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Why regulate State trading? STEs versus private traders In the sphere of international trade, there is a general presumption that trading enterprises will act on the basis of commercial considerations, and that based on the theories of comparative advantage, they will expand their international trade in order to reap the benefits. However, a private firm, if it has significant power in a given market, may exercise this power in a way that distorts trade and thus causes economic detriment, rather than benefit. Furthermore, governments can act in indirect ways to influence world trade in an uneconomic direction; for example, acting through firms or enterprises to provide protection against imports or to advance exports, to the detriment of foreign producers. Thus, the drafters of the General Agreement sought to place the State trading enterprise in the same competitive position with regard to governmental support or protection as the private firm. In other words, they sought to make State traders behave as private competitive traders, and thus to remove the potential for trade distortion offered by government involvement in an enterprise's decisions and activities.

Widespread incidence of State trading State trading is a common feature of many economies where agriculture is an important sector of trade. Thus, State trading enterprises are found in developed countries with significant agricultural trading interests, as well as in agriculturally-based developing countries. The heavy emphasis on agriculture in State trading activities would seem to indicate governments' belief that State trading is an appropriate means of implementing agriculture-related policy objectives, such as providing price support for important agricultural products or ensuring food security. In the area of industrial goods, State trading may arise as a by-product of the nationalization of an ailing industry or as a means of pursuing government policies on products or industries considered to have strategic importance.

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Lack of transparency One of the main problems relating to State trading in the context of a rules-based international trading system is the lack of transparency of the existence and activities of State trading enterprises. While the obligation to notify such enterprises has been on the books that is to say, in the General Agreement since 1947, and the first deadline for such notifications was February of 1958, compliance with this obligation has been, until only very recently, very poor. This situation, coupled with the fact that the relationship between governments and State trading enterprises and the activities of the latter may give rise to trade distortion, means that a significant area of potentially WTO-inconsistent practices may be escaping WTO scrutiny and regulation. Much more needs to be known about State trading enterprises so that Members can assess the impact of their operations on international trade, and, perhaps, as time goes on, develop further the disciplines necessary to regulate this area of trade.

Possible negative trade effects State trading enterprises may be used as a vehicle for implementing a number of trade policy measures which are not consistent with WTO provisions. The most common is a violation of market access obligations. For example, an STE might be used to provide protection for the domestic market in a given product by setting resale prices of imports at very high levels, thus negating tariff concessions bound in WTO Schedules and violating Article II of GATT 1994. The provision of subsidies to STEs which are mainly involved in exporting may run afoul of export subsidy disciplines. Even in cases where the objective of the government acting through the STE is not intentionally trade-distorting, the STE's operations may nevertheless distort trade. For example, the protection of public health, which is a frequently stated rationale for the maintenance of monopolies on alcohol and alcoholic beverages, may seriously distort trade in those products. It is only when the activities of State trading enterprises can be examined that their impact on trade can be analyzed and, ultimately, more effective rules developed.

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Problem of lack of clarity Throughout the history of Article XVII, a major lacuna has been the absence of any clear definition of what a State trading enterprise is, or what State trading is. Many attempts were made at such a definition, but all of them failed. Needless to say, this was a serious handicap in the efforts to enforce the transparency obligation under Article XVII. How can you make a notification when you don't understand what it is you are supposed to be notifying? Thus, it is likely that many State trading enterprises of many countries went unreported for years. To further complicate this already unsatisfactory situation, very few contracting parties to GATT complied with the notification requirement to make a notification annually, even where there were no STEs to report.

What is a State trading enterprise?

Article XVII:1(a) The first paragraph of Article XVII itself provides the basic idea of what a State trading enterprise is, without attempting an actual definition. It refers to three types of enterprises: (i) State enterprises (that is, owned by the State);

(ii) enterprises granted special privileges by the State (for example a subsidy or subsidy equivalent); and

(iii) enterprises granted exclusive privileges (i.e. a monopoly in the production, consumption or trade of certain goods).

Thus, a private corporation or enterprise that receives some special right or privilege from the State (that is, a right or privilege not generally available to other private sector entities in the

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same area and thus giving the enterprise an advantage over those firms) and that as a result of this right or privilege is in a position to influence the level or direction of trade, could be considered to be a State trading enterprise. It is important to note that the special right or privilege granted need not give the enterprise a monopoly position.

