The Limits of Liberalization: WTO Entry and Chinese State-Owned Firms

Abstract

Does state ownership reduce the effectiveness of trade agreements? We examine the case of China, which is not only the world's largest trading nation but also lends active support to its state-owned enterprises (SOEs), potentially distorting global trade. Using Chinese import data disaggregated by firm ownership, we analyze how state-ownership conditions the response to entry into the WTO. We demonstrate that after WTO entry, tariff cuts have a larger effect on private compared to SOE trade. We then show that state ownership alone does not block the liberalizing effects of the WTO. For most industries, SOEs display a commercial orientation that is similar to private firms. However, where strategic goods targeted by industrial policy hold a large share of bilateral trade, lowering tariffs has no impact on SOE trade. In short, the effect of WTO liberalization depends on the countervailing force of domestic industrial policy, rather than state ownership alone.