WTO Rules on State-Owned Enterprises and Implications for
Chinese SOE Reforms
Vol. 3, No. 6
(Editor's Note: Due to space limitation, all footnotes have
been omitted. References can be obtained from the author at
this article, I analyze the World Trade Organization ("WTO")
rules concerning state trading, the Subsidy and Countervailing
Agreements, several dispute settlement cases, and their implications
for the operation of state-owned enterprises ("SOEs")
in WTO member countries ("Members"). I will also
discuss how the WTO rules may affect Chinese SOEs and efforts
to reform them.
I go into the details of the WTO rules, two general observations
may be made. First, historically speaking, the WTO was designed
to be ownership-neutral and some authors suggest that it should
maintain such neutrality. Second, the WTO is an intergovernmental
body. Only member states and their governments have rights
and obligations under various WTO agreements. There are very
few WTO rules under which business enterprises might arguably
have rights and obligations. Thus, it is usually understood
that the WTO has no special rule for SOEs.
would be too hasty, however, to conclude that the WTO is totally
unconcerned with the creation and operation of SOEs. During
the negotiations leading to China's admission as a Member
of the WTO, the role of China's SOEs and their impact on free
and fair trade were repeatedly questioned by the Members.
The Members' concerns are reflected in the special rules for
China's SOEs in the Working Party's Report for China's WTO
accession. It is true that prior to the Chinese negotiations,
ownership was a relatively minor issue at the WTO and did
not draw much attention. However, an issue that is minor for
the WTO as a whole could become critical for a very large
member state like China, where SOEs dominate many of the most
important industrial and trade sectors.
Part I of this article, I will review WTO rules that are potentially
relevant for SOEs. I will then evaluate such WTO rules in
Part II. Finally, in Part III, I will try to draw some lessons
for China's SOEs.
Is There a WTO Rule Governing SOEs?
A. The STE Rules
a. Article XVII of GATT--State Trading Enterprises
i. The Obligations for State Trading Enterprises
original signatories to the General Agreement on Tariffs and
Trade ("GATT") were aware of the danger that some
Member governments might create certain public or state-owned
enterprises to circumvent the governments' obligations under
GATT. At the same time, those signatories were reluctant to
impose greater restrictions on public enterprises than on
private ones. As a result, Article XVII of GATT was enacted
to regulate state trading, but the definition of "state
trading enterprise" ("STE") was left ambiguous
to allow a good deal of leeway.
Article XVII, STEs are required to abide by general principles
of non-discriminatory treatment. More specifically, an STE
shall make its purchases and sales "solely in accordance
with commercial considerations" and shall "afford
the enterprises of the other contracting parties adequate
opportunity, in accordance with customary business practice,
to compete for participation in such purchases or sales."
This is often considered to be the substantive obligation
contained in Article XVII. In addition, the Contracting Parties
were required to notify GATT of their state trading practices;
this is normally referred to as the transparency obligation.
The gist of the Article XVII is the principles of "non-discriminatory
treatment obligation," "solely based on commercial
consideration" and "adequate opportunity to compete."
Clouds of disagreement surrounded the exact meanings of these
it is unclear from the WTO agreements whether the non-discrimination
obligation in Article XVII is applicable to the national treatment
principle in GATT Article III or only the most favored nation
principle in GATT Article I. The ambiguity has been discussed
both on a theoretical and a practical level,, but was somewhat
cleared in the Korea - Measures Affecting the Import of Fresh,
Chilled and Frozen Beef ("Korea - Beef") case. In
the case, the Panel very clearly held that "this general
principle of non-discrimination includes at least the provisions
of Articles I and III of GATT". Furthermore, the Panel
clarified the relationship between the "non-discrimination
principle" of Article XVII: 1(a) and the "commercial
consideration" obligation in 1(b). The Panel stated that:
lists of variables that can be used to assess whether a state
trading action is based on commercial consideration (price,
availability etc…) are to be used to facilitate the assessment
whether the state trading enterprise has acted in respect
of the general principles of non-discrimination. A conclusion
that the principle of non-discrimination was violated would
suffice to prove a violation of Article XVII; similarly, a
conclusion that a decision to purchase or buy was not based
on 'commercial considerations,' would also suffice to show
a violation of Article XII."
this approach, price, quality, availability, marketability
and other elements are used to gauge the commerciality of
a disputed STE business transaction, and furthermore, to decide
whether the non-discrimination obligation has been violated.
