State Trading and Agricultural Trade: New Rules and Policy Options DRAFT FOR DISCUSSION

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1 State Trading and Agricultural Trade: New Rules and Policy Options W. M. Miner Paper prepared for: The World Bank s Integrated Program of of Research and Capacity Building to enhance participation of developing countries in the WTO 2000 Negotiations Presented at: The Conference on Agriculture and The New Trade Agenda in the WTO 2000 Negotiations Sponsored by: The World Bank in cooperation With The World Trade Organization October 1-2, 1999 Geneva, Switzerland DRAFT FOR DISCUSSION The impact of state trading on agricultural trade is among the issues of importance to developing countries that will be addressed in the WTO 2000 negotiations. State trading enterprises are used by both developing and developed countries, as well as centrally organized economies, for a number of purposes including the import and export of agricultural products. The WTO Agreement on Agriculture made unprecedented progress in improving the conditions for trade in agriculture and food product, by establishing meaningful and enforceable rules and commitments with respect to access barriers and trade distorting subsidies. The Agreement brought agricultural exports and imports, which are of such great importance to developing countries, more fully under the security of international trade law. The Uruguay Round result also exposed the remaining forms of government protection and intervention in agricultural markets including concerns that the operations of state trading enterprises (STEs) could be used to circumvent the WTO disciplines. The renewed multilateral negotiations on agriculture will provide a unique opportunity to deal with all measures that impact on the agricultural trade interests of developing countries. The activities of state trading enterprises will be among the measures to be brought to the negotiating table with respect to their impact on imports, exports and

2 State Trading and Agricultural Trade: New Rules and Policy Options W. M. Miner * Introduction The impact of state trading on agricultural trade is among the issues of importance to developing countries that will be addressed in the WTO 2000 negotiations. State trading enterprises are used by both developing and developed countries, as well as centrally organized economies, for a number of purposes including the import and export of agricultural products. The WTO Agreement on Agriculture made unprecedented progress in improving the conditions for trade in agriculture and food product, by establishing meaningful and enforceable rules and commitments with respect to access barriers and trade distorting subsidies. The Agreement brought agricultural exports and imports, which are of such great importance to developing countries, more fully under the security of international trade law. The Uruguay Round result also exposed the remaining forms of government protection and intervention in agricultural markets including concerns that the operations of state trading enterprises (STEs) could be used to circumvent the WTO disciplines. The commitment in the Agreement to return to the negotiating table by the turn of the century signals the intent of WTO members to continue the process of agricultural trade reform. The renewed negotiations will involve an expanded WTO membership, including * Mr. Miner is a Private Trade Consultant and Senior Research Associate for the Centre for Trade Policy and Law in Ottawa. This paper draws on his earlier work State Trading and the WTO: Reforming the Rules for Agriculture, published in Canadian Foreign Policy, Spring, more countries that use state-controlled enterprises to manage food supplies, and to import and export. With the prospect of China s participation, as well as several former centrally planned economies, the issues related to state trading have increased in importance. The renewed multilateral negotiations on agriculture will provide a unique opportunity to deal with all measures that impact on the agricultural trade interests of developing countries. The activities of state trading enterprises will be among the measures to be brought to the negotiating table with respect to their impact on imports, exports and competitive behavior. An Early Role Many countries have used state entities to further a broad range of national objectives. Since most economies develop from an agricultural base, and an adequate food supply is regarded as essential for development, it is not surprising that state trading of agricultural products has taken place for decades. For several national reasons, governments have established specialized agencies and marketing organizations that intervene, directly and indirectly, in agricultural trade. The purposes of these activities include food security, price stabilization, income support, industrial development, and protection of the domestic market. The forms of agricultural STEs are diverse and range from marketing boards with monopoly control over all supplies through exclusive import or export agencies, to parastatal organizations with specific powers to intervene in domestic and foreign markets. These entities exercise complete or partial control over domestic and international trade in one or more products, and may perform many other functions depending upon their mandate and market circumstances. They exist in all types of economies and in both large and small nations. Although many countries have removed their STEs, or constrained 1

