China's 2004 value-added tax (VAT) pilot reform in the Northeast region,which changed the VAT from production type to consumption type,introduced a sizable tax credit for fixed investment in manufacturing industries,leading to more investment and higher productivity at firm level.This paper,however,uses difference-in-difference estimation and finds a negative structural effect;that is,the VAT pilot reform leads to a reduction in the export sophistication of Northeast cities relative to other cities in China,and the results hold for a battery of robustness checks.It is found that resources are reallocated towards less-sophisticated industries.As the products with higher export sophistication are more skill and research and development (R&D) intensive,the shortfalls of skilled labor and R&D spending hinder the upgrading process.With a new round of revitalization plans in the Northeast,policymakers should be cautious with similar structural effects and focus on increasing skilled labor supply and R&D investment.
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