Companies owned or controlled by governments – referred to in this paper as State enterprises (SEs) – play an increasingly important role in global manufacturing supply chains. They account for a growing share of production and revenue in several strategic industries, including shipbuilding, aluminium, steel and cement, and, more recently, automobiles, wind turbines, and telecommunications network equipment. Their expanding presence raises important questions about competition, subsidies and trade policy, particularly where state ownership is combined with government support and other non-market practices. While state ownership is particularly widespread in the People's Republic of China (hereafter China), SEs in other regions, including the Gulf Cooperation Council (GCC), are also contributing to the growing role of state actors in industrial production and trade.
Government ownership may not be problematic in and of itself. However, OECD research on industrial subsidies has shown that SEs can be both recipients and providers of subsidies, as well as beneficiaries of other non-market policies and practices in manufacturing sectors. As a result, advantages granted to or through SEs may distort competition and international trade. These risks highlight the need for effective policy tools at the multilateral, plurilateral and domestic levels to address market distortions linked to state ownership and government support.
At the multilateral level, the World Trade Organization (WTO) does not provide a dedicated set of rules dealing with both the market conduct of SEs and the subsidies or regulatory advantages they may receive from governments or other SEs. In response, governments have increasingly incorporated disciplines on SEs in their preferential trade agreements (PTAs) since the early 2000s. This trend accelerated following China's accession to the WTO, as concerns grew about the role of subsidised SEs and the impact of state support on international markets.
This report finds that PTAs address market distortions associated with SEs in several important ways. First, many PTAs adopt broad definitions of SEs that cover entities directly or indirectly owned or controlled by governments. Second, they often require SEs to act in accordance with commercial considerations and the non-discrimination principle when purchasing or selling goods and services. Such provisions may help address situations where SEs provide systematic or recurring support to selected firms. Third, some PTAs include provisions that discipline subsidies provided by governments or SEs to other SEs. These provisions may be particularly relevant given OECD evidence that SEs can be significant recipients of subsidies, including below-market financing from state-owned financial institutions. Finally, PTA transparency provisions can improve access to information on the scale and extent of government ownership and control in companies, the financial health of SEs, as well as the subsidies or other advantages that SEs receive.
Overall, the report finds that PTA disciplines on SEs have considerable potential to address market distortions arising from subsidies and other non-market practices involving SEs. At the same time, important gaps remain. While some forms of state support and distortive conduct are addressed in existing PTAs, others are only partially covered or not covered at all. In addition, the geographical reach of SE disciplines remains limited. Notably, no PTA concluded by China, the GCC, or any GCC member country currently contains dedicated disciplines on SEs. Expanding the coverage of such provisions could strengthen international efforts to address market distortions associated with state ownership and government support.