3 their activities as part of broader policy reforms, state trading continues to be important in several countries and food sectors. There are significant differences in the purposes and operations of STEs between developed and developing countries, and in relation to imports and export activity. For most developed countries, state trading forms part of a broader policy regime intended to stabilize and support agricultural markets and producer returns. On the export side state entities may exercise control over supplies, prices, and exports subject to government policies and regulations. Importing STEs may have exclusive authority for imports and domestic sales. These state entities may operate to stabilize the internal market through managing purchases, sales and stocks. Their responsibilities may include grading, handling, transportation and processing. The purposes of STEs in developing countries are often related to macroeconomic policies including national food security, consumer subsidies, tax revenue, and import and export activities. Their role may extend to the production level through credit, risk management, the provision of inputs, and providing services at the consumer end of the food chain. Governments use state trading for a broad range of commodities and products. The majority of STEs notified to the GATT/WTO operate in the agricultural sector. 1 Their use has been more prevalent for grains, dairy, and sugar products which are important components of many national diets. Trade in these food commodities is also subject to other forms of government intervention in most countries. It is estimated that STE importing countries accounted for one-third to one half of wheat imports ( ) and a higher proportion on the export side. About one half of rice exports and nearly a third of rice 1. GATT Notifications imports are conducted by STEs. 2 State trading is also used for a wide range of other agriculture products including meats, fruits and vegetables, poultry and eggs. Food security is unlikely to be an important consideration for these groups compared with protecting domestic markets, managing imports and promoting exports. State trading in alcohol, spirits and tobacco is related primarily to fiscal and market organization objectives. The diversity in product coverage and purposes of state trading practices demonstrates the difficulties in formulating rules and commitments to discipline their operations. While state trading is more prevalent in developing countries, some of the largest state trading operations are in developed countries. 3 In terms of value of exports, Canada, New Zealand and Australia are the largest STE agricultural exporters. Turkey and Israel also have substantial agricultural exports through state entities. South Africa was among the leading STE exporters until it terminated the operation of its marketing boards in Japan and Indonesia are the largest STE agricultural importers by value. Other large STE importers are Egypt, Korea, India, Pakistan, Mexico, Tunisia, Morocco and Malaysia. A number of Latin American countries maintained export and import STEs whose operations were eliminated or privatized as part of broad reforms to open their economies to investment and international competition. The activities of state trading entities in several other developing countries have also been curtailed or eliminated as part of domestic policy reforms. State trading continues to play a significant role in agricultural trade in many of the countries seeking to accede to the WTO. This is the 2. USDA, Economic Research Service. 3. Ibid. 2

4 case in China, the transition economies of Central and Eastern Europe, most Newly Independent States of the former Soviet Union and also Algeria, Saudi Arabia, Taiwan and Vietnam. In many of these countries STEs co-exist with private trade, and reforms are underway. However, the importance of an assured and stable food supply to state security and development demonstrates the difficulties and sensitivities that are likely to complicate the search for common rules and disciplines on state trading. Since STEs are more prevalent in the agricultural sector, and other forms of trade interventions are increasingly subject to more effective international rules, trade effects of agricultural STEs are increasingly exposed and subject to scrutiny. Their significant role in agricultural policy formulation and trade emerged during the Depression years and the immediate post-wwii period, as was the case for most forms of agricultural support. It was generally agreed in the early stages of the Uruguay Round that internal farm support policies were largely responsible for the agricultural trade problems that became increasingly severe leading up to the chaotic conditions of the 1980s. Many of these support policies are being progressively reformed or removed in response to structural changes in consumption, production and markets. Concurrently the use of STEs as instruments of policy has been greatly reduced as government interventions have been withdrawn, or moved back from the marketplace. Many countries have used STEs as an instrument to support other domestic policies which are now subject to trade disciplines. Not only were many support programs proving to be ineffective in terms of their original objectives, most had become costly and counter -productive in the rapidly evolving age of modern communications and integrated markets. The rules and commitments of the Agreement on Agriculture are generally consistent with the domestic policy reforms that have taken place, or are underway, in most countries, and they contribute to the restructuring of production and marketing activities. While the WTO rules apply to all trade, including the trade of state entities, STE activity is usually conducted under special legislation and government regulation and involvement. The limited transparency of these operations, and the difficulties in distinguishing between government and public market roles, has led to concerns and allegations that STEs are used to