Economic openness is typically associated with declining fiscal capacity in developing economies. This paper develops the concept of embedded fiscal centralization to explain how openness can instead strengthen central fiscal authority and support targeted redistribution. I argue that China’s WTO accession created incentives for the central government to centralize taxing rights over the expanding private sector, invest in a professionalized, centrally controlled tax bureaucracy, and direct new revenues toward compensating groups hit by large-scale state-sector layoffs. These administrative reforms boosted central revenue from the private sector and funded targeted social protection for laid-off state workers. Using original data and Bartik export shocks, I find that trade-exposed cities experience greater growth in centrally recruited tax personnel and higher central revenue collection, and that cities with larger layoffs receive greater transfers for social protection. The paper shows how economic openness can drive deliberate fiscal capacity building and redistribution in the context of a developing economy.
In this paper, I ask who wins the political contest in China between firms seeking cheaper inputs abroad and protectionist producers in the context of China's WTO accession. I argue that the central government privileges firms under its direct control. Two mechanisms drive this result. First, a top-down fiscal mechanism: because tariff cuts create winners, a revenue-seeking center concentrates reductions on inputs used by more tax-compliant, centrally supervised firms; a theory with firm-specific costs of tax avoidance and a fixed “tariff-cut budget” formalizes this allocation problem. Second, a bottom-up access mechanism: firms under direct control can transmit product-specific preferences through a privileged information channel that bypasses the bureaucratic bottleneck otherwise confronting private firms. I test this argument using firm, product, and industry-level evidence, a novel method to detect corporate tax avoidance, as well as qualitative evidence from fieldwork on the policymaking process. I find that at both the firm and product levels, tariff reductions are concentrated on imports from these privileged and compliant producers, which provide the lion's share of central fiscal revenue.