This decision can simplify the application of Article XVII.
In a challenge to an STE business transaction, the complainant's
evidence usually includes the market conditions and circumstances
when and where the transaction happened, which can be determined
by regular market surveys and a comparison with similar non-STE
transactions. An STE transaction that is not commercially
justified under normal market conditions is equated with discrimination
and is thus a violation of the Article XVII obligation.
Vagueness of the Definition
a rule that has, during the existence of GATT, been rarely
invoked by Members or applied by the Dispute Settlement Body
("DSB"), the definition of STEs and the relevance
of that definition for SOEs have not always been clear. The
1994 Understanding on the Interpretation of Article XVII of
the General Agreement on Tariffs and Trade (the "Understanding")
gave a working definition (the "Working Definition")
for an STE as follows:
and non-governmental enterprises, including marketing boards,
which have been granted exclusive or special rights or privileges,
including statutory or constitutional powers, in the exercise
of which they influence through their purchases or sales the
level or direction of imports or exports."
definition has three elements:
the enterprise is a governmental or non-governmental entity,
which includes marketing boards;
(ii) the granting to the enterprise of exclusive or special
rights or privileges; and
(iii) a resulting influence, through the enterprise's purchase
or sales, on the level or direction of imports or exports.
Working Definition seems to indicate that Article XVII is
concerned only with special or exclusive rights and privileges
over a market rather than state ownership itself. In other
words, if operating in fully competitive market, SOEs are
not subject to the discipline of substantive and transparent
obligations of Article XVII.
are several reasons why this observation is not free from
doubt. First, the Understanding explicitly provides that the
Working Definition is "without prejudice to the substantive
disciplines prescribed in Article XVII," by which it
means that the definition is only applicable to the transparency
section, not the whole clause. Second, the original text of
Article XVII, Section 1(a) includes two disjunctive elements:
"a State enterprise, wherever located;" or
(ii) "grants to any enterprise, formally or in effect,
exclusive or special privileges…"
scope of the Working Definition corresponds only to the second
element of Article XVII: 1(a) - "any enterprise"
with exclusive or special privileges. Interpreting this provision
to replace the provisions of Article XVII: 1(a), would be
tantamount to nullifying the first element of Article XVII:
1(a) - a "State enterprise, wherever located" -
or render it redundant, an approach inconsistent with generally
accepted rules for interpretation of WTO rules.
drafters of Article XVII said "the term 'State enterprise'
in the text did not require any special definition; it was
the general understanding that the term includes, inter alia,
any agency of government that engages in purchasing or selling."
The 1960 Report states "[T] he Panel did not use the
word 'enterprise' to mean any instrumentality of government.
There would be nothing gained in extending the scope of the
notification provisions of Article XVII to cover governmental
measures that are covered by other articles of the General
Agreement. The term was used to refer to an instrumentality
of government which has the power to buy or sell …" Thus,
government administrative organs should not be considered
to be STEs, since their activities are regulated by other
articles of the General Agreement. The history of the negotiations
excludes governmental administrative organs from the scope
of the definition of STEs, but gives no indication as to whether
a government-owned enterprise should be considered to be a
government agency engaging in purchasing and selling.
discussing the Ad Note to Articles XI, XII, XIII, XIV and
XIII, the Panel in the Korea - Beef case used the phrase "when
an import restriction is imposed by a state trading enterprise,
with or without exclusive rights…" (emphasis added).
This statement suggests that an STE may be found "with
or without exclusive rights" under Article XI. This observation
may be applied to Article XVII to support the conclusion that
exclusive rights are not necessarily a prerequisite to finding
an STE. It takes a step back from the narrowing interpretation
of STE in the Understanding, and leaves more uncertainty for
the applicability of Article XVII.
the lack of clarity, neither denying nor admitting the applicability
of Article XVII to SOEs is sufficiently justified. Short of
further official clarification by the Members or an interpretation
by the Dispute Settlement Body, it would seem that SOEs can
benefit from the vagueness and claim that they are not bound
by Article XVII.