circumvent the trade rules. In the increasingly competitive world of freer global trade, there are also concerns over whether government trading entities represent fair competition in foreign markets. Similar concerns are raised with respect to multinational enterprises which is contributing to the consideration of international rules on trade and competition polices. State Trading and Trade Rules In discussions leading to the initial General Agreement on Tariffs and Trade the need for rules to address state trading activities was foreseen. Many countries had state trading entities and non-market economies were assuming greater importance in trade. Article XVII of GATT 1947, which applies to trade in all goods, recognized that STEs are legitimate participants in international trade but require specific rules to govern their behavior in relation to competition with private organizations. In the negotiating history of GATT, governments also discussed the need for rules to guide competitive behavior in the marketplace, whether private or public. The Havana Charter contained provisions on restrictive business practices which were not adopted. It was agreed in GATT 1947 that its obligations would apply directly to governments which would assume the responsibility to ensure that the private trade operated within the GATT rules and disciplines. No direct rules or guidelines were agreed with respect to the competitive behavior of private entities since it was the responsibility of each government to enforce the 3

5 GATT. Trade remedy provisions were established to back-up the enforcement. With respect to the trade of private entities, some countries maintained anti-trust and competition legislation to discipline internal competitive practices. However, governments did agree that rules were required with respect to the import and export activities of each other s state trading organizations which are responsible to governments under specific legislation and authority. The original Article XVII of GATT as retained in GATT 1994 of the WTO, is intended to ensure that STEs operate in a manner consistent with the principles of the GATT itself, and with the measures prescribed by governments to enforce GATT rules and disciplines on imports or exports by the private sector. The Article endeavors to discipline the behavior of an STE, rather than to place specific constraints on the right to operate state trading entities. The Article sets out a number of requirements and obligations with respect to STEs and governments, the principal ones being: in purchases and sales, an STE shall act in a manner consistent with the general principles of non discriminatory treatment prescribed in the GATT for governmental measures affecting imports or exports by private traders, it shall make any purchases or sales solely in accordance with commercial considerations with respect to price, quality, availability, marketability, transportation and other conditions of purchase and sale, it shall afford foreign enterprises adequate opportunity to compete in such purchases and sales, in accordance with customary business practices, members shall limit or reduce obstacles to trade created by STEs, and notify the products imported and exported by them, and importing state traders should not grant protection above that given by the bound tariff Schedules under Article II. 4 An interpretive note establishes that marketing boards engaged in purchasing or selling are subject to relevant provisions of the Article including those laying down regulations covering private trade or parastal entities. It also establishes that a state enterprise may charge different prices for its sales in different markets provided this is done for commercial reasons to meet conditions of supply and demand in export markets. Interpretive notes also make it clear that government measures to ensure standards of quality and efficiency in external trade do not constitute exclusive and special privileges. Further, a country receiving a tied loan may take the loan into account as a commercial consideration when purchasing abroad. There is a relationship between Article XVII and several other provisions of GATT in addition to Article II referred to above. A GATT panel considered that Article III:4 on National Treatment in which imports shall be treated no less favorably than national products was applicable to STEs, at least in cases where the monopoly extended to both import and domestic distribution. 5 The provisions of the Agreement also establish that disciplines relating to import and export restrictions include restrictions operated by STEs. In Part IV of the GATT, Article XXXVII:3 provides that developed country members will make every effort to maintain trade margins at equitable levels where government directly or indirectly determines the resale price of products from less-developed members. 6 4 GATT 1994, Article XVII. 5 Analytical Index of the GATT, p Ibid, p

