Do state trading exporters distort trade?

Abstract

In this paper, we analyse the trade-distorting effects of state trading enterprises (STEs) which exist in some exporting countries. Because of these potential effects, several countries have raised the issue of state enterprises in the Doha Round negotiations in the WTO. The belief is that STEs in certain developed countries have trade effects which are equivalent to an export subsidy. STEs also exist in developing countries, though since the aim of government policy may differ from the developed country case, the trade distortion may be equivalent to an export tax. We present a theoretical model that is sufficiently general to allow us to consider the case of exporting STEs in developed and developing economies. The model is calibrated with data on two examples of STEs, one typical of an STE in a developed country, the other typical of an STE in a developing economy. In each case, we allow for differences in the nature of the STE's pay-off function. The overall conclusion is that STEs do distort trade and the trade distortion effect is potentially significant.