In international trade, we usually assume that businesses make decisions based on profit and market needs. According to the idea of comparative advantage, companies will trade more if it benefits them.
But this does not always happen.
Sometimes, a large private company can become so powerful that it controls a market. When this happens, it may use its power in unfair ways. This can harm other countries and distort normal trade.
Governments can also influence trade indirectly. Instead of openly using taxes or rules, they may use certain companies to protect local industries or push exports. This can hurt foreign producers and create an uneven playing field.
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Widespread State Trading
State trading is still very common in countries where agriculture is important. Many developed and developing countries use government-owned or government-controlled companies to manage trade in key products like rice, wheat, milk, sugar, or fertilizers.
Governments often believe state trading helps them:
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Keep food prices stable
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Protect farmers
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Ensure food security
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Support rural development
This is why state trading is mainly seen in the agricultural sector. Some countries also use it for industrial products, but less often.
Problem: Lack of Transparency
One major issue is that many countries do not clearly reveal their state trading enterprises (STEs) or their activities.
Even though the rule to report such companies has existed since 1947 under the GATT agreement, many nations have not followed it properly.
Without transparency, other countries cannot understand how these enterprises operate or whether they follow fair trade rules.
Possible Negative Effects on Trade
State trading enterprises can easily violate World Trade Organization (WTO) rules if not monitored.
Common issues include:
1. Breaking Market Access Rules
An STE may set very high resale prices for imported goods. This makes imports uncompetitive and blocks foreign products from entering the market. This goes against WTO tariff commitments.
2. Hidden Export Subsidies
If a government supports an STE that mainly exports goods, it may act as an export subsidy. This is also restricted under WTO rules.
3. Unintended Distortions
Even when the government does not plan to distort trade, an STE’s actions can still affect prices and supply.
Example:
Some countries keep state monopolies on alcohol for public health reasons. But these monopolies can also limit foreign alcohol brands and distort trade.
Better transparency and clear rules are needed to measure these effects and create fair global trade practices.
What is a State Trading Company?
The Clarity Problem
For many years, one big challenge was the lack of a proper definition of a state trading enterprise.
Many attempts were made to create a clear definition, but none succeeded.
This made the reporting requirements under Article XVII very difficult to follow.
Article XVII:1(a) – Basic Idea
Even though there is no exact definition, Article XVII:1 mentions three types of companies:
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State-owned companies
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Companies with special rights (like subsidies)
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Companies with exclusive rights (like a monopoly)
Types of State Trading Enterprises
1. Official Marketing Boards
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Most common in agriculture
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Handle buying, selling, production, and distribution
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Often have monopoly power
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Example: Wheat boards, dairy boards
2. Export Marketing Boards
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Promote exports only
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Managed mostly by producers
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Aim to secure better prices in foreign markets
3. Marketing Regulation Boards
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Similar to marketing boards
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They do not trade directly
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They hire private companies to handle actual trade
Extra Content Added: Why State Trading Still Matters Today
State trading continues to be important because:
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Many developing countries rely on agriculture for income
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Governments want to protect vulnerable farmers
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Food security is becoming a global concern
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Market failures sometimes require government intervention
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During crises (war, pandemic, natural disasters), STEs can stabilize supply
However, without clear rules, state trading can lead to:
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Unfair competition
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Price manipulation
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Blocking of foreign products
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Loss of trust in global trade systems
This is why regulation, transparency, and global cooperation are essential.
Conclusion
State trading plays a major role in many countries, especially those focused on agriculture. These enterprises can support farmers, stabilize food prices, and improve national food security.
But they can also distort trade if they are not transparent or if governments give them too much power.
Clear rules, better reporting, and stronger monitoring are needed to ensure state trading supports fair and open international trade.