6 Although a limited number of GATT Panel Reports based partially on the provisions of Article XVII have been issued over the years, there is very little evidence that the Article has influenced the behavior of state trading entities. Few countries reported to the GATT on the activities of their STEs, nor were they challenged to do so. A questionnaire was adopted in 1960 to strengthen the notification requirements but this was not followed by examples of stronger enforcement. There have been attempts to clarify and strengthen the Article but with limited results. The weakness of the rule is attributed in part to the lack of a clear definition of a state trading entity. The Article refers to a state enterprise or any enterprise that has been granted exclusive or special privileges involving imports and exports. Governments have interpreted the reach of the Article for themselves. The disciplines require that the entity apply commercial considerations in its conduct without identifying what these may be. Presumably governments would not accord exclusive or special privileges to an organization with respect to trade if it is to act as a normal commercial entity. A further difficulty is the lack of information on the specific activities of STEs. Since they compete with private concerns, the Article specifically does not require any government to disclose confidential information which would impede law enforcement or otherwise be contrary to the public interest or would prejudice the commercial interests of particular enterprises. While STEs are subject to specific GATT requirements, and governments are obligated to ensure that their entities respect the rules and commitments, the information to determine whether or not they do so is inadequate. Independent analyses of the impact of STEs on trade have been unable to demonstrate conclusively that STEs do or do not distort markets and trade. The disciplines and commitments in the Agreement on Agriculture apply to all trade including STEs. In addition to this general requirement there are specific references to STEs in the disciplines on market access. The definition of nontariff barriers that must be converted to tariff equivalents includes those maintained through STEs. The export subsidy commitments apply to governments and their agencies. Information on the implementation of access commitments must also provide details on STE activities when they are used to administer the commitments. The Committee on Agriculture is responsible for monitoring the implementation of the Agreement. There was some discussion of state trading in the Uruguay Round but the substance of Article XVII was not altered by the Uruguay Round. To improve the transparency of STE activities, an Understanding was reached which clarifies the definition, strengthens the notification requirements and establishes a working party to review them and make recommendations on their adequacy. An illustrative list is to be developed showing the kinds of relationships between governments and their enterprises. The definition of STEs was agreed as governmental and nongovernmental enterprises, including marketing boards, which have been granted exclusive or special rights or privileges, in the exercise of which they influence through their purchase or sales the level or direction of imports or exports. 7 The WTO Working Party on State Trading has developed a more comprehensive questionnaire to help consider whether additional disciplines are needed. Member governments are required to notify their STEs and provide information on the kinds of activities engaged in by them. Since Article XVII applies to all goods, the notifications cover a range of products. With respect to agricultural activities, the United States notified the Commodity Credit Corporation. The EU notified the tobacco monopoly in Italy and 7 Understanding on the Interpretation of Article XVII, GATT

7 monopolies in Austria for tobacco, alcohol and salt, (subsequently the salt monopoly was abolished and the operations for tobacco and alcohol changed so they no longer operate as STEs). 8 The EU did not notify its agricultural intervention agencies and management committees on the basis that the entities were not directly involved in trade. Many relatively large agricultural importing and exporting state enterprises have been notified to the WTO Secretariat, including the Canadian Wheat Board, New Zealand Dairy Board, Australian Wheat Board, Queensland Sugar Corporation, Japan Food Agency, Indonesian Badan Urusan Logistik (BULOG) and Mexican Compania Nacional de Subsistencias Populares (CONASUPO). The activities of STEs in China, Russia, Ukraine and several other countries negotiating to join the WTO form part of their accession negotiations. These organizations conduct a wide range of import, export and national market activities related to agriculture, in some cases including the administration of tariff rate quotas. The trade effects of STEs have also been raised in the analyses and information exchange process undertaken by the WTO Committee on Agriculture in preparation for further agricultural negotiations. Concerns were raised that STEs may be used to circumvent WTO rules on market access and subsidies although these entities are subject to the obligations. The principal concern expressed in relation to export STEs is their ability to use their exclusive marketing powers to compete unfairly in export markets. The allegations usually identify differential pricing, price pooling arrangements and the financial backing provided by governments as potentially trade distorting. These concerns also relate to export subsidy issues which are covered by the Agreement on Agriculture, and to pricing practices, dumping or the terms of competition in 8 WTO documents on EU notifications. national and export markets. On the import side, it is argued that market access disciplines and commitments may be avoided where STEs manage the market and control imports. Other allegations relate to discrimination against imports in purchases, the operation of TRQs, and whether imports are being allowed to compete fairly in the national market when managed by STEs The limited transparency of the operations of state trading entities inhibits competitors from determining whether WTO rules and commitments are being respected. Many of these concerns and observations can apply to the trading activities of private entities which increases the complexity of addressing the issues of state trading. The concerns over the potential for exporting and importing STEs to circumvent WTO rules and disciplines affect developing country institutions as well as