Sebastián Claro Trade and FDI Liberalization: What to Expect from Chinas ́s Entrance to WTO? Trade and FDI liberalization: What to expect from China’s entrance to WTO?¤

Trade liberalization episodes are usually analyzed in a horizontal dimension, that is, the movement of resources across sectors due to relative price changes. This perspective underestimates an element present in many liberalization processes: the opening access of foreign ...rms to produce and sell locally. As long there exist productivity di¤erences between native and foreign ...rms and depending on the degree of technological transfers during the liberalization process, the e¤ects on local ...rms of direct competition with better-equipped foreign ones within each industry the vertical dimension may dominate the resource allocation and factor return e¤ects of traditional tari¤ liberalizations. This paper presents a model to evaluate the outcome of a liberalization process in terms of resource allocation and income distribution when a tari¤ reduction is accompanied by FDI liberalization. The framework presented provides a natural setting to answer several questions present in liberalization episodes: What is the rationale for privatizing native state-owned ...rms? How big are the potential short run e¤ects on aggregate employment? Is there a role for ...scal and labor policies in sustaining the reform? The model is used to estimate the e¤ects of China’s entry to WTO, as a fall in tari¤s is expected together with an end to the dual economic structure. Overall, the results show that FDI liberalization will not a¤ect signi...cantly the outcome in terms of the production structure but it will have a signi...cant impact on the winners and losers of the process. (JEL F1, F2) ¤I am grateful to Edward Leamer for comments and criticisms. I have also bene...ted from conversations with Janet Currie, Sebastian Edwards,Arnold Harberger and comments from seminar participants at UCLA. All errors are mine.(email: [email protected]).