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Competitive Neutrality of State-owned Enterprises in China's Steel Industry: Causal Inference on the Impacts of Subsidies

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  • WATANABE Mariko

Abstract

This study investigates whether subsidies to state-owned enterprises (SOEs) in China's steel industry are distorting competitive neutrality. The Subsidy and Countervailing Measures Agreement of the World Trade Organizations defines ''specific'' and ''harmful'' subsidies as being subject to discipline, because they distort the allocation of resources. During the recession in the steel industry between 2008 to 2015, China produced excessively and exported aggressively at a lower price. This study hypothesizes that subsidies given by local governments to specific SOEs with undefined conditions softened the budget constraints of these SOEs and that the market equilibrium price would have been lower had no subsidy been provided. Using data from the financial statements of listed steel and iron firms and other relevant sources, I find that firms with operating deficits received subsidies that were large enough to compensate for their deficits. This preferential treatment of these specific SOEs induced them to engage in price cutting behavior, harming competitiveness in the market.

Suggested Citation

  • WATANABE Mariko, 2020. "Competitive Neutrality of State-owned Enterprises in China's Steel Industry: Causal Inference on the Impacts of Subsidies," Discussion papers 20014, Research Institute of Economy, Trade and Industry (RIETI).
    • Handle: RePEc:eti:dpaper:20014
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    References listed on IDEAS

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    1. Stefan Lutz & Mario Pezzino, 2010. "Mixed oligopoly, vertical product differentiation and fixed qualitydependent costs," Economics Discussion Paper Series 1015, Economics, The University of Manchester.
    2. WATANABE Mariko, 2015. "Identifying Competition Neutrality of SOEs in China," Discussion papers 15134, Research Institute of Economy, Trade and Industry (RIETI).
    3. Myrto Kalouptsidi, 2018. "Detection and Impact of Industrial Subsidies: The Case of Chinese Shipbuilding," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 85(2), pages 1111-1158.
    4. KAWASHIMA Fujio, 2015. "Competitive Neutrality Principles in Australia: Lessons for the TPP negotiation on disciplines over state-owned enterprises (Japanese)," Discussion Papers (Japanese) 15026, Research Institute of Economy, Trade and Industry (RIETI).
    5. Antonio Capobianco & Hans Christiansen, 2011. "Competitive Neutrality and State-Owned Enterprises: Challenges and Policy Options," OECD Corporate Governance Working Papers 1, OECD Publishing.
    6. repec:bla:econom:v:71:y:2004:i:284:p:671-688 is not listed on IDEAS
    7. de Fraja, Giovanni & Delbono, Flavio, 1990. "Game Theoretic Models of Mixed Oligopoly," Journal of Economic Surveys, Wiley Blackwell, vol. 4(1), pages 1-17.
    8. Haley, Usha C.V. & Haley, George T., 2013. "Subsidies to Chinese Industry: State Capitalism, Business Strategy, and Trade Policy," OUP Catalogue, Oxford University Press, number 9780199773749.
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    Cited by:

    1. Yixuan Duan & Yu Kang, 2022. "Research on Competitive Neutrality of SOEs with Special Functions in China," Sustainability, MDPI, vol. 14(13), pages 1-18, June.

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