How preferential trade agreements address market distortions from state enterprises

7. How do PTAs deal with the issue posed by state enterprises as providers of government support?

While the issue posed by SEs in the marketplace has often been presented as a competitive neutrality issue, whereby SEs receive more subsidies and other forms of government support than their private competitors, SEs may also be providers of support themselves, often acting as intermediaries between the government and the beneficiaries of support. In this respect, the OECD work on industrial subsidies has documented instances in which SEs can be providers of support (Annex A). To address this issue, there are three different types of obligations imposed on SEs that can be found in existing PTA, which regulate their behaviour or practices, as well as discipline their conduct in relation with downstream or upstream companies.

The first obligation prohibits both SEs and SOEs to provide NCA to other SOEs when causing adverse effects; this regulates subsidisation occurring between SEs at different levels of production (i.e. a SE located upstream in the value chain providing inputs at below-market rates to another SE located downstream in the value chain) or in different markets (i.e. a state bank providing loans to another SE at below-market rates). The second and third obligations, namely the obligation to act in accordance with commercial considerations as well as of non-discrimination, apply to SEs in their relationships with both state and private enterprises.1 Unlike the first obligation, these two obligations are not specifically geared towards the provision of subsidies by or through SEs, although subsidies granted by SEs to downstream or upstream firms may be captured by the “commercial considerations” obligation. This disciplines more generally the conduct and practices of SEs, which must be market-based and consistent with the principle of competitive neutrality when purchasing or selling goods or services. Only the CPTPP, the Australia-Peru FTA, the USMCA, the United Kingdom-New Zealand, and the United Kingdom-Australia FTA combine provisions related to both the first obligation prohibiting NCA and the second cluster of obligations. Interestingly, some of these agreements also deal with the issue posed by transnational subsidies (Box 4).

Box 4. A few preferential trade agreements deal with the issue of transnational subsidies

Transnational subsidies are an emerging concern in international trade, prompted in part by China’s investment practices in third countries, notably through its Belt and Road Initiative. They challenge the traditional subsidy scenario where a government subsidises firms operating within its jurisdiction. Instead, subsidies flow from the originating country to support firms active in other jurisdictions, leading in turn to distortions in third country markets where the goods are exported. Various jurisdictions have recently taken action to counter the distortive effects of transnational subsidies.¹

Some PTAs discipline transnational subsidies involving SEs, given their potential significance in the transnational subsidies chain both as providers and recipients of subsidies. The Australia-Peru, the USMCA, and the United Kingdom-Australia PTAs are cases in point.² Under these PTAs, the activities of a Party’s SE that cause adverse effects in the market of a non-Party to the agreement are subject to the same substantive disciplines, namely the prohibition of NCA, the obligation to act in accordance with commercial considerations, and the non-discriminatory obligations. These activities are also subject to procedural rules, including transparency requirements and dispute resolution under the PTA. These disciplines have the potential to go a long way in addressing concerns about the role of SOEs in transnational subsidisation and other distortive activities in third countries.

¹ The European Union has recently countervailed transnational subsidies based on its basic anti-subsidy Regulation. In addition, the Foreign Subsidies Regulation captures and addresses transnational subsidies distorting mergers, public procurement, and greenfield investments in the internal market. In a similar vein, the United States have enhanced, improved, and strengthened the enforcement of anti-subsidy countervailing laws, by eliminating a former prohibition of countervailing transnational subsidies, aiming to address their distortive effects.

² See Article 16.2(1) footnote 9 of the Australia-Peru FTA, Article 22.2(1) of the USMCA, and Article 18.2(1) footnote 9 and Article 18.7 of the United Kingdom-Australia PTA.

