How preferential trade agreements address market distortions from state enterprises

2. Existing trade rules in relation to state enterprises

At the multilateral level, World Trade Organization (WTO) Agreements do not contain a definition of SEs, nor do they have a specific agreement or provision in place which would address both the distortive conduct of SEs in the marketplace and the provision of support and other non-pecuniary advantages by governments to and through SEs.1 The WTO deals with some of the issues posed by SEs in the context of a range of specific disciplines, notably the Agreement on Subsidies and Countervailing Measures (SCM) – which regulates subsidies bestowed by a government or a “public body” to specific undertakings manufacturing goods and causing adverse trade effects – and the plurilateral Agreement on Government Procurement (GPA). WTO Members can also raise selected issues pertaining to SEs on an ad hoc basis during accession negotiations with acceding countries. Yet, apart from China’s Protocol of Accession, which includes a few provisions on State Owned Enterprises (SOEs), as well as Viet Nam’s (Annex C), other Accession Protocols (e.g. the Russian Federation, hereafter Russia, and GCC countries) largely do not have specific provisions related to SOEs,2 despite the relative prevalence of state-run entities or sovereign wealth funds in these countries (Mavroidis and Janow, 2017[6]). Many of the problems raised by the government support SEs receive or provide, as well as the non-market practices of SEs thus remain currently unaddressed in the WTO Agreements.

Concerns about the subsidies received or provided by SEs have, nevertheless, been raised by WTO Members in the context of trade disputes litigated under the SCM Agreement or in the course of their own trade-defence investigations. One example was a WTO Request for Consultations from the United States (WT/DS519/1, 17 Jan 2017), which alleged that China had provided below-market interest loans to Chinese primary aluminium producers through banks argued to be government agencies or entities, “public bodies”, or “private bodies entrusted or directed by the government” within the meaning of SCM Agreement. More recently, the European Commission’s 2024 anti-subsidy investigation into imports of battery electric vehicles (BEVs) from China noted that state-owned commercial banks and policy banks had provided preferential financing to the Chinese BEV sector, again considering these financial institutions to be “public bodies.” The European Commission also determined in this investigation that key inputs such as batteries and lithium iron phosphate had been provided “for less than adequate remuneration” by public bodies or under government-mandated pricing co-ordination.

These cases notwithstanding, the opacity surrounding firms’ ownership structure and their dealings with other companies can complicate efforts to discipline and mount defensive action against the subsidies received and provided by SEs. Tracing and mapping the government ownership of companies can prove to be a difficult exercise since such information is not always readily available, especially where government stakes are indirect and involve a chain of entities masking the government’s beneficial ownership of industrial producers. Meanwhile the WTO’s concept of “public body” remains undefined in the text of the SCM Agreement (Box 1), which has led Members to hold diverging views as to what constitutes a “public body”, thus hindering consistent notifications across the WTO membership of subsidies bestowed by SEs.

Box 1. The WTO’s concept of “public body”

Although SEs may be important providers of, or vehicles for government support, their treatment under WTO subsidy disciplines has been the subject of debate. In US-Anti-Dumping and Countervailing Duties (China), the Appellate Body held that a “public body” is “an entity that possesses, exercises or is vested with governmental authority.”¹ The Appellate Body held inter alia that majority state-ownership is insufficient to demonstrate that the entity is a “public body” under Article 1.1(a)(1) of the SCM Agreement. Instead, a complaining WTO Member before the WTO dispute settlement system or a national investigating authority in a countervailing investigation must bring evidence of a set of circumstantial evidence showing the core features of the entity and its relationship with the government. The presence of formal links with the government, the existence of legal instruments, the exercise by the entity of governmental functions or meaningful control may serve, amongst others, to demonstrate that the entity “possesses, exercises, or is vested with governmental authority”.²

The Appellate Body reading has proven to be a matter of debate (Miranda and Sánchez Miranda, 2023[7]; Woznowski, Depayre and Cartland, 2012[8]).³ Indeed, the Appellate Body’s interpretation could potentially complicate efforts to address subsidies provided by or through SEs. The notion of “public body” might, for instance, fail to capture specific funds providing support, especially where they have complex joint-ownership structures involving local and central governments as well as certain SOEs. In this respect, several WTO Members have in recent years expressed concern with respect to the Appellate Body’s construction.

¹ Appellate Body Report, US-Anti-Dumping and Countervailing Duties (China), WT/DS379/AB/R, adopted 25 March 2011, para 317. The Appellate Body upheld its interpretation some years later: Appellate Body Report, US-Countervailing Measures on Certain Hot-rolled Carbon Steel Flat Products from India, WT/DS436/AB/R, adopted 19 December 2014, paras 4.31‑4.55.

