Trade Liberalization and State-Owned Enterprises: Evidence from Vietnam's Accession to the WTO

The findings of the new New Trade Theory are compelling and elegant, and the predictions have been justifiably held up as a watershed event in international trade. Nevertheless, the simplifying assumptions necessary to generate the results obfuscate key differences in the strategic assets firms bring to bear in lobbying national governments. In this paper, we focus on critically important subset of these assets -- firms that are owned by the government, state owned enterprises (SOEs). To do this, we study trade liberalization in Vietnam, a country transitioning from central planning, after its accession to the World Trade Organization (WTO) in 2007. Using firm-level data, we show that the productivity and size of private firms have a positive effect on tariff reduction pre- and post-accession. These findings confirm the predictions of the Melitz (2003) model regarding firm preferences in international trade negotiations. The opposite is true for state-owned firms, however, whose productivity and size lead to small tariff reductions. Further we show that tax is the mechanism through which SOEs are able to capture the government. The findings demonstrate that previous trade work has overlooked the power of SOEs in emerging markets.