State Owned Enterprises (SOEs) and Non Transparent Trade Policies

Abstract

A hot issue in trade negotiations concerns SOEs and state subsidies. Disputes between the US and the EU and the discussion on the recognition of the status of market economy to China are often the epitome of that. In China almost 1/3 of firms are SOEs and loom in almost all industries with relevant or even dominant market shares. SOEs maximize domestic social welfare. When they export or compete with foreign producers at home their objective functions produce equilibria similar to those obtained via specific trade policies such as tariffs. We investigate oligopoly trade with SOEs and find that both dumping and foreclosure of the domestic market may occur explaining home prices significantly higher or lower than export prices. In this sense SOEs could become the vehicle governments may use for disguised trade policies.