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Trade and Competition: Best Friend Forever?

 |  October 29, 2021

By: Ruben Maximiano & Lorena Giuberti Coutinho (OECD On The Level)

With the global economy hard hit by a crisis of unprecedented scale, interactions between trade and competition have become central to the international policy debate. Distressed businesses and disrupted supply chains have prompted active government interventions and trade restrictive measures. Industrial policy is also back at the top of the policy agenda. While necessary as a response to the crisis and even beyond, government support granted to companies can also have important implications for competition and trade policy.

In a globalised economy, government interventions can affect competition in both domestic and international markets. State support has an impact on the cost and revenue structure of supported firms and their actual or potential foreign competitors. This means that unsupported foreign competitors may struggle to enter a market or be compelled to leave it because they do not benefit from the same support as their locally-based competitors. This can also enable supported national firms to expand into international markets, not because they are more efficient, but because they may be entering markets where competing firms have not received any – or the same level of – support.

These dynamics can undermine the global competitive playing field and weaken gains from trade by distorting the efficient international allocation of resources. This may also lead to snowballing effects whereby individual countries respond by providing more support in the form of direct subsidies, preferential treatment, or state-backed guarantees for their domestic firms. This potentially erodes support for the multilateral trade rules that have brought so many economic benefits…