State-owned enterprises : trade effects and policy implications

With a growing integration via trade and investment, state-owned enterprises (SOEs) that have traditionally been oriented towards domestic markets increasingly compete with private firms in the global market place. Three principal questions emerge from the international trade perspective: (1) How important is state ownership in the global economy; (2) What types of advantages granted to SOEs by governments (or disadvantages afflicting them) are inconsistent with the key principles of the non-discriminatory trading system; and (3) What policies and practices support effective competition among all market participants? Using a sample of world‘s largest firms and their foreign subsidiaries, this paper shows that the extent of state presence in various countries and economic sectors is significant. Moreover, many of the countries with the highest SOE shares and economic sectors with strong SOE presence are intensely traded. The potential for economic distortions is hence large, if some of these SOEs benefit from unfair advantages granted to them by governments–an allegation that is often raised in political and business circles. Existing information on such advantages is often either anecdotal or limited to individual cases. As a groundwork for future analysis and building on the existing information and literature, this paper presents a conceptual discussion of how potential SOE advantages can generate cross-border effects. It also describes several cases when actions of SOEs as well as advantages allegedly granted to them by governments have been contested as inconsistent with national or international regulations, albeit with varying degree of success. This may be partially explained by the fact that existing regulatory frameworks that discipline some forms of anti-competitive behaviour of SOEs have been designed with domestic objectives in mind or were conceived at times when the state sector was oriented primarily towards domestic markets. The survey of existing rules at the national, bilateral and multilateral levels presented in this paper is a first step in determining whether there is a need to fill any gaps and in finding the most constructive ways of doing so.