Subsidy, SOE, and competition policy regulations in trade agreements

As noted earlier, PTAs can act as commitment devices—mechanisms providing a government with the means to tie its own hands in dealing with domestic agents that lobby for state support. The incentive for governments is that even if SOEs and subsidies generate short-run rents for the actors involved (including the government), their sustained use will distort the allocation of resources as investors overinvest in the sectors expected to benefit from state support. Because the government will not benefit from that distortion, it has an incentive to commit to limits on its ability to back subsidies and SOEs (Maggi 2014).

Provisions on subsidies in most PTAs, whether among Latin American and Caribbean countries or elsewhere, build on the provisions established in the World Trade Organization (WTO) Agreement on Subsidies and Countervailing Measures (ASCM). The ASCM has a twofold objective: (a) to keep members from using subsidies to circumvent negotiated market access (tariff) concessions, and (b) to regulate the use of measures to countervail (offset) the adverse effects of foreign subsidies of goods on domestic producers.5

The WTO, though prohibiting export subsidies, does not regulate domestic subsidies as such. Governments may use subsidies other than export subsidies, but countervailing import duties can be imposed in destination markets, or challenges can be raised through dispute settlement procedures over adverse effects in third markets. The adverse trade effects, not the purposes of a subsidy, are what matters.

Exceptions are found in the so-called Green Box subsidy measures in the WTO’s Agreement on Agriculture, which permits subsidies deemed not to distort trade significantly. The Green Box subsidies include environmental protection, regional development programs, and farmers’ direct income support, decoupled from production levels or prices. A similar approach to nonagricultural subsidies became defunct in 1999, after failure to obtain the consensus required to extend the relevant provision (ASCM, article 8) beyond the initial five years negotiated in the Uruguay Round of multilateral trade negotiations.

PTA provisions on subsidies tend to mirror those found in the WTO (see Rubini 2020). Only a quarter of PTAs covered in the World Bank’s Deep Trade Agreements database go beyond the ASCM with provisions specifying types of subsidies not considered trade distorting. The EU is a signatory to most of those PTAs. The permissible subsidies generally pertain to public services, regional aid, or environmental protection. If they are deemed to have detrimental spillover effects, the PTAs call for consultations rather than legal action. EU PTAs also regulate state guarantees and support to insolvent or ailing companies. Recent PTAs also have such provisions, as in the

Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which prohibits state support on noncommercial terms for SOEs’ commercial activities. Both EU PTAs and the CPTPP subsidy restrictions exclude activities providing governmental (public) services in domestic markets.

Virtually all Latin American and Caribbean PTAs (80 of 82) include language on subsidies, but most do not require partners to report to each other on subsidies, and only a handful include provisions for partners to discuss control or review of them. Most emulate the WTO in permitting subsidies allocated to the services sector (figure 6.8).

Provisions for SOEs follow a similar pattern. Latin American and Caribbean PTAs tend to replicate WTO rules on state trading enterprises, banning discrimination and requiring that they operate on a commercial basis.

Figure 6.8 Number of Latin American and Caribbean PTAs with selected provisions on subsidies and SOEs, 2017

Does the agreement cover support granted by subcentral, regional, and local authorities? 80

Does the agreement cover support to state enterprises? 79

Does the agreement provide for any institution to deal with transparency or enforcement?

Does the agreement provide for notification requirements (individual measures, annual reporting)? Does the agreement provide for the discussion of information for the deliberation and assessment of individual measures/situations?

Does the agreement cover subsidies in the services sector? 26

14

8 77

Does the agreement provide for the supervision or review of subsidy regulations?

Does the agreement specify any objective for controlling subsidies and reactions to them? 5

1

0 20 40 60 80 100 Number of agreements

Source: World Bank’s Deep Trade Agreements database. Note: Data cover a total of 82 Latin American and Caribbean preferential trade agreements (PTAs). SOE = stateowned enterprise.

Recent EU PTAs, PTAs in East Asia and Pacific (including the CPTPP), and the US–Mexico–Canada Agreement (effective in 2020) require SOEs to operate on a commercial basis, ban them from providing subsidized inputs to producers in member countries, require them to operate on a nondiscriminatory basis, and prohibit anticompetitive practices. The CPTPP requires SOEs and designated monopolies to compete on quality and price rather than benefit from discriminatory regulation and distortive subsidies. More specifically, CPTPP signatories must avoid discrimination, apply commercial considerations to SOEs, limit the scope for designated monopolies to engage in anticompetitive practices, refrain from granting noncommercial assistance that might injure or adversely affect the interests of another party, and establish an impartial regulatory and institutional framework for SOEs (Licetti, Miralles, and Teh 2020).