those in other countries. Since developing countries appear more likely to use STEs or parastatal entities in their food and development policies, some may be reluctant to accept new trade disciplines on their activities. The WTO rules and commitments provide developing countries with greater flexibility in meeting certain obligations which may be of importance with respect to STE activity. For example, special treatment is given developing countries regarding tariffication of measures for a primary agricultural product that is the predominant staple in the diet (Annex 5). Also during the transition period, developing country members are not required to undertake commitments with respect to certain export subsidies for marketing costs, transport and freight, provided they are not used to circumvent reduction commitments (Article 9(4)). A further example is the use of STEs for public stockholding programs for food security purposes, or the provision of subsidized foodstuffs for the poor under specific conditions which are considered to be in conformity with the basis for exemption from domestic support reduction commitments. Similar flexibility may be part of any new disciplines related state trading provided they do not 6

8 conflict with establishing a rules-based market oriented trading system. State Trading and Competition Policies There is also a history of governments seeking to enhance fair competition by disciplining the activities of multilateral trading enterprises (MNEs) dating back to the origins of the GATT. These relate to concerns that the operations of MNEs are not fully transparent, and they may operate beyond the reach of national legislation. Governments are responsible to ensure that private concerns operating in each country respect WTO rules and commitments, and this is accomplished in part through the enactment and administration of domestic legislation relating to business practices and anti-competitive behavior. The draft measures in the Havana Charter to prevent anti-competitive practices such as price-fixing, allocation of markets and boycotts, were not adopted apparently because this was considered to be a national responsibility. As multinational corporations grew in size and scope of operations, and engaged in inter-corporate trade there have been attempts to develop international rules to discipline their behavior. In the early 1980s, a voluntary restrictive business practices code was established under UNCTAD auspices. The OECD also adopted Guidelines for Multinational Enterprises at about the same time. The WTO Agreements include provisions relating to competition, particularly under the General Agreement on Trade in Services, the Agreement on Trade Related Investment Measures and the Agreement on Trade-Related Aspects of International Property Rights. More recently international efforts relating to MNE activities in both the OECD and WTO have focused on the relationship between trade and competition, and separately on trade and investment. It was agreed at the Singapore Ministerial Meeting to establish a working party on trade and competition policy, and also a working group on trade and investment. Discussions on international investment in the OECD led to a draft Multilateral Agreement on Investment which has been set aside but may form the basis for further negotiations among WTO Members. Although there is a relationship between the issues of state trading, competition policies, investment, and MNE behavior, discussions have focused on each issue separately in terms of international rules. The WTO Working Party on State Trading is considering whether further disciplines on STE activity are desirable applying to all goods. The WTO Working Party on Trade and Competition Policy may develop new disciplines relating to the trade activities of the private sector, particularly MNEs, and their linkage to WTO rules. There is a relationship between concerns over unfair competition by multinational traders and STEs, and, at least in the case of agriculture, state trading issues will be pursued in the forthcoming WTO Round due to their relationship to the rules and commitments on access, domestic supports and export competition. Although it may be argued that STEs are created for many purposes beyond the scope of trade rules, it is evident that they have the potential to distort trade and competition. Thus the issues of state trading in agriculture must be addressed as they relate to access to markets, farm supports and export competition. New Rules and Policy Options There are various combinations of additional rules and policy options to address the issues arising from the use of state trading. The current trade rules are a combination of disciplines on the use of specific government measures, such as quantitative restrictions or export subsidies, and rules and commitments to be implemented 7

9 through national laws and regulations affecting the behavior of governments, their agencies, and private corporations. Consequently the impacts of STEs on trade may be influenced by rules that deal with the entity itself or commitments on how it operates. Policy options include an outright ban on the use of state enterprises in trade, agreement to negotiate new rules to apply to all STEs based on Article XVII, the negotiation of additional WTO rules combined with commitments or multilateral rules relating to competition law, and additional rules and commitments in the Agreement on Agriculture. One option regarding state trading would be to prohibit the use of governmental and parastatal enterprises in trade. This approach would be intended to prevent the direct involvement by government entities in exports or imports that could restrict or distort trade. However, despite the many allegations that state trading distorts markets, it