Trade Policy as a Promoter of Domestic Policy: The Case of China's SOE Sector and the WTOTianshu Chu, East-West Center Abstract Accessing the WTO involves provisions that include domestic reforms. In
particular, it often implies substantial reduction of subsidies to
state-owned enterprises (SOE). Reforming such policies produces
substantial welfare and productivity benefits that are not included in
traditional studies of WTO accession, leading to underestimation of the
welfare effects of WTO agreements. In this paper we develop a dynamic
general equilibrium model to quantitatively assess the welfare benefit
of reducing subsidies to the SOE sector under both open and closed
capital markets. We calibrate the model to the Chinese economyand to
the provisions on domestic subsidies implied by the Chinese WTO
accession protocol. We find the welfare benefits of reducing the
subsidies to SOE to be substantial. The magnitude of the welfare gains
depends upon the speed of recovery and employment during the
transition. Liberaliing the capital market has small but positive
welfare effect.
Note: This is an earlier version of the paper.
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