² Appellate Body Report, US-Anti-Dumping and Countervailing Duties (China), paras 318, 319, 345, 346. In paragraphs 318 and 346 of its Report, the Appellate Body, however, specified that there may be no need to rely on, and bring evidence of, such formal indicia in the event of “an express delegation of authority in a legal instrument.”

³ See, for instance, WT/DSB/M/294, 9 June 2011, paras 97, 103, 106‑107, 109, 113, 114, 117, 119, and 127; WT/DSB/M/354, 16 February 2015, paras 1.22, 1.31, and 1.32. In a more recent Appellate Body report, one member of the Appellate Body division drafted a dissenting opinion, qualifying the Appellate Body’s attempt to define the term “public body” as “an entity that possesses, exercises or is vested with governmental authority” as an “original mistake.” See Appellate Body Report, US-Countervailing Measures (China) (Article 21.5), WT/DS437/AB/RW, adopted 15 August 2019, para 5.245.

Source: TAD/TC(2022)9/FINAL.

While the WTO does not have a specific agreement – nor specific provisions in existing agreements – addressing both the distortive conduct of SEs in the marketplace and the provision of support and other non-pecuniary advantages by governments to and through SEs, various PTAs do contain disciplines on SEs. These disciplines emerged in the 2000s, notably following the accession of China to the WTO, and have become more frequent over time (Figure 3, left), possibly as some governments started weighing up the challenges posed by the pervasive presence in China of subsidisation to and by SEs (Wu, 2016[9]; Bhala, 2017[10]; Gao and Zhou, 2022[11]). That said, notwithstanding this increase, agreements that do not contain any discipline on SEs have remained prevalent: the OECD has found that among the 386 agreements in force as of December 2025, only 95, i.e. around 24%, contained some form of disciplines on SEs.3 Important differences remain, however, across these agreements, with only a few including provisions that not only provide a definition of SEs but also impose substantive obligations on governments in relation with their SEs, as well as on SEs in terms of their activities in the marketplace.

Figure 3. PTAs with SE disciplines have increased over time but remain geographically concentrated

Note: Annex E provides an explanation of the compilation exercise illustrated in this figure. Only PTAs that entered into force after 1990 until December 2025 are shown in the left graph. The spike in the years 2020 and 2021 reflects the fact that many PTAs undertaken by the United Kingdom following its withdrawal from the European Union entered into force. The figure on the right-hand side focuses on companies covered in the OECD MAGIC database, thus leaving out certain primary sectors that may have relatively large government ownership (e.g. agriculture and natural-resource extraction), as well as services. It uses the shares of assets by firms with more than 25% government ownership for the year 2024. Members of the Gulf Cooperation Council (GCC) include Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.

Source: based on a compilation of preferential trade agreements that are today in force, which contain disciplines on SEs (left- and right-side graph) and OECD MAGIC database (accessed 9 March 2026) (right-side graph).

Despite the progress made, the geographical coverage of PTAs with SE disciplines remains a key challenge: at this juncture, there are no PTAs concluded by the GCC or China nor by any of the GCC countries individually, containing SE disciplines, despite the prevalence of government ownership in the manufacturing sectors of these jurisdictions (Figure 3, right).4 Although PTAs signed by China have increasingly integrated provisions related to the adequate implementation and enforcement of competition laws within each Party’s territory, they do not include any rules directly regulating the behaviour and conduct of SOEs (Gao and Zhou, 2022[11]) (Box 2). In addition, in December 2020, China and the European Union reached an agreement in principle on the Comprehensive Agreement on Investment (CAI), containing a comprehensive definition of SEs, as well as substantive transparency obligations in relation to SEs (Box 2), but its signature and entry into force have been suspended since then.5

Box 2. An overview of Chinese PTAs including references to competition rules and the Comprehensive Agreement on Investment