has not been established that these activities adversely affect trade. In any event, this would be unlikely to be the case for all state trading activities. A ban on STEs in trade would raise sensitive issues of national sovereignty. Until developing countries and economies in transition have established adequate domestic markets and institutional infrastructure they will be reluctant to forego some control through state entities of sensitive sectors such as food. As demonstrated by notifications to the WTO, these activities are widespread among the membership. They are also prevalent in the countries currently seeking accession. While many STE activities are being adjusted to operate in a more market sensitive manner, or are being removed entirely in favor of private trading, it would not be appropriate, nor acceptable to many governments, to apply a trade rule to prohibit the organization of STE marketing activities that may not harm trade. As most trade agreements recognize state trading as a legitimate form of business activity it would seem unrealistic to pursue a ban on STEs and parastatal entities on trade on a multilateral basis. A second policy option would be the negotiation of stronger and more effective multilateral rules and disciplines to apply to those STEs or parastatal entities that obstruct or distort trade, or have the potential to do so. This is the option being discussed in the WTO Working Party on State Trading. It implies the need to clarify and strengthen Article XVII to prevent trade abuse in relation to other WTO rules and commitments. If a more complete rule applying to all state trading were negotiated, or a new WTO Understanding agreed to this effect, it would be necessary to ensure that STE operations were sufficiently transparent to demonstrate that all WTO rules and commitments were being respected. Provided full transparency of STE activities were achieved through the openness of their operations and international monitoring activities there may be no need for new disciplines on STEs which are already bound to respect the trade rules. The approach would require the elaboration and clarification of Article XVII, to ensure that it effectively disciplines those activities of government entities that are not explicitly covered by other trade rules. This implies further negotiations with respect to a number of issues, including: the definition of what constitutes a state enterprise for the purposes of applying trade law, including which enterprises are covered (or excluded), what measures would represent the granting of exclusive or special privileges, the nature and level of a state transaction that involves imports or exports (and is subject to the Article), the activities of an STE that would be inconsistent with the general principles of non-discriminatory treatment, 8

10 what constitutes commercial considerations, including those related to pricing practices, the relationship of Article XVII to other Articles of the Agreement, and the requirements for adequate notification and the provision of information in relation to commercial dealings, or alternate means of ensuring compliance with the trade rules. The Working Group on State Trading, and subsequent WTO negotiations, may result in strengthened and enforceable rules and procedures on STE activity relating to imports and exports of all goods. For agricultural trade, it implies that conditions of sufficient competition and transparency would exist in acquisitions and sales to demonstrate that the STE is operating within the trade rules and not abusing its marketing powers. In the case of importing STEs, their monopoly of imports could be removed, or arrangements made to allocate a share of TRQs and import requirements to the private sector. The STE might become subject to domestic competition laws. If countries are unwilling to open their state trading import operations to competition, an alternative is to provide sufficient information to demonstrate that these obligations are being met, including the requirement to ensure that the mark-ups of importing STEs are no larger than the bound tariff as required under Article II(4) of GATT Thus the obligations arising from the conversion of ntbs into tariff equivalents, the maintenance of existing access and provision of minimum access through the administration of TRQs, and fair treatment of imports in the internal market could be seen to be respected. As the existing Article XVII does not require the disclosure of confidential information that would prejudice the commercial interests of an STE, it may be difficult to obtain adequate information without comparable requirements for private entities. The full resolution of the transparency issue may require complementary progress in the realm of competition law. Turning to exporting STEs, similar considerations and policy options prevail. The monopoly of an exporting STE could be removed or modified to permit sufficient transparency and competition to ensure that its marketing powers could not be abused and the WTO rules are being respected. For the internal market, this might arise from applying domestic competition legislation to these entities and allowing private traders to operate in all or part of the market. If there is competition for supplies, the STE activity could not create price distortions between internal and export markets. With respect to export monopolies, the private sector could be allocated a share of the export business to ensure competition in both acquiring supplies and in making sales for export. If countries are unwilling to adjust the monopoly powers of an exporting STE, they might be required to operate in an equivalent manner and provide sufficient commercial information to demonstrate that internal support and export subsidy commitments are being respected. Again the requirement for adequate commercial information may not be forthcoming unless private trading enterprises face similar requirements. Consequently, the prospects of making progress would be enhanced by negotiating multilateral rules for trade and competition. Governments are more likely to discipline their STEs and provide information on their activities if equivalent disciplines and information requirements apply to large private entities. The WTO Agreements, NAFTA and other regional trade agreements recognize state trading as a legitimate form of business activity. Governments may decide for their own national reasons to eliminate state trading, or to force these entities to operate openly and become subject to competition or anti-trust legislation. This was demonstrated by the 9