No Benefit from Vagueness for Chinese SOEs
the Article XVII was translated into Chinese, the Chinese
Ministry of Foreign Trade and Economic Cooperation inadvertently
or advertently interpreted the "state trading enterprise"
as "Guo Ying Mao Yi Qi Ye," or "state-run trading
enterprises." This subtle discrepancy might somewhat
comfort the SOEs since over twenty years of economic reform
they are now owned, but not operated, by the State. It might
create the illusion that Article XVII is irrelevant to an
SOE without special or exclusive trading rights. As we have
seen, to understand the state trading enterprise as a state-run
trading enterprise is not well justified in light of the WTO
and GATT literature. Furthermore, it would be misleading to
believe that SOEs have no special WTO obligations.
discussed earlier, there is no conclusive answer regarding
whether and how the state trading rules apply to SOEs in the
existing WTO literature. China's SOEs will not be able to
benefit from this vagueness. During the negotiations for Chinese
membership, some Members raised concerns about "[t]he
continuing governmental influence and guidance of the decisions
and activities of such [state-owned and state-invested enterprises]
relating to the purchase and sale of goods and services,"
and they required that "such purchases and sales should
be based solely on commercial considerations without any governmental
influence or application of discriminatory measures."
In response to the request of the Members, China's representative
state-owned and state-invested enterprises would make purchases
and sales based solely on commercial considerations, e.g.,
price, quality, marketability and availability, and that the
enterprises of other WTO Members would have an adequate opportunity
to compete for sales to and purchases from these enterprises
on non-discriminatory terms and conditions."
"commercial considerations" obligations imposed
upon SOEs are comprised of the commercial factors of price,
quality, etc., "non-discriminatory terms and conditions"
and "adequate opportunity to compete." This commitment
was included in the Working Party Report for China's accession
to the WTO (hereinafter the "Working Party Report"),
which is not legally binding in and by itself. Nonetheless,
China reaffirmed such commitments as binding obligations through
Article 1.2 of the Accession Protocol by including them as
an integral part of the WTO agreements.
obligations have exactly the same keywords as that are prescribed
in Article XVII, paragraphs 1(a) and (b). Essentially this
commitment uses the same approach used in Article XVII to
regulate China's SOEs. The vagueness of the definition of
STEs thus becomes a side issue. It may be too hasty to equate
Article XVII to China's SOE commitments in the Working Party's
Report, but in interpreting this SOE commitment, the existing
Understanding and application of Article XVII are valuable
A Harsher Obligation for China's SOEs
the analysis used in the Korea - Beef case, the "non-discrimination"
provisions of the Working Party's Report will be applicable
to both most-favored nation treatment and national treatment
obligations. Also the Working Party's Report substantially
enlarges the scope and content of STE obligations. A close
reading of Paragraph 1 of Article XVII demonstrates that the
non-discrimination obligation for STEs is limited to "purchases
or sales involving either imports or exports", and that
this obligation applies only to the trade of goods under the
GATT framework, while the non-discrimination obligation for
China's SOEs and state-invested enterprises ("SIEs")
is plainly applied to the "purchase and sale of goods
and services." It extends the obligations to purchases
and sales that do not involve exports or imports, as well
as to goods and services. The expansion of the scope of the
non-discrimination obligation committed to in the Working
Party Report is great and its impact has yet to be seen.
the special rules governing SOEs and SIEs are not sector-specific.
They have the potential to stir up large conflicts in those
areas with regard to which China has not made WTO commitments.
For example, China did not sign the Civil Aircraft Agreements,
but that will make little difference to Chinese aircraft procurement
practices, since all the airlines are either state-owned or
state-controlled and are therefore subject to the non-discrimination
obligations. Also the service areas where China has opted
out for application under the General Agreement on Trade in
Services will not be exempt from the non-discrimination obligation
if the service providers or procurers are SOEs. To be sure,
there has not as yet been any indication that China's SOE
commitments will be interpreted and applied in such a way
by the Member States; and China certainly would not agree
with such an interpretation. However, the door to further
argument was not definitively closed by the accession negotiations.
Much more work will need to be done in the post-accession
may receive different kinds of subsidies just like those given
to other kind of enterprises. Usually their ownership by the
government may make it easier to get government benefits and
government subsidies, but this does not represent a substantial
difference from enterprises that are not affiliated with the
government. In this sense, SOEs are treated equally under
general WTO subsidy rules. However, government provision of
equity capital can result in an enterprise owned or partly
owned by government becoming an SOE. Equity infusion, as one
form of subsidy, is thus inherently related to SOEs and directly
relevant to the subject of this essay.
