China’s policy-makers argued that WTO accession and the deregulation accompanying it would have a beneficial impact on the domestic economy. We exploit cross-sectoral variation in the extent of import tariff reduction and market access to identify the effect on industry and firm-level productivity. The effect on continuing firms is small however we find significant effects on industry-level TFP. These effects are primarily coming through the effect of tariff reduction on domestic prices and the quality of entrants into industry, especially of private firms. This link can be rationalized in the context of a model in which increasing competition following tariff liberalization raises the required threshold of new entrants.