Tariff and FDI Liberalization: What to Expect from China's Entry into the WTO?

This paper presents a model that introduces foreign firms' competition in product and factor markets in an otherwise standard tariff liberalization setting. Pressures on factor markets from more advanced foreign firms undermine the competitive position of native enterprises. The final impact on native firms' employment, the country's comparative advantage and factor returns depend on the size and dispersion of the technology differences, the ability of native firms to imitate more advanced technologies and the final tariff structure. The case of China's entry into the WTO reveals the relevance of this feature, as the elimination of the dual economic structure is mandated by the WTO along with a fall in tariffs. The results show that in the short run the required process of FDI liberalization can generate a substantial impact on the factorial distribution of income and may imply a shift toward a more labor intensive mix of production, depending on the degree of technological imitations. However, nothing can be said with respect to the long run pattern of production.