The Three Elements of Subsidy in the Form of Equity Infusion
The following three conditions must be satisfied to confirm
that there is a "subsidy:"
there is a financial contribution by a government or public
body, that, among other things, includes the direct transfer
of funds in the form of an equity infusion;
(ii) a benefit is thereby conferred; and
(iii) the subsidy must be specific, or is presumed to be specific
(the prohibited subsidy is presumed to be specific).
first element of financial contribution or direct transfer
of funds by government is relatively straightforward since
the definition explicitly includes equity infusion as one
form of transfer of funds.
The Appellate Body has given its guidance on how to identify
the existence of a "benefit:"
word 'benefit', as used in Article 1.1(b), implies some kind
of comparison. This must be so, for there can be no 'benefit'
to the recipient unless the 'financial contribution' makes
the recipient 'better off' than it would otherwise have been,
absent the contribution. In our view, the market place provides
an 'appropriate basis for comparison in determining whether
a 'benefit' has been 'conferred', because the trade-distorting
potential of a 'financial contribution' can be identified
by determining whether the recipient has received a 'financial
contribution' on terms more favorable than those available
to the recipient in the market."
interpretation of "benefit" is congruent with Article
14 (a) of Agreement on Subsidies and Countervailing Measures
("SCM"), according to which a government equity
infusion does not confer a benefit on the recipient unless
the government investment decision is "inconsistent with
the usual investment practice (including for the provision
of risk capital) of private investors in the territory of
Discussion Paper prepared during the drafting of the Subsidy
and Countervailing Agreements (the "SCM Agreements")
sheds some light on how this comparison should be conducted.
provision of equity is not a subsidy if the shares are purchased
at prevailing market prices. If there is no comparable market
price, the Discussion Paper required that the government "[s]how
that a reasonable evaluation had concluded that the investment
would yield an adequate return, or that the investment was
consistent with the reasonable practice of private investors."
recently, the Informal Group of Experts to the Committee on
Subsidies and Countervailing Measures reached the same conclusion
with respect to how the comparison should be conducted in
a scenario where the recipient company's stock is publicly
traded. If the government pays more than the market price
of the public trading stock to obtain its shares, the overpayment
is a cost to the government and should be treated as a subsidy.
In cases where the stock in question is not publicly traded,
the expert group did not endorse the Discussion Paper's comparison
approach. It only suggested that other general factors, like
the allocation period, government cost of funds, the time
value of money, adjustments for inflation and interest etc.,
should be taken into account.
the most comprehensive effort to elaborate the calculation
of benefits was presented in the United States' regulations
implementing the SCM Agreements. According to the final countervailing
duties regulations promulgated by the United States Department
of Commerce ("USDOC"), when a comparable market
price is available, the government investment shall be compared
to the market price to decide its legality under the subsidy
rules. When there is no comparable private investor price,
the government-provided equity is categorized as equity-worthy
or unequity-worthy at the time of the equity infusion. It
is equity-worthy if "the firm shows an ability to generate
a reasonable rate of return within a reasonable period of
time." If the government-provided investment is equity-worthy,
the relevant United States authority will go further to check
whether the terms and conditions of the government purchase
of equity is consistent with the usual practice of private
investors on a case-by-case basis. If the government-provided
investment is decided to be unequity-worthy, the relevant
United States authority will calculate the benefit as the
amount of the equity infusion. The United States approach
is different from that proposed by the Informal Group of Experts.
It simply disregards any value the investment may have, and
equates the entire investment as a grant that does not result
in a return. Considering that the United States is the single
largest user of countervailing measures, this difference between
the United States approach and the widely accepted approach
may become significant in future dispute settlement proceedings.
regard to the specificity test, the SCM Agreements do not
say whether the SOEs, as a group characterized by their common
ultimate ownership, can be categorized as "certain enterprises."
There is a special rule in the Protocol on the Accession of
the People's Republic of China (the "Protocol").
It provides that:
purposes of applying Article 1.2 and 2 of the SCM Agreement,
subsidies provided to state-owned enterprises will be viewed
as specific if, inter alia, state-owned enterprises are the
predominant recipients of such subsidies or state-owned enterprises
receive disproportionately large amount