PRB 98-2E
THE WTO, STATE TRADING ENTERPRISES (STEs)
AND EXPORT SUBSIDIES
Prepared by:
Sonya Dakers, Science and Technology Division
Jean-Denis Fréchette, Economics Division
September 1998
The
Uruguay Round of multilateral trade negotiations (MTN), which concluded in 1994, led not
only to the creation of the World Trade Organization (WTO) but also to the birth of a new
order in world trade. They have served to bring about reductions in export subsidies and
domestic support programs, and have promoted greater market access, thanks to introduction
of a tariff rate system to replace the varied and complex trade barriers that existed
previously. One of the anticipated effects of the new tariff structure is that commercial
transactions between countries will become more transparent.
For
Canada’s grain trade, the major impact of the MTN has been to eliminate the
"Crow rate" system (Western Grain Transportation Act), which was a direct
subsidy to grain exports. Since Canada maintains no other export subsidy for grains, and
since the domestic support it gives producers is in line with WTO rules, Canada should now
in principle be viewed as a fair trading partner; however, this is not the case. After
years of attacking the Crow rate, the Americans have now shifted their attention to the
Canadian Wheat Board, which is the only remaining target.
Although
they did not feature as a major subject of discussion during the last MTN, state trading
enterprises such as the CWB were nonetheless subjected to an examination that served to
define them more closely, and thus identified more clearly the regulatory framework within
which they operate.
What
is a state trading enterprise? The 1994 Understanding Concerning the Interpretation of
Article XVII of the GATT defined trading enterprises as follows:
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.(1)
The
WTO Secretariat notes that there are 16 member countries where a specialized STE is
engaged in the wheat trade. The best known and most important of these are the Australian
Wheat Board and the Canadian Wheat Board (CWB). The structure of the latter rests on three
pillars — its role as a single-desk seller, its relationship with the federal
government, and price pooling. The CWB is the object of regular attacks by the U.S.
government. (see Canada-U.S. Grain Trade Relations)
A
Canada-U.S. Joint Commission on Grains, created pursuant to the Canada-U.S. Free Trade
Agreement (FTA), was mandated to examine the structures for marketing grains between the
two countries, and to suggest approaches for resolving grain trade disputes. In its final
report, submitted in October 1995, the joint commission concluded that:
The government-guaranteed
initial price, which is set by regulation, is not an export subsidy, since it is applied
indiscriminately for grains sold on both the domestic and export markets.
Nevertheless,
the Joint Commission stressed that the discretionary pricing policies that the CWB is able
to pursue, thanks to its monopolistic position, have the potential for distorting trade.
It recommended therefore that the CWB should no longer have this advantage, and that the
Board should be [translation] "more at risk of profit or loss in the marketplace or
[encouraged] to act as if it were subject to comparable market risks, without excluding
recourse to pooling […]."(2)
The
Joint Commission’s conclusions did not prevent 18 members of the U.S. Congress from
asking the General Accounting Office (GAO), the equivalent of Canada’s Auditor
General, to investigate the capacity of STEs in Canada, Australia and New Zealand to
create distortions in export markets.
In
its June 1996 report, the GAO noted that officials of the USDA had admitted to having no
tangible proof that the CWB was violating trade rules. At the same time, however, it
mentioned that the CWB’s monopoly position and its relationship with the federal
government — in other words, the first two pillars of the CWB — do have the
potential to create trade distortions. In effect, the GAO continued the argument put
forward by the Canada-U.S. Joint Commission.
The
operations of STEs are subject to the agency’s general rules and must in addition
obey their own regulations, as clarified during the Uruguay Round. Thus, the CWB must
"in its purchases or sales involving imports or exports, act in a manner consistent
with the general principles of non-discriminatory treatment set out in the General
Agreement for governmental measures affecting imports or exports by private traders."(3)
The
CWB of course will sometimes pursue discriminatory pricing policies in various markets,
particularly to counter unfair trade practices such as the export subsidies used by
competitors. At first glance, it might appear that the CWB is not respecting the WTO
rules; however, it should be noted that an addendum to Article XVII specifies that
[translation] "the provisions of this article do not prevent a state enterprise from
selling a product at different prices on different markets, provided that it acts in this
way for commercial reasons, in order to satisfy the play of supply and demand on export
markets."
As
can be seen, as a state trading enterprise the CWB has a recognized status under the
Canada-U.S. Free Trade Agreement, as well as under the WTO. It has nonetheless been a
target for the American government, which has announced its intention of putting STEs on
the agenda for the next round of multilateral trade negotiations. This approach may stem
from the political interests of U.S. pressure groups, who would like to see the United
States increase its market share, or may be part of a U.S. strategy to divert attention
from its own "Export Enhancement Program" for grains. The fact is that both the
United States and the European Union subsidize their grain exports to certain markets. The
U.S. has recently replenished the EEP budget, which now amounts to more than
U.S.$500 million.
In
examining the behaviour of STEs and their capacity to create market distortions, it is
important to look beyond their unique position as a domestic monopoly and beyond the
government guarantees that they enjoy. Other factors, such as the amount of domestic
support, export subsidies and market access — all conditions that make for market
strength — can cause distortions just as readily.
Moreover,
economic theory demonstrated long ago that a large share of the world market is needed to
have any real influence on trade in any product. Is the CWB, which has a 20% share of the
world wheat export market, really a sufficiently important player to "control"
that market? There is certainly room for doubt, in which case the CWB would be merely a
"price taker" on the world market, even if it must be admitted that some studies
have contested this position. It is true that the CWB, thanks to its monopoly in the
Canadian wheat export market, can practise price discrimination in certain markets, and
can exact premiums that would be impossible if other Canadian sellers were competing for
the same market share. At the same time, when the CWB comes face to face with competition
from producing countries that provide export subsidies, its only defence is to rely
precisely on price discrimination. When account is taken of the circumstances in which
grains are marketed, where competition is often fierce and where market segmentation and
price discrimination are frequently employed, the CWB’s economic behaviour does not
appear substantially different from that of the large private companies active in the same
sector, except for one significant advantage: the initial payment, followed by a final
payment at the end of the crop year, permits the CWB to assume lower risk than a grain
company, which has to pay the full price up to delivery.
As
a result of Bill C-4, An Act to amend the CWB and to make consequential amendments to
other Acts, Canadian grain producers, through the board of directors, will have a
significant role in the destiny of the new corporation. Although the CWB will retain its
monopoly on wheat and barley that is marketed for export or domestic human consumption,
new pricing options, increased flexibility and enhanced cash flow will now be available to
farmers. Single desk and price pooling remain pillars of the CWB; however, should the
board of directors ever receive the mandate to change the CWB from a marketing agency to a
grain company, they could do so under the current legislation.
For
many analysts, the days of the CWB as a single-desk agency are now numbered, particularly
if the international pressure for further reform of STEs in the next round of multilateral
negotiations and the domestic pressure for a dual-marketing agency persist.
(1) World Trade Organization, General Agreement
on Tariffs and Trade, Article XVII, paragraph 1.a.
(2) Canada-U.S. Joint Commission on Grains, Final Report,
October 1995.
(3) World Trade Organization, General Agreement on Tariffs
and Trade.
|
