Leveraging PTAs to improve policy transparency

PTAs elsewhere. The region’s PTA chapters on competition also address subsidies much less frequently than do other MICs’ PTA chapters on competition: 7 percent versus 44 percent. Conversely, the competition chapters of the region’s PTAs more frequently include provisions dealing with anticompetitive behavior by SOEs.

Latin American and Caribbean governments thus recognize that PTAs should address subsidies and SOEs. But on average, they do less than other countries to use PTAs as commitment devices, as reflected in the infrequency of PTA provisions regulating subsidies for SOEs or requiring SOEs to operate on a commercial basis as well as the few references to subsidies in PTA competition chapters. Compared with the EU approach discussed below—where competition policy is the framework to regulate the use of subsidies and the behavior of all undertakings, both private and state owned— Latin American and Caribbean PTAs do much less to regulate either policy area. On average, the region’s PTAs also have fewer provisions than the EU’s and other MICs’ PTAs requiring notification of subsidies (annex 6A, figure 6A.1), and so they do less to foster policy transparency.

Most legal and economic analysis of PTAs focuses on the extent and substance of their coverage of different policy areas, whether provisions are binding, and whether binding provisions are enforceable. The status of commitments depends on whether they will be implemented, which is indirectly indicated by the ability to invoke dispute settlement proceedings.6 This focus on legal norms—and whether they can, in principle, be enforced—depends on whether governments know whether provisions are being implemented, which in turn depends on whether market participants recognize instances of partner governments acting inconsistently with the provisions of the PTA.

The focus on enforceability is arguably too narrow, in part because many provisions in trade agreements call for undertaking good regulatory practice and relying on “soft law” focal points for dialogue and cooperation. From an economic perspective, soft law can be more important than hard law commitments. Trade agreements can be useful to economic policy makers—and to voters, citizens, and taxpayers—as instruments to support collecting and reporting information on policies that affect competition. They can also provide a vehicle for analytically informed deliberation between trade partners to assess domestic policies and their effects on trading partners.

Notification obligations feature in many trade agreements but often do not work well. For example, few WTO members live up to the notification obligations embodied in various WTO agreements (Hoekman 2012; Wolfe 2018). The implementation of PTA notification requirements has received less attention. In practice, the committees and councils tasked with overseeing PTA implementation provide the forums and focal points for dialogue and monitoring. PTAs provide stronger incentives than WTO agreements for governments to invest in monitoring implementation since they aim to remove substantially all trade barriers between signatories.

Whether PTAs lead to better monitoring is an empirical question about which little is known. Some Latin American and Caribbean PTAs include transparency obligations for all measures relating to trade. Mexico is a partner in many: examples include Mexico–Costa Rica and Mexico–Uruguay for trade in goods; Mexico–Japan for trade in services; and measures addressing specific sectors such as automobiles (Mexico–Colombia), financial services (Mexico–Peru), and telecommunications (Mexico–Nicaragua) (Kaufmann and Saffirio 2021).

The number of provisions in Latin American and Caribbean PTAs aimed at enhancing transparency has grown (figure 6.11). And when it comes to transparency, the region’s PTAs on average do fairly well compared with PTAs in other regions, such as East Asia and Pacific and North America (figure 6.12).

Even so, Latin American and Caribbean PTAs do not generally appear to be used by signatories to cooperate in collecting and jointly analyzing policies covered by their PTAs.7 The EU is the pacesetter for this practice, partly reflecting the depth of the integration being pursued by EU member states.

EU regulations on “state aids” belong to a broader framework of competition policy and pertain to both governments and firms.A key focus of EU state-aids regulation is safeguarding the European single market.Four criteria apply for state aid to be illegal: (1) state resources lead to (2) a selective advantage for a firm or activity that (3) distorts competition and (4) affects trade between member states. These criteria also apply to undertakings to which member states have granted special or exclusive rights—SOEs, among others. A competitive neutrality framework subjects undertakings “entrusted

Figure 6.11 Average coverage ratio of transparency provisions in Latin American and Caribbean PTAs, by period, pre-1995 to 2010–17

Average coverage ratio (%) 40

35

30

25

20

15

10

5

0

Before 1995 1995–99 2000–04 2005–09 2010–17 Latin America and the Caribbean, extraregional Latin America and the Caribbean, intraregional Rest of the world Source: World Bank’s Deep Trade Agreements database. Note: The coverage ratio is the share of provisions in an agreement relative to the maximum number of possible provisions. PTA = preferential trade agreement.