By the end of December 2023, there were 18 PTAs in force with China as a Party. While none of these PTAs includes a specific chapter disciplining SEs, some among the more recent include competition rules, requiring each Party to adopt or maintain competition laws and regulations that proscribe anti-competitive business practices, to enforce those laws and regulations accordingly, as well as to establish or maintain independent authority(ies) capable of effectively implementing and enforcing the Party’s competition laws and regulations.¹ Only five of these PTAs, albeit to varying degrees of detail, specify the scope of application of the chapter, namely the entities to which each Party’s competition laws and regulations shall apply, thereby implicitly or explicitly including SEs. In this respect, three of these PTAs mention that the “Competition” chapter applies to “all undertakings of the Parties” or to “all entities engaged in commercial activities,”² whereas the other two PTAs explicitly refers to “all undertakings, regardless of their ownership” in the case of the Regional Comprehensive Economic Partnership (RCEP) Agreement and to all undertakings, including public enterprises and enterprises entrusted with special rights or exclusive rights in the case of the China-Korea FTA.³ No specific provisions disciplining SEs appear, however, in these different PTAs contrary to other PTAs in which China is not a Party, which at times includes specific SE disciplines within their “Competition” chapter.

On 30 December 2020, the European Union and China reached an agreement in principle on the CAI, which was designed to be a stand-alone investment agreement. Since then, however, the signature of the agreement has been put on hold following the adoption of a resolution by the European Parliament on 20 May 2021. The CAI is not a PTA but rather an agreement focusing on investment opportunities and access conditions between the two markets that aims, among other things, to level the playing field. One of the key objectives in this respect was to include specific rules on SEs, with a view to reining in distortive practices of Chinese SEs. For this purpose, the CAI requires SEs, for which it provides a definition (Table 1), to act in accordance with commercial considerations in their purchases or sales of goods and services and not to discriminate against the investors and enterprises of the other Party in their purchases or sales of goods and services.⁴ It also requires each Party to provide, upon request by the other Party, information to assess whether a SE complies through its commercial activities to the obligations mentioned above.⁵

¹ Among the 18 PTAs with China that have entered into force before December 2023, only eight include a “Competition” chapter. These eight PTAs entered into force after 2014.

² See Article 10.2 of the China-Switzerland FTA, Article 4.2, Appendix 7 of the Upgrade to the China-Singapore FTA, and Article 3.3, Appendix 8 of the Upgrade to the China-New Zealand FTA.

³ See Article 13.3(5) of the RCEP Agreement and Article 14.5(1) and (3) of China-Korea FTA.

⁴ Article 3, Section II on Investment Liberalisation.

⁵ Article 4, Section II on Investment Liberalisation.

Notes

← 1.  Note that under Article XVII:1(a) and (b) of the GATT 1994, Members must ensure that the operations of state trading enterprises are conducted in a manner consistent with the general principles of non-discrimination. While the concept of “State trading enterprises” had remained undefined under the GATT 1947, the Uruguay Round negotiators clarified the concept by introducing a “working definition” of state trading enterprises under the Understanding on the Interpretation of Article XVII. According to the provision, this covers “[g]overnment or non-governmental enterprises, including marketing boards, which have been granted exclusive or special rights or privileges, including statutory or constitutional powers, in the exercise of which they influence through their purchases or sales the level or direction of imports or exports.” This definition is narrower than the concept of SE as it limits state trading enterprises to enterprises that are granted “exclusive or special rights or privileges” and that exercise such rights or privileges to purchase or sell goods, with a view to influencing the level or direction of imports or exports. Statutory marketing boards, export marketing boards, regulatory marketing boards, fiscal monopolies, canalising agencies, or foreign trade enterprises may be, amongst others, deemed state trading enterprises. The definition was also introduced mainly with agricultural issues in mind rather than matters related to industrial subsidies.

← 2.  That said, upon its accession to the WTO in 2011, Russia committed to ensure that producers and distributors of natural gas in Russia (including Gazprom, as well as independent producers, such as Rosneft and Novatek) “would operate within the relevant regulatory framework, on the basis of normal commercial considerations, based on recovery of costs and profits” (WTO, 2011[23]; USTR, 2022[24]).

← 3.  The number of PTAs with SE disciplines is lower when excluding those PTAs that contain provisions regulating more broadly the relationship of governments with their SEs, notably under the EU Association Agreements (see Annex D).

← 4.  By contrast, Viet Nam, which has also made specific commitments with respect to SEs under its Protocol of Accession to the WTO, has recently entered into PTAs involving rules on SEs, despite still having a sizeable number of SEs across its economy (Dang, 2020[25]). Since 2018, Viet Nam has entered into three PTAs which regulate SEs, namely the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, the EU-Viet Nam Trade Agreement, and the United Kingdom-Viet Nam FTA.

← 5.  China also submitted a formal application to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership on 16 September 2021. Note that the CAI is not covered by the database developed by the OECD concerning SE disciplines in PTAs as it has not yet been signed and hence has not entered into force.