Access to globally-sourced inputs can bring a variety of benefits to firms, from higher profit margins to product upgrading, but it comes at the expense of protectionist producers. In this paper, we study who wins the political contest in China between firms seeking cheaper inputs abroad and protectionist producers. We argue that the central government privileges firms under its direct control (yangqi) that it relies on for tax revenue. We propose a theory with firm-specific costs for tax avoidance to show the strategic decision revenue-seeking policymakers face in distributing tariff reductions when the development of fiscal capacity is slow. We test this argument using firm, product, and industry-level evidence, a novel method to detect corporate tax avoidance, as well as qualitative evidence from fieldwork on the policymaking process. We find that at both the firm and product levels, tariff reductions are concentrated on imports of these privileged and compliant producers that provide the lion’s share of the central fiscal revenue. In return, these firms are allowed exclusive preference aggregation channels to policymakers – bypassing the bureaucratic bottleneck that confronts private firms – and ultimately lower tariffs on their internationally sourced inputs.
“If it is not right do not do it; if it is not true do not say it.”― Marcus Aurelius, Meditations