Figure 6.12 Average coverage ratio of transparency provisions in PTAs, by region, 2017

35

Average coverage ratio (%) 30

25

20

15

10

5

0 North America Latin America and the Caribbean East Asia and PacificMiddle East and North AfricaEurope andCentral Asia South AsiaSub-Saharan Africa

Source: World Bank’s Deep Trade Agreements database. Note: The coverage ratio is the share of provisions in an agreement relative to the maximum number of possible provisions. PTA = preferential trade agreement.

with the operation of services of general economic interest or having the character of a revenue-producing monopoly” to the general competition rules unless the rules obstruct the performance of undertakings’ public tasks.8

Although the depth of EU integration is much greater than that of Latin American and Caribbean PTAs, elements of the EU’s transparency policy for subsidies are relevant. EU member states are required to notify the European Commission of state aid allocations exceeding €500,000, including the name of the beneficiary and the amount granted. An annual State Aid Scoreboard that reports data on subsidy expenditures by EU member states covers all existing aid measures to industries, services, agriculture, and fisheries, except aid to railways and services of general economic interest.9 The data, intended to foster transparency and facilitate monitoring, are complemented by impact evaluations of selected large or innovative state aid schemes to guide possible improvements in program design and state aid rules. A similar mechanism could be conceived for Latin American and Caribbean PTAs, perhaps offering significant economies given the number of PTAs signed by the region’s countries with an interest in improving policy transparency.

The incentives for such an effort are determined in part by the regulations that countries agree to. In the case of the EU, notifications are encouraged by a General Block

Exemption Regulation (GBER) applied to subsidies deemed to raise few or no competition concerns, such as regional aid (including for ports and airports), assistance to small and medium enterprises, and support for sports and culture; employment and training; broadband infrastructure; natural disaster relief; energy and the environment; and research, development, and innovation.10 Agreeing to subsidies unlikely to cause concern focuses attention on subsidies more likely to have harmful trade spillover effects.

Cooperation to improve transparency over subsidies and the operation of SOEs need not occur under the umbrella of a PTA. For example, the Global Forum on Steel Excess Capacity (GFSEC), established at the 2016 Group of Twenty (G-20) summit, produces and shares reliable statistics on production capacity and measures of excess capacity across major steel producers and identifies ways to reduce global production. The forum provides a platform for exchanging data on steel capacity and information on steel policies, including support measures—improving the information base and increasing the transparency of policies implemented by major steel-producing countries. The forum includes governments and industry (a key source of information on production and investment trends). It was supported by the OECD Secretariat.

Although the GFSEC was not linked to a trade agreement, PTAs would provide ready-made institutional frameworks for the types of activities it undertakes. An important feature of the GFSEC was its support by a trusted intermediary clearinghouse organization: the OECD Secretariat. Delegating measurement and analysis to a neutral and technically capable body that acts as an agent for the principals (governments) is common practice in the EU and OECD—and also in the WTO, whose Secretariat has been mandated by the WTO membership to undertake trade policy reviews that document trade policy in member countries. The OECD has played such a role for decades, producing data on support policies in a range of sectors (including agriculture, fisheries, biofuels, and fossil fuels) and analyses of subsidies in specific sectors (such as aluminum and semiconductors) that explicitly incorporate value chains (OECD 2019a, 2019b, 2019c). Both the OECD and WTO experiences illustrate transparency as going beyond documenting policies to measuring the magnitude of interventions using well-defined indicators of the support the policies entail.11

Although Latin American and Caribbean PTAs include provisions to ensure transparency in applied trade policies, these provisions do not entail comprehensive and regular monitoring of applied policy or commitment implementation. Transparencyrelated provisions for subsidies and SOEs are limited, as noted earlier. Many government agencies participate in designing and implementing subsidy policies, and PTA forums bring these actors together. They include national finance ministries, competition agencies, and international organizations—notably the World Bank, International Monetary Fund, Inter-American Development Bank, and regional United Nations agencies. A focal mechanism is needed to map what data these entities already collect, identify gaps, and foster information sharing, building on the existing institutions and networks that have an interest and requisite expertise. For example, the International Competition Network (ICN), an informal grouping of competition agencies, is already active.12