How does non-market economy structure work as a trade barrier?

ABSTRACT

This study investigates the effect of a non-market economy structure on the duopoly competition in which a foreign private firm competes with a state-owned enterprise in a non-market economy. By comparing with Singh and Vives (1984) and Matsumura and Ogawa (2012), we find that the non-market economic structure can function as a trade barrier and cause foreign firms to face discriminatory competition. The transition from a non-market economy to a market economy may sacrifice social welfare, which implies no more Pareto improvement.

KEYWORDS:

• Non-market economy
• state-owned enterprise
• mixed duopoly
• trade barrier

JEL CLASSIFICATION:

• P20
• L13
• H42

Disclosure statement

No potential conflict of interest was reported by the author(s).

Correction Statement

This article has been republished with minor changes. These changes do not impact the academic content of the article.

Notes

¹ The US Department of Commerce uses six criteria when determining whether a country is a non-market economy. Two of the six are deeply related to government ownership and control over price and output as follows: ‘(iv) the extent of government ownership or control of the means of production, and (v) the extent of government control over the allocation of resources and over the price and output decisions of enterprises.’ In a non-market economy, considerably and extensively, the government affects market outcomes. State-owned enterprises play the most important role in this process.

² In 2019, state-owned enterprises in China generated 28 ~ 40% of GDP, accounted for 40 ~ 60% of total market capitalization and 55% of total assets. 91 of the 124 Chinese firms listed as Fortune Global 500 are state-owned enterprises. Chinese state-owned enterprises are embedded in the bureaucratic hierarchies of the ruling Chinese Communist Party (Leutert, 2020)

³ Recall that we assume $m_0\ge m_1$.

Additional information

Funding

Funding sources include Chungbuk National University BK 21 programme granted by the ministry of education.