China's WTO Accession and Its Effect on State-Owned Enterprises

China's WTO accession has major implications on China's massive state-owned enterprise (SOE) sectors. In China, SOEs as a whole generate substantial losses and absorb majority of financial resources, creating increasing risks for financial crisis. This paper argues that China's WTO agreement has positive effect of reducing the subsidies to SOEs and contributing to the continuing reduction of the SOE sector and the corresponding increase in welfare. We document the history of SOE reform in China as well as its unsatisfactory performance. We hypothesize that an important rationale, among many others, of China's pursuit of WTO membership is to use WTO accession to lock-in the agenda for fundamental domestic reforms, which has been difficult to implement by domestically measures alone. We conduct quantitative analysis of the effects of SOE subsidies on GDP and welfare. The welfare effects of SOE reform induced by the WTO agreement are likely to be much bigger and more significant than the direct gains obtained from tariff reduction. This result highlights the fact that domestic reforms and trade reforms are interlinked. Trade liberalization promotes domestic reforms, often institutional in nature, which may produce substantial welfare gains. These benefits should be added to the direct benefits from tariff reduction.