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Definition in the WTO Understanding The results of the Uruguay Round of multilateral trade negotiations include the Understanding on the Interpretation of Article XVII of GATT 1994. One of the main features of the Understanding is the working definition of State trading enterprise contained in paragraph 2 of the text, which reads: governmental and 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. Three fundamental elements are identified in this working definition:

(i)

governmental

or

non-governmental

entity,

including

marketing

boards;

(ii) the granting to the enterprise of exclusive or special rights or privileges; and

(iii) a resulting influence, through the enterprise's purchases or sales, on the level or direction of reports or exports.

Particularly important in this definition is the phrase: in the exercise of which they influence through their purchases or sales the level or direction of imports or exports, because this goes to the heart of what the regulation of State trading in the WTO is aimed at: that is, the potentially distorting effects of the operations of STEs on trade. However, although this text provides considerable clarification of Article XVII, it still leaves room for differing interpretations of what is intended.

Once again, it must be emphasized that an enterprise need not be State owned, nor need it have a monopoly position, in order to be covered by Article XVII and subject to WTO rules on STEs. The important criteria are that it enjoys exclusive or special rights or privileges, and that in the exercise of these rights and privileges it influences imports or exports by its buying and selling activities.

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Illustrative list being developed The Working Party on State Trading Enterprises has developed an illustrative list showing the kinds of relationships between STEs and governments and the kinds of activities engaged in by STEs. Such a list may be a useful tool to help Members determine whether a given entity is a notifiable STE, and thus should contribute to improved transparency in this area.

Types of STEs Statutory marketing boards Export marketing boards Regulatory marketing boards Fiscal monopolies Canalizing agencies Foreign trade enterprises Where are the rules on State trading ? The main GATT Article on STEs is Article XVII. Numerous other Articles relate either directly or indirectly to STEs, including parts of articles II, XX et XXXVII. An Interpretative Note to Articles XI, XII, XIII, XIV and XVIII specifies that throughout these Articles, the terms import restrictions or export restrictions include restrictions made effective through State trading operations. (Interpretative Notes are agreed interpretations of GATT Articles, which form an integral part of the General Agreement and are found in Annex 1 of GATT 1994.) The most recent addition to the rules on State trading is the Understanding on the Interpretation of Article XVII, which is legally part of GATT 1994. The results of various GATT dispute settlement proceedings which touch on the issue of State trading also help to clarify some of the complex issues involved in this area of trade.

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What do the rules aim to achieve? The rules on State trading essentially try to ensure that STEs:

operate on the basis of commercial considerations and in a non-discriminatory manner;

do

not

erode

or

nullify

the

value

of

negotiated

tariff

concessions;

do not serve to implement otherwise WTO-inconsistent measures, such as quantitative restrictions are or subsidies; and

fully

notified

to

the

WTO

on

regular

basis.

Given that so little is known of State trading operations world-wide, the transparency obligation is perhaps one of the most important rules at present. As more becomes known and understood of the functions and operations of STEs, there may be efforts to further tighten the rules governing them. However, it should be stressed that the WTO does not seek to prohibit or even discourage the establishment of maintenance of STEs, but rather to ensure that they are used and operated in a manner consistent with WTO principles and rules. Non-discrimination Article XVII:1 sets forth the concept of nondiscriminatory treatment. Members undertake that any enterprise covered by XVII:1(a) shall, in its purchases or sales involving imports or exports, act in a manner consistent with the general principles of nondiscriminatory treatment set out in the General Agreement for governmental measures affecting imports or exports by private traders. This standard of conduct is further explained in paragraph 1(b): ... such enterprises shall... make any such purchases or sales solely in accordance with commercial considerations including price, quality, availability, marketability, transportation and other conditions of purchase or sale, and shall afford... other contracting parties adequate opportunity... to compete for participation in such purchases or sales.

