Understanding the impact of state support

European Union (EU) countries. And SOEs play a large role in many Latin American and Caribbean countries, potentially affecting market competition as well as having potentially large fiscal implications.

Deep trade agreements (DTAs) can help overcome political economy constraints to policy reforms by providing an external anchor for frameworks of state support. Including provisions or commitments that regulate state support to enterprises in trade agreements can reduce national support policies’ harm to market competition and reduce adverse cross-border spillover effects. Agreements could include commitments to adopt a competitive neutrality framework in national legislation; adopt a regulation on competition, subsidies, and SOEs; require SOEs to operate on a commercial and nondiscriminatory basis; and expand the mandate of competition authorities to govern subsidies and SOEs.

DTAs can also improve the quality of institutions by requiring greater policy transparency, promoting evidence-based assessment of policy impact, and creating frameworks for public-private partnerships. Trade agreements can enhance policy transparency on subsidies and SOEs, which is currently limited and so constrains the analysis of the economic effects of subsidies and SOEs on trade and on participation in regional and global value chains. Using trade agreements as a commitment device to improve the availability of data on state support and the analysis of its effects on valuechain-based investment incentives can also increase the appeal of trade agreements to the private sector and to communities with a stake in economic upgrading.

State support instruments can affect competition in markets and thus can upset competition policies and the activities of national competition agencies. Subsidies, SOEs, and competition law regulate different but often overlapping aspects of government intervention in the economy. All three can create cross-border spillovers, so trade agreements may include rules that regulate their use. In recent decades, preferential trade agreements (PTAs) have tended to become “deeper”—to include more provisions—in part to attenuate potential competitive distortions and reduce the trade and transaction costs associated with domestic behind-the-border policies.

Including regulations in PTAs on state support to enterprises can help manage possible interference in market competition stemming from the use of subsidies or SOEs. Rules in these policy areas can help governments ensure competitive neutrality. Trade agreements thus offer a mechanism for states to reform subsidy and SOE policies to reduce adverse cross-border spillover effects (Brou and Ruta 2013). The use of subsidies and SOEs in some Latin American and Caribbean countries suggests that PTAs could have considerable importance.

Trade agreements can spur transparency even if they are not used to guide domestic competition policy. Information on subsidies and SOEs in Latin America and the Caribbean is limited, though it is needed to analyze their effects and