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Trade Theory, Analytical Models and Development

Essays in Honour of Peter Lloyd, Volume I

Edited by Sisira Jayasuriya

Trade Theory, Analytical Models and Development, comprises 11 essays offering new contributions on the following topics: trade and wages; factor endowments, factor mobility and political economy of trade; optimality of tariffs; measurement of welfare; customs union theory; endogenous mergers and tariffs; intra-industry trade; state trading enterprises and trade liberalisation; general equilibrium effects of e-Commerce, and trade; economic growth with production and consumption externalities; and environmental pollution and resource degradation.
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Chapter 8: Reforming trade-distorting state trading enterprises

Steve McCorriston and Donald MacLaren


* Steve McCorriston and Donald MacLaren 1. INTRODUCTION State trading enterprises (STEs) are an important and controversial feature of several markets for internationally traded goods and services. While state trading enterprises were recognized in GATT 1947 (Article XVII:3) as a possible source of trade distortions because of their potentially anticompetitive effects, it is only relatively recently that state trading has emerged as a substantive issue in the context of the GATT and the World Trade Organization (WTO) (Hoekman and Low, 1998). The principal explanations for this emergence are perhaps three-fold. First, STEs are to be found largely in sectors which, until 1995, lay largely outside the application of the Articles of GATT 1947, namely, those of services and agriculture. Second, there are a number of transition economies where STEs are pervasive and which are becoming members, or which are applying to become members, of the WTO.1 And third, STEs appear anachronistic and contrary to the general trend towards competition policy and reduced government involvement in markets, both domestic and international. During the Uruguay Round negotiations, Article XVII of GATT 1947 was discussed with a view to making it more effective as a constraint on the activities of STEs rather than with a view to re-drafting it.2 The main deficiency in that Article was that it had not provided a definition of an STE and, as a consequence, STEs that should have been notified to the GATT were not (Davey, 1998, p. 29). Hence there was...

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