11 EU when the Commission required the dismantling of monopoly powers of the British Milk Marketing Board. Since STEs are organized under national legislation, it is the responsibility of each government to ensure that its national enterprises operate in a manner consistent with international trade obligations, and with domestic competition law. But these laws may not reach across borders, or apply to the internal operations of an STE. Under NAFTA, each Party agreed to maintain measures to proscribe anticompetitive business conduct and to cooperate on issues of competition law enforcement. They also agreed to establish a Working Group on Trade and Competition to pursue these issues in a free trade area. This may lead to further trilateral arrangements or help to advance the discussions in the WTO Working Group. The development of international rules on competition would offer the opportunity to further discipline the behavior of both private and state enterprises. For example, governments may agree to multilateral rules regarding the use and enforcement of national competition legislation in a manner similar to the WTO rules for countervail and anti-dumping (Article VI). The option of strengthening and enforcing Article XVII to ensure that STEs are not used to circumvent the trade rules is under consideration in the WTO Working Group on State Trading and would apply to all goods. Should improvements emerge through subsequent negotiations, these may prove adequate to overcome the problems that currently arise for agriculture. However, there is no certainty that these discussions will result in new agreements or understandings, or proceed in step with the agricultural negotiations that are to begin shortly. As suggested, to be effective it may also require rules on the competition front to apply to MNEs. Consequently in order to make substantial progress in liberalizing agricultural trade, particularly with respect to access and the reduction and elimination of export subsidies, it may be necessary to consider additional obligations and commitments for agricultural STEs as part of a comprehensive agricultural agreement. In a third option applying to agricultural trade, governments could seek agreement on additional rules and commitments on state trading to reinforce and extend the access and subsidy rules in the Agreement on Agriculture. Since government intervention in agricultural trade continues to be widespread, despite the significant progress made in most countries to decouple their support from production, consumption, and the market, and to reduce direct market interventions, additional rules and commitments on STE activity would encourage further broad progress in the liberalization of farm trade. Experience gained from the implementation of the Agreement on Agriculture, and preparatory work in the Committee on Agriculture for the upcoming negotiations, has identified issues relating to access, domestic support and export competition that require early attention. However, some governments may be reluctant to remove TRQs or substantially improve access to their markets unless comparable concessions are made by others, including those utilizing importing STEs. Similarly, the elimination of export subsidies, and complementary disciplines on other forms of export competition such as export credits, may only be possible if competition from exporting STEs is placed under stronger discipline. Indeed, additional commitments relating to the import and export activities of STEs may prove to be essential in order to obtain a substantial agricultural result in the upcoming negotiations. This approach poses some risks that obligations applying to STEs dealing in agriculture run counter to the evolution of future rules applying to all goods. It would be important to ensure that any new disciplines applying to agricultural STEs are consistent with the existing Article XVII and with developments in the WTO Working Group on State Trading. This would also be important with respect 10

12 to WTO work on trade and competition law. Since the nature of STE organization and activity varies widely it will be difficult to develop general rules and commitments that are appropriate for all sectors and circumstances. Hence the types of measures discussed under the second option to ensure STE compliance with WTO rules may be considered, including specific commitments for agricultural importing and exporting STEs, and possibly in relation to subsectors such as grains, sugar and dairy. Building on Article XVII, and discussions in the WTO Working Groups, governments should be encouraged to pursue additional commitments for agriculture in the next Round that would strengthen the Agreement on Agriculture and improve the conditions of competition in trade in agricultural products. Conclusions A satisfactory result for agriculture in the WTO 2000 negotiations will require a significant advance in opening markets for farm products and eliminating the use