7.1. Specific provisions disciplining subsidies provided by state enterprises

The disciplines related to the provision of NCA by both SEs and SOEs to other SOEs included in the CPTPP, the Australia-Peru FTA, the USMCA, the United Kingdom-New Zealand, and the United Kingdom-Australia FTA seem to address a wide range of subsidies channelled through SEs, such as grants, debt forgiveness, preferential loans and guarantees on terms more favourable than those commercially available, equity investment inconsistent with what private investors can offer, as well as the provision of goods or services on more favourable terms than those commercially available. These disciplines would, for instance, capture situations where a state bank or state financial institution provides below-market financing or where a state utility supplies electricity or gas at below-market rates to energy-intensive state manufacturing firms. Similarly, such disciplines may deal with instances involving the selling of inputs (e.g. steel, aluminium, cement, etc.) at below-market prices by a state industrial firm to another SE located downstream in the value chain and manufacturing intermediate or final products.2 In the case of the USMCA, support provided by an SE through the purchase of goods on terms more favourable than those commercially available to the SE manufacturing the good is also covered.3

By envisaging specific provisions disciplining subsidies provided by SEs to other SEs, the five PTAs mentioned above capture instances where certain SEs act as intermediaries between the government and the recipient SEs by providing subsidies. Importantly, these provisions on NCA have the merits of avoiding – at least partly – the issue posed by the concept of “public body” as construed by the WTO Appellate Body (Box 1). It suffices to prove that the provider of support is owned or controlled by the government4 without the need to demonstrate that the SE in question possesses, exercises, or is vested with governmental authority.5 The reach and effectiveness of these provisions, however, crucially depends on how SEs as providers of support are defined in the different agreements. Under the five PTAs with NCA provisions, both SOEs and SEs can be providers of support. They, therefore, cover enterprises “owned or controlled through ownership interests by a Party” (SE) and enterprises falling under either Category B or C (Table 1), namely enterprises directly or indirectly owned or controlled through ownership interests or managerial power (SOEs). This broad coverage is particularly important given that certain SEs providing support may not be directly majority-owned by a government. This is notably the case, for instance, of some joint-stock commercial banks, as well as city and rural commercial banks in China (Annex G), which can be providers of BMB, including through so-called bank acceptance drafts (BADs), discussed in the next section.

7.2. Specific provisions dealing with the conduct of state enterprises in the marketplace

While the provisions on NCA by SEs surgically address the issue posed by subsidies provided by SEs to other SEs, the obligation imposed on SEs to act “in accordance with commercial considerations” deals with the non-market-based behaviour of SEs when purchasing or selling goods or services. Such an obligation appears more widespread across the different PTAs disciplining SEs, notably in recent FTAs signed by the European Union6 and the United Kingdom.7 It requires SEs to act on market-based terms when purchasing or selling goods or services, and hence to make sure that they do not de jure or de facto act inconsistently with considerations of, for instance, price, quality, availability, marketability, transportations, and other terms and conditions of purchase or sale,8 which a privately-owned enterprise in the relevant business or industry would normally take account of in its commercial decisions. In other words, the obligation imposes a market-based behaviour on SEs when selling goods or services to downstream customers or when purchasing goods or services to upstream suppliers.9

In incorporating an obligation on SEs to act in accordance with commercial considerations, PTAs cover instances where SEs sell goods or services at below-market price, purchase goods or services at prices above the market price, and possibly provide below-market financing. Interestingly, contrary to the WTO subsidy rules, this obligation allows to capture cases where a SE systematically acts on non-market-based terms. In this respect, the OECD work on industrial subsidies has shown that the issue posed by SEs as providers of government support may in certain jurisdictions such as China represent a systemic issue. More specifically, the provision by SEs and state financial institutions of inputs at below-market prices or of loans at below-market rates is rarely in China a one-off, non-recurring support measure. Rather, support by SEs – which often stems from the central government policies or directives – can be systematic, spanning across several sectors, companies, and years.

As an illustration, there is evidence that Chinese state banks have been largely and systematically involved in the issuance of BADs upon which Chinese companies significantly rely to delay payment to their suppliers (OECD, 2025[18]).10 BADs shift credit risk from the buyer to the issuing bank, with the issuing bank bearing the responsibility for collecting repayment from the buyer at maturity or for paying the supplier in case the buyer defaulted. BADs can, in certain downstream sectors, account for a significant portion of their total debt (Figure 9 in Annex H). Moreover, BADs have represented between 10% and 20% of Chinese state banks’ entire corporate loan portfolio during the period 2005‑24 (Figure 6).11 These types of short-term financing are one of the reasons behind the larger amounts of BMB in China (ibid). The obligation to act “in accordance with commercial considerations” would capture this form of systematic practice, which is not specific to a given sector, industry, or enterprise and which, due to its systematic character, cannot be identified as an isolated measure. In this respect, it bears mentioning that when dealing with systematic practices of SEs, the legal and economic apparatus crafted over the years to analyse and discipline subsidies, notably within the WTO framework, proceeds from the perspective that subsidies are specific policies that can be identified (and quantified in the best of cases) may no longer be adequate.