Recent DTAs specifically require SOEs to operate on a nondiscriminatory and commercial basis. Two-thirds of the 283 DTAs assessed by Rubini and Wang (2020) included language requiring SOEs to behave in accordance with commercial considerations, and 70 percent of those included subsidy restrictions for SOEs. Consequently, signatories could act against subsidies to SOEs, whether direct fiscal transfers or indirect supports. One-third of the PTAs that included provisions on SOEs had notification requirements. For instance, the CPTPP requires signatories to publish data on extant SOEs and the measures that support them. Although a significant minority of DTAs included policy transparency provisions, only 10 of the 283 went further to cover generation of information on SOE operations (Rubini and Wang 2020).

Fewer Latin American and Caribbean PTAs have at least one provision on SOEs (63) than have at least one on subsidies (82). Only one-third of the region’s PTAs call for SOEs to operate on a commercial basis, compared with two-thirds of PTAs in the World Bank database. Only two Latin American and Caribbean PTAs include provisions regulating state support in the economy through SOEs, and none includes a mechanism to increase the transparency of state intervention in the economy (figure 6.9).

Competition policy-related provisions in Latin American and Caribbean PTAs lead to similar conclusions. More than four-fifths (84 percent) of all the agreements in the World Bank’s Deep Trade Agreements database have competition-policy related provisions (Licetti, Miralles, and Teh 2020). Latin American and Caribbean PTAs are similar: 80 percent (66 of 82) have provisions on competition policy. Of the 66, 43 are extraregional, meaning that agreements between Latin American and Caribbean countries are less likely to include competition policy provisions than are the region’s agreements with extraregional partners. Most Latin American and Caribbean PTAs do not use the PTAs to foster coordination and collaboration

Figure 6.9 Number of Latin American and Caribbean PTAs with selected provisions on SOEs, 2017

Does the agreement cover state-owned enterprises, state enterprises, or public undertakings?

Does the agreement provide for a body or a committee to deal with transparency or enforcement of the disciplines of state enterprises?

Does the agreement regulate subsidization to state enterprises? 63

57

52

Does the agreement provide for any dispute settlement mechanism to deal with state enterprises? 49

Does the agreement require state enterprises to act in accordance with commercial considerations (for commercial activities)? 29

Does the agreement provide for discussion of information or for deliberation and assessment of operations/conduct? 5

Does the agreement specify an objective of regulating state intervention in the economy via state-controlled or delegated entities? Does the agreement provide for any other requirement or mechanism to deal with transparency or corporate governance with respect to state intervention in the economy? 2

0

0 20 40 60 80

Number of agreements

Source: World Bank’s Deep Trade Agreements database. Note: Data cover a total of 82 Latin American and Caribbean preferential trade agreements (PTAs). SOE = stateowned enterprise.

between competition agencies, nor do their competition policy chapters include provisions to regulate SOEs or state aid (figure 6.10).

In many of their provisions for SOEs, subsidies, and competition policy, PTAs in Latin America and the Caribbean are similar to those signed by middle-income countries (MICs) in other parts of the world (annex 6A, figures 6A.1–6A.3). On average, the coverage of subsidy provisions in the region’s PTAs is like that found elsewhere, but a slightly greater share of Latin American and Caribbean PTAs (94 percent) include provisions on transparency and dispute settlement than do PTAs of MICs elsewhere (83 percent). Notification requirements and annual reporting for subsidies show a larger difference: fewer than one-third of Latin American and

Figure 6.10 Number of Latin American and Caribbean PTAs with competition policy provisions, 2017

Does the agreement establish cooperation in the field of competition? 59

Does the agreement regulate monopolies?

Does the agreement regulate anticompetitive behavior of SOEs?

Does the agreement provide for exchange of information among bodies with a competition mandate?

Does the agreement provide for coordination among bodies with a competition mandate?

Does the agreement regulate undertakings with exclusive rights? 26

17 47

46

37

Does the agreement regulate state aid? 6

Does the agreement provide for the creation of a regional/agreement-related competition authority? 3

0 20 40 60 80 Number of agreements

Source: World Bank’s Deep Trade Agreements database. Note: Data cover a total of 82 Latin American and Caribbean preferential trade agreements (PTAs). SOEs = stateowned enterprises.

Caribbean PTAs (31.7 percent) include such provisions, compared with half of other MICs’ PTAs (51.6 percent) (annex 2A, figure 6A.1).

Latin American and Caribbean PTAs also generally differ from the PTAs of MICs elsewhere by placing provisions on subsidies for SOEs in SOE chapters rather than in chapters on subsidies or competition policy. More than 60 percent of the region’s PTAs have such provisions in SOE chapters, compared with 2.5 percent of PTAs in MICs the rest of the world. Only 35 percent of the region’s PTAs require SOEs to operate on a commercial basis, compared with 49 percent of other MICs’ PTAs. And only 2.4 percent of Latin American and Caribbean PTAs include provisions treating the regulation of SOEs as an objective, compared with 16 percent of PTAs in other MICs.

Similarly, 21 percent of the chapters on competition policy in Latin American and Caribbean PTAs include provisions regulating undertakings with exclusive rights— that is, SOEs—in contrast to an average of 35 percent of such chapters in MICs’