The trade distorting effect of state trading enterprises in importing countries

This paper focuses on the potential trade distorting effect of state trading enterprises, an issue that is likely to receive greater attention than hitherto in the context of the current agricultural negotiations in the WTO. Although state trading enterprises can arise in both exporting and importing countries, the emphasis here is on the importing country case. Our results show that state trading enterprises do distort trade, though the nature of the distortion (i.e., whether it is equivalent to an import tariff or import subsidy) depends on the nature of exclusive rights bestowed by government on the state enterprise. We also consider state trading enterprises in both developed and developing economies, the main difference being the nature of the government's pay-off function. The theoretical framework allows us to derive the tariff equivalent effects for various types of STEs, the results suggesting that the trade distorting effect is likely to vary considerably dependent on the type of STE that arises in particular circumstances.