The regulation of state trading under the WTO system

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Article XVII of the GATT 1994 is the principal Article dealing with state trading enterprises (referred to as "STEs") and their operations. It sets out that such enterprises – in their purchases or sales involving either imports or exports – are to act in accordance with the general principles of non-discrimination, and that commercial considerations only are to guide their decisions on imports and exports.

The regulation of state trading under the WTO system
Article XVII of the GATT 1994 is the principal Article dealing with state trading enterprises (referred to as "STEs") and their operations. It sets out that such enterprises – in their purchases or sales involving either imports or exports – are to act in accordance with the general principles of non-discrimination, and that commercial considerations only are to guide their decisions on imports and exports. It also instructs that Members are to notify their state trading enterprises to the WTO annually. Clarification of what is considered to be a state trading enterprise, and thus notifiable, is provided in the WTO Understanding on the Interpretation of Article XVII. Paragraph 1 of this text states that Members shall notify state trading enterprises in accordance with the following working definition:

"Governmental and non-governmental enterprises, including marketing boards, which have been granted exclusive or special rights or privileges, including statutory or constitutional powers, in the exercise of which they influence through their purchases or sales the level or direction of imports or exports."

Particularly important in this definition is the phrase "in the exercise of which they influence … the level or direction of imports or exports", as this goes to the heart of what the regulation of state trading in the WTO is aimed at – that is, the potentially distorting effects on trade of the operations of state trading enterprises. Conversely, the WTO does not seek to prohibit or even discourage the establishment or maintenance of state trading enterprises, but merely to ensure that they are not operated in a manner inconsistent with WTO principles and rules.

It should be noted that the notification requirement does not apply to what is termed "government procurement", i.e. imports of products for immediate or ultimate consumption in governmental use, and this is specified in both of the above legal texts. (Government procurement is regulated by the Agreement on Government Procurement for those Members which are parties to it.)

In addition to the core provisions in Article XVII and the Understanding, a number of other GATT Articles deal with state trading in one way or another. The Interpretative Note to Articles XI (General Elimination of Quantitative Restrictions), XII (Restrictions to Safeguard the Balance of Payments), XIII (Non-discriminatory Administration of Quantitative Restrictions), XIV (Exceptions to the Rule of Non-discrimination) and XVIII (Governmental Assistance to Economic Development) states that throughout these Articles, the terms "import restrictions" or "export restrictions" include restrictions made effective through state trading operations. Added to the Article XVII requirement to notify, it can be seen that the thrust of the rules on state trading are two-fold: to increase the transparency of the use of state trading to implement various trade-related policies, and to ensure that the state trading enterprise is not used to implement WTO-inconsistent measures.

The substantive obligations of Members under the rules governing state trading can be summarized in the following four points:

(1) non-discrimination, commonly referred to as "most favoured nation" or "MFN" treatment;

(2) no quantitative restrictions;

(3) preservation of the value of tariff concessions; and

(4) transparency.