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It should be noted that a strict m.f.n. (most favoured nation) treatment was not intended, as is shown by the Interpretative Note to Article XVII:1, which allows a State trading enterprise to charge different prices for its sales of a product in different markets, provided this is done for commercial reasons, to meet conditions of supply and demand in export markets. Also, a country's receipt of a tied loan (whereby country A receives a loan from country B in order to buy goods from country B) falls in the category of commercial considerations. (This too is spelled out in the Interpretative Note to XVII:1 (b)).

No quantitative restrictions The Interpretative Note to Articles XI, XII, XIII, XIV, and XVIII, all of which deal in whole or in part with quantitative restrictions, states that:

Throughout [these] Articles, the terms import restrictions or export restrictions include restrictions made effective through State trading operations.

Thus, a law which granted a State trading enterprise exclusive import rights in a certain product, and a decision by that enterprise to refuse to import at all, would appear to be a violation of Article XI (General Elimination of Quantitative Restrictions).

Preservation of tariff concessions GATT Articles II:4 and XVII:3 deal with concessions relating to market access. Article II of GATT 1994 deals with GATT schedules of concessions and sets out (in paragraph 4) that any monopoly of the importation of any product covered in a GATT Schedule shall not result in protection which is on the average in excess of the amount of protection provided for in that Schedule. An Interpretative Note clarifies that the provisions of paragraph 4 are to be applied in the light of Article 31 of the Havana Charter (which contains the obligation to negotiate the level of protection afforded by monopolies) and explains that: the term import mark-up... shall

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represent the margin by which the price charged by the import monopoly for the imported product (exclusive of internal taxes within the purview of Article III, transportation, distribution, and other expenses incident to the purchase, sale or further processing, and a reasonable margin of profit) exceeds the landed cost.

By its terms, Article II:4 applies to import monopolies whether or not they are State enterprises. Article XVII:4 (b) covers import monopolies on products which are not the subject of an Article II concession (i.e., not included in a GATT Schedule) and sets out that such monopolies shall, on request, inform the WTO Members of the import mark-up on the product during a recent representative period or of the price charged at resale. The clear purpose of these extra provisions relating to monopolies was to preserve the value of negotiated tariff concessions i.e. to prevent an import monopoly from instituting protection for domestic producers and thus nullifying a tariff concession.

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Transparency The requirement to notify STEs and their operations is in paragraph 4 (a) of Article XVII: Members shall notify... the products which are imported into or exported from their territories by enterprises of the kind described in paragraph 1 (a) of this Article; and in paragraph 1 of the Understanding on the Interpretation of Article XVII of the General Agreement on Tariffs and Trade 1994: In order to ensure the transparency of the activities of state trading enterprises, Members shall notify such enterprises to the Council for Trade in Goods.... The notification requirement is an essential element in the rules on State trading. One reason for notifications is to make it possible for Members to judge the extent to which State trading enterprises serve as a substitute for other measures covered by the General Agreement, e.g. quantitative restrictions, tariffs and subsidies. Another is to allow Members to assess the possible trade distortion resulting from the operations of notified STEs. The format for such notifications is a standard questionnaire. The questionnaire was revised in 1998 and then again in 2003 when the frequency of notifications was made less burdensome (see G/STR/3/Rev.1). A new and full notification (i.e. a complete set of answers to the questionnaire) must be made every two years. The previous requirement for new and full notifications every three years with updating notifications in the intervening years was changed to a biennual obligation to ease the burden on Members and encourage compliance with the notification obligation. (see G/STR/5; G/STR/6 and G/STR/7). The notifications are made to the Council for Trade in Goods and circulated to all Members. Counter-notifications may also be made by a Member which has reason to believe that another Member has not adequately met its notification obligation. Article XX (d) and Article XXXVII:3 (a) Two additional Articles of GATT 1994 deal with State trading. Article XX covers General Exceptions and its paragraph (d) states that nothing in the Agreement shall prevent the adoption or enforcement by any Member of measures necessary to ensure compliance with laws or regulations relating to the enforcement of monopolies operated under Articles II:4 and XVII. Article XXXVII, which is part of Part IV of the General Agreement and deals with Commitments, states in paragraph 3 (a) that developed country Members shall make every effort, in cases where a government determines the resale price of products wholly or mainly

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produced in the territories of developing country Members, to maintain trade margins at equitable levels.

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