Figure 6. Chinese banks have been systematically involved in the issuance of bank acceptance drafts

Note: The list of banks covered and the year in which they entered into the sample can be found in Annex I. OECD research based on banks’ annual reports covers all Big Six state-owned commercial banks, 11 of the 12 joint-stock commercial banks and a sample of seven city commercial banks.

A third type of obligation imposed on SEs within PTAs is a non-discrimination obligation. It is the most common obligation contained in PTAs, although its scope varies. More specifically, it usually requires that SEs accord treatment no less favourable: (i) in their purchase of goods or services, to a good or service supplied by an enterprise of another Party than to a like domestic good or service; and (ii) in their sale of goods or services, to an enterprise of another Party than to a domestic enterprise. This obligation is another form of regulation of the conduct of SEs. While having some overlap with the two obligations previously discussed, it focuses on difference of treatment by SEs on the basis of nationality, in terms of more favourable treatment to domestic goods, services, or enterprises. In this respect, it may complement both the prohibition of NCA causing adverse effects and the “commercial considerations” obligations. More specifically, it may permit to capture instances where an SE, acting according to governmental directives, policies, or objectives differentiates within its territory, between domestic and foreign enterprises, thus offering a competitive advantage to the former over the latter. On some occasions, however, the non-discrimination obligation does not apply to the purchase by SEs of goods or services or to both the purchase and selling of goods or services, which constitute covered investments in the territory of the Party. This exclusion may importantly affect the scope of this obligation, hence limiting its ability to capture specific distorting issues pertaining to the conduct of SEs.

7.3. Potential gaps remain within the provisions disciplining state enterprises acting as providers of government support

Despite their wide coverage, the various obligations addressing the issue posed by SEs as providers of government support described above have potential gaps. As mentioned above, the provisions on NCA envisaged under the different PTAs do not cover cases where a SE supports a private firm. Evidence from the OECD MAGIC database, however, shows that the provision of BMB in China, which often involves Chinese state banks (OECD, 2024[1]), can be significant in high-tech and clean energy manufacturing sectors, such as semiconductors or wind turbines, where government ownership is less prevalent.12 For this purpose, however, the other two obligations traditionally found in PTAs, namely the “commercial considerations” obligation and the non-discrimination obligation, apply to SEs in their relationships with both state and private enterprises. Yet, with respect to support bestowed by SEs to other enterprises, these two obligations may have a narrower material scope than the prohibition on providing NCA causing adverse effects to the interests of another Party.

In some PTAs, most of the provisions on NCA, the “commercial considerations” obligation, and the non-discrimination obligation do not yet apply to sub-central SEs.13 Furthermore, both the “commercial considerations” and the non-discrimination obligation may not apply under certain PTAs to equity investment in the form of purchase or sales of shares, stocks, or other forms of equity by a SE in another enterprise.14 Such an exemption may constitute an issue, be it in a bilateral, plurilateral, or multilateral context, if a signatory country uses equity investment by SEs as a means to support its industry. Previous OECD work has shown that this form of support has been particularly widespread in the sector of semiconductors where local governments have created government-owned guidance funds, which have taken large equity stakes in local semiconductor firms (OECD, 2024[1]; OECD, 2019[2]).

Notes

← 1.  Note that the obligation to act “in accordance with commercial considerations” and the “non-discrimination” obligation are also contained in the CAI concluded between China and the European Union. See Article 3bis(3) CAI.

← 2.  While the OECD has previously identified cases of below-market financing and below market energy involving, respectively, state financial institutions and state energy utilities (OECD, 2021[5]; OECD, 2023[3]), it has proved more difficult thus far to accurately assess the extent to which SEs located upstream in the value chain pass through the subsidies they have received to other SEs located downstream in the value chain presumably by selling them inputs at below-market prices, thereby implying the presence of a chain of subsidisation between SEs. Related OECD work currently underway analyses how subsidies accumulate along value chains, potentially cascading from upstream to downstream sectors.

