What Drives China’s Exports: Evidence from a Domestic Consumption Expansion Policy

Abstract

The relationship between domestic demand and exports has remained the focus of the academic world for a long time. A large body of research has confirmed the promotion effect of international trade on domestic demand. This study uses a difference-in-difference (DID) model to estimate instrumental variables. In addition, we have discussed that China’s “Home Appliances to the Countryside” policy as an instrumental variable for domestic demand as it affects exports through the two-stage least squares (2SLS) method. The empirical results show that expanding domestic demand can significantly promote exports. The internal mechanism is that the subsidy policy stimulates domestic demand, which improves total factor productivity (TFP). TFP could enhance the international competitiveness of enterprises effectively. Furthermore, this study negates the channel that prices decline in promoting export. A series of robustness test policies that promote domestic demand can significantly boost exports. This study provides evidence for the solid complementary relationship between domestic demand and exports in the home appliance industry.