State enterprises (SEs) have played a growing role in key manufacturing sectors. This is consistent with the rise of the People’s Republic of China (hereafter China) in industrial sectors and in manufacturing supply chains, although SEs from other regions, including countries of the Gulf Cooperation Council (GCC), are also contributing to the growing weight of state involvement.
While government ownership may not be problematic in and of itself, SEs can be a source of market distortions. Previous OECD work on industrial subsidies has found that SEs can both receive and provide subsidies, as well as benefit from other non-market policies and practices. This can affect competition and trade, creating a need for effective policy tools at the domestic, plurilateral, and multilateral levels.
Current multilateral agreements do not address the issue of SEs and market distortion. The World Trade Organisation (WTO) does not have a dedicated agreement addressing the issue posed by the non-market conduct of SEs and government support to and through SEs. As a result, since the 2000s, countries have increasingly introduced disciplines on SEs in preferential trade agreements (PTAs), notably following China’s accession to the WTO.
Many preferential trade agreements seek to address the problem posed by SEs as providers of support by disciplining their conduct. The obligation requiring SEs to act in accordance with commercial considerations and with the principle of non-discrimination when purchasing or selling goods and services may permit to capture better the provision of systematic and recurrent support by SEs to other companies. A few PTAs seek to ensure a level playing field between state and private enterprises by including provisions specifically disciplining subsidies provided to SEs by governments or other SEs.
Preferential trade agreements have the potential to address many of the concerns related to subsidies and other non-market practices involving SEs, but are limited by geographical coverage. Notably, neither China nor the GCC countries (individually or collectively) have concluded PTAs containing SE disciplines.
How preferential trade agreements address market distortions from state enterprises