← 3.  This may be the case where a state railway company purchases trains and/or signalling equipment from a SE producing such equipment at an above market price or a state telecommunication service company purchases telecommunication equipment from another SE at above-market rate. The OECD could thus far not find systematic evidence of such practices.

← 4.  Note that under the five PTAs with NCA provisions, both SOEs and SEs may be providers of NCA.

← 5.  Parties to a PTA which does not include such a NCA provision would need to rely on the other two obligations traditionally found in PTAs, namely the “commercial considerations” obligation and the non-discrimination obligation to avoid the issue posed by the concept of “public body”.

← 6.  While the text of the Trans-Pacific Partnership was the first agreement to impose this obligation on the SEs of all Parties to the Agreement, the PTA between Canada and the European Union, the Comprehensive Economic Trade Agreement, is the first agreement which has entered into force with such an obligation. Various EU PTAs have subsequently incorporated this obligation. Agreements negotiated earlier during the 1990s and the 2000s, primarily by the United States, limited such an obligation to designated monopolies, thus requiring any privately-owned monopoly designated by a state or government monopoly to act solely “in accordance with commercial considerations” when purchasing or selling its monopoly goods or services (Sylvestre Fleury and Marcoux, 2016[30])

← 7.  Other PTAs involving an obligation for SEs to act “in accordance with commercial considerations” are the USMCA, the CPTPP and the earlier United States-Singapore FTA, although the obligation applies to Singaporean SEs only.

← 8.  Note that these factors are illustrative.

← 9.  The obligation of SEs to act consistent with commercial considerations contained in different PTAs comes from the WTO obligation imposed on state-trading enterprises to act solely “in accordance with commercial considerations” (Article XVII:1(b) GATT 1994). It has, however, a broader scope. More specifically, it is a stand-alone obligation, which – as opposed to Article XVII:1 GATT 1994 as construed by the Appellate Body in Canada-Wheat – is not tied to the discriminatory behaviour of the enterprise. In other words, contrary to the WTO obligation imposed on state-trading enterprises, it is not necessary to show that the SE acted in a non-discriminatory fashion. Note that the adverb “solely” attached to the obligation imposed on state trading enterprises is not present in PTAs including such an obligation on SEs. It is not clear whether the absence of this term weakens such an obligation by allowing governments to derogate from their obligations, arguing that “commercial considerations do not need to be solely market driven” (Sylvestre Fleury and Marcoux, 2016[30]).

← 10.  BADs are mainly found in China and remain uncommon in other jurisdictions, at least in the form in which they are used in China. They consist of a type of short-term financing instrument, whereby corporate buyers of inputs can request banks to issue BADs and the issuing banks then promise payment to the suppliers by a certain date in the future. By granting the right to the purchasing company to defer payment to its supplier until the BAD arrives at maturity, this financial instrument contributes to improving the working capital of the buyer. Absent such a financial instrument, the buyer would need to make an actual cash payment and thus use its own working capital or conclude a short-term working capital loan with a bank so as to pay its suppliers. Both options infer a cost for the purchasing company. By contrast, the use of BADs may not imply any cost. While BADs share several features with short-term loans, they do not require the payment of interest; the companies requesting the BADs must pay instead a one-off lump sum commission fee to the issuing banks.

← 11.  The figures are even higher for joint-stock commercial banks where BADs can represent between 40% and 50% of their entire corporate loan portfolio.

← 12.  Between 2010 and 2024, Chinese producers of wind turbines benefitted on average from 2.4% of BMB (expressed as a percentage of firms’ revenue), placing them in third place directly after Chinese producers of aluminium and steel. During the same period, Chinese manufacturers of semiconductors received on average 2.2% of BMB.

← 13.  As mentioned above, Parties to the CPTPP and the USMCA must begin further negotiations within six months of the date of entry into force of the Agreement with a view to extending the application of the obligations imposed on SEs listed in, respectively, Annex 17-D CPTPP and Annex 22-D USMCA to the activities of sub-central SEs. See Article 17‑14 and Annex 17-C(a) CPTPP and Article 22‑14 and Annex 22-C USMCA.

← 14.  See, for instance, footnote 13 of Chapter 17 CPTPP, footnote 12 of Chapter 16 Australia Peru FTA, and footnote 11 of Chapter 22 USMCA.