 6 Policy scenarios for export rebate rate esub Scenarios Definition PA esub is increased for each sector PB esub is increased only for manufacturing industries 20

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