of trade-distorting support. As agriculture plays a key role in development, and adequate food represents a basic requirement for all countries, developing and developed, the establishment of a well functioning, rules-based trading system is vital. A substantial agricultural package is in the interests of all countries, but particularly developing countries. For such a major outcome, governments must be prepared to deal with all of the outstanding issues that continue to confront the agricultural trading world. Among these issues is the potential impact of agricultural STEs on imports, exports and market competition. Although there is much controversy over the trade effects of STE operations, there is no doubt that government agencies and parastatal organizations have the potential to avoid or abuse the trade rules and commitments. Failure to address the issues of state trading may jeopardize a further significant improvement in access to agricultural markets and the elimination of export subsidies and other forms of trade-distorting activity. In particular, a poor result may disadvantage developing countries. The issues arising from state trading enterprises could be addressed in several ways. One option is to seek a prohibition on their use for trading purposes but this is unlikely. Work is underway in the WTO to improve the transparency requirements of Article XVII and to clarify its provisions. The rules could be altered to achieve greater clarity and effectiveness including full disclosure of STE trading activities but this could place the entities at a serious disadvantage in relation to private traders, particularly multinational enterprises. Since the greatest concern is the potential abuse of their monopoly powers, governments could agree to force STEs to compete, at least for a portion of trade. Domestic competition laws could be used for this purpose, but not all governments have competition and anti-trust laws, and some may not be prepared to open their STEs and parastatals to direct competition. These issues could be addressed through developing multilateral rules on competition policies and trade to apply to both private and state trading enterprises. However, these discussions are in an early stage, and international agreement in such a complex area will take considerable time. In any case, revisions to Article XVII for all goods and progress in dealing with trade and competition law may not fully address the issues of concern for agriculture. For the coming Round specific commitments dealing with all of the measures that impact on agricultural trade in an enhanced Agreement on Agriculture may offer the best option for progress. The prospects for a substantial improvement in market access for agricultural products and the elimination of trade distorting subsidies 11

13 would be enhanced by the negotiation of additional disciplines relating to the export and import activities of STEs, and their competitive behavior. These should deal with STE involvement in the administration of TRQs, in minimum access arrangements, domestic marketing and price support activities, and in exports including pricing behavior, export credits and other competitive practices. To be effective and enforceable there must be greater transparency and monitoring of STE activities and the actions of their competitors. Ultimately a full result may require the refinement and strengthening of Article XVII, and the negotiation of effective and balanced rules relating to competition in world markets by both multinational and state enterprises. Since many developing countries use STEs for an important part of their trade in food and agricultural products these policy options will require changes in their operations. However, the provisions of the Agreement on Agriculture provide for special treatment of developing countries to help achieve food security objective and similar flexibility may be negotiable for relevant STE activities. Commitments on the behavior of state entities with respect to both import and export activities may prove to be necessary for a satisfactory agricultural result in a WTO 2000 Round. Only with a significant advance in agricultural trade liberalization as part of a broad negotiation can developing countries ensure that their key trade objectives and specific concerns are addressed. References Canada-US Joint Commission on Grains, (1995) Final Report, volume 1, October. Dixit, Praveen M., and Josling, Tim, (1997) State Trading in Agriculture: An Analytical Framework, International Agricultural Trade Research Consortium (IATRC) Working Paper GATT, Analytical Index and Notifications. Jackson, J., World Trade and the Law of GATT, The Michie Company. Josling, Tim., (1998) State Trading and the WTO: Agricultural Trade Policy Aspects, Stanford Workshop on State Trading in North America. MacLaren, Don, and Josling, Tim, (1999) Competition Policy and Agricultural Trade, IATRC Working Paper Robertson, G. et.al. (1997), Competition Policy, Trade Liberalization and Agriculture, Policy Harmonization/Convergence/Compatibility Workshop, Tucson, February. Sorenson, V.L., et.al., (1991) State Trading in International Agricultural Markets: Institutional Dimensions and Select Cases, International Policy Council on Agriculture and Trade. USDA, Agricultural Outlook (1997), State Trading Enterprises: Their Role in World Markets, Economic Research Service, June and November, also Akerman, K., and Dixit, P., (1998), An Overview of the Extent of State Trading in Agricultural Markets, Stanford Workshop. US Government Accounting Office, (1995), State Trading Enterprises, Compliance with the General Agreement on Tariffs and Trade, Report to Congressional Requesters. World Trade Organization, GATT (1994). 12

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