When GATT came into force in 1948, some member countries had active state trading programs and wanted to ensure their governments’ right to engage in market activities. However, governments with a dual role as market regulator and market participant can act in ways that protect domestic producers and disadvantage foreign producers. While the drafters of GATT 1947 accepted STEs as legitimate participants in trade, they recognized that STEs, especially those with a monopoly of imports or exports, could be operated to create serious obstacles to trade. GATT 1947 addressed STEs in article XVII (see app. I for the complete text). However, article XVII did not define the term “state trading enterprise,” and as discussed later in this report, GATT members have had problems understanding which entities were subject to the provisions of article XVII. As a result of the Uruguay Round, GATT 1994 defined STEs in the Understanding on the Interpretation of Article XVII of the General Agreement on Tariffs and Trade 1994 (the “Understanding”—see app. III for the complete text or page 11 of this report for the definition). All entities covered by this definition are subject to article XVII. Article XVII establishes a number of guidelines and requirements with respect to the activities of STEs and the obligations of member countries. For example, it stipulates that STEs shall act in a manner consistent with the principles of STEs shall make any purchases or sales in accordance with commercial considerations and shall allow enterprises from other member countries the opportunity to compete; member countries shall provide certain information to the GATT/WTO secretariat about their STEs’ activities; and member countries are not required to provide confidential information that (1) would impede law enforcement, (2) would be contrary to the public interest, or (3) would prejudice the legitimate commercial interests of their STEs. Information is provided to the GATT/WTO secretariat about STEs and their activities on the basis of a questionnaire adopted in 1960. (The full text of the questionnaire is contained in app. II.) GATT/WTO members are to provide responses, called “notifications,” to the questionnaire. Ideally, the notifications should provide enough transparency (openness) about STE operations to determine whether or not they are adhering to GATT disciplines. The questionnaire asks members to list their STEs, the products for which STEs are maintained, and the reasons for maintaining STEs. It also asks them to provide certain information about how their STEs function and statistics that indicate the extent of trade accounted for by STEs. Other portions of GATT 1947 and GATT 1994 also contain references to STEs. For example, countries that have negotiated with other GATT/WTO members to provide a certain level of protection for domestic producers cannot allow their STEs to operate in a way that affords a level of protection greater than was negotiated. Also, references made in certain GATT articles to import or export restrictions include those made effective through STEs. We prepared this report for congressional requesters to provide information about the nature of state trading in other countries and the treatment of STEs in GATT/WTO. To determine the extent of STEs in GATT member countries, the type of information available about STEs, and the level of compliance with article XVII, we reviewed article XVII notifications provided to the GATT/WTO secretariat from 1980 to 1994. (Details on our analysis of STE reporting are contained in apps. IV and V.) We also reviewed reports of the Panel on Notifications of State Trading Enterprises, member country position papers on article XVII presented during the Uruguay Round, and GATT/WTO secretariat notes on article XVII prepared for the Uruguay Round. Finally, we discussed the effectiveness of article XVII prior to the Uruguay Round with officials from the United States, GATT/WTO, and other countries. We discussed the results of the Uruguay Round as contained in GATT 1994 and the Agreement on Agriculture with officials from the United States, GATT/WTO, and other countries, including the chairmen of the WTO Working Party on State Trading Enterprises and the WTO Committee on Agriculture. We also reviewed relevant documents, including the Understanding and the Uruguay Round Agreement on Agriculture. We discussed the potential for an increase of STEs in GATT/WTO with relevant officials from the United States, GATT/WTO, the United Nations, and other countries. We also reviewed studies of economies in transition by the Organization for Economic Cooperation and Development (OECD) and other expert organizations. We discussed U.S. efforts to monitor the activities of STEs in other countries with respect to GATT/WTO requirements with officials from USTR, USDA/FAS, the Department of Commerce, and the International Trade Commission. We obtained oral comments on a draft of this report from the U.S. Trade Representative and the Department of Agriculture. Their comments are discussed on page 19. We conducted our review in Washington, D.C., and Geneva, Switzerland, from April 1995 to July 1995 in accordance with generally accepted government auditing standards. A central objective of article XVII is the collection of information about STEs in member countries in order to provide transparency about their activities and ensure they operate in accordance with GATT disciplines. However, according to GATT/WTO and member country officials, article XVII has generally been ineffective in meeting this objective. The notifications we reviewed provided much of the information requested in the questionnaire, including sectors in which STEs operate, their purposes and activities, and some statistics about their operations. However, compliance with the notification requirement was limited during 1980 to 1994, as 79 percent of GATT members did not submit STE notifications during 1981, the best year of reporting. The evidence we obtained suggested the lack of compliance could be attributed to (1) confusion over the definition of STEs, (2) the lack of systematic review of notifications received, (3) the apparent low priority some GATT members assigned to article XVII’s reporting requirement, and (4) the overall burden associated with GATT reporting requirements. Under these circumstances, it is impossible to determine whether article XVII has yielded information on the full nature and extent of STE activity in GATT/WTO member countries. Moreover, the lack of notifications from most member countries has hindered GATT/WTO members in identifying all STEs in GATT/WTO member countries and determining whether they operate in accordance with GATT disciplines. Twenty-nine member countries submitted STE notifications to the GATT/WTO secretariat at least once during the period 1980 to 1994, with 21 of the countries reporting some form of state trading. These notifications provided some insight into the activities of STEs in member countries. For example, the majority of STEs described in these notifications operated in the agriculture sector, covering such products as grains and cereals, dairy products, beef and veal, and sugar (see fig. 1). Member countries also reported that they maintained state trading in alcoholic beverages and petroleum products. In addition to the products listed in figure 1, a few countries also provided notifications about state trading in salt, coal, inflammables, aircraft, and nuclear fuel. The notifications also provided information related to the purpose of STEs and how they operate. With respect to purpose, some member countries have reported using STEs to help agricultural producers “achieve their full potential in overseas markets,” to ensure “protection of the domestic agricultural production against low-priced imports,” and to ensure a “stable and adequate supply” of certain agricultural commodities as part of “national defense preparedness.” Regarding operations, member countries have reported that STEs acted as sole agents for production, imports, and/or exports in the sectors covered. Additionally, the STEs assessed levies on production and/or imports, issued export licenses, and received government guarantees on borrowed funds. Other state trading practices reported included government-guaranteed minimum prices and subsidized exports. The variety of state trading practices reported to GATT makes comparisons between countries difficult since the level of state involvement, and therefore impact on trade, may differ in each case. In general, most notifications have contained statistical information on STE operations, but the information has occasionally been less than requested in the questionnaire. For example, although the questionnaire asked that statistics be furnished on the value and quantity of imports, exports, and national production for the products notified where possible, several countries did not provide information covering national production. In addition, some countries provided information on the quantity, but not the value, of trade and production. In accordance with article XVII, each GATT/WTO member country should provide new and full responses to the questionnaire on state trading activities every 3 years, called “full notifications,” even if the country does not have any STEs. Additionally, GATT/WTO members should provide notifications of any changes to their state trading regimes in intervening years, called “updating notifications.” Nonetheless, compliance with article XVII was poor during the period we reviewed. Regular, full notifications of STEs by GATT members were the exception and not the rule. Even during 1981, the full notification year with the best response rate, approximately 79 percent of GATT member countries failed to submit a notification. (Article XVII notifications by year and by country from 1980 to 1994 are contained in apps. IV and V, respectively.) As shown in appendix IV, compliance with the full notification requirement every 3 years was poor. The number of countries responding during full notification years varied from a high of 18 notifications in 1981 (about 21 percent of GATT members) to a low of 7 notifications in 1990 (about 7 percent of GATT members). Only Finland, Norway, and Sweden provided full notifications for all five of the full notification years occurring during the period we reviewed. Between 1980 and 1994, a total of 29 countries responded at least once to article XVII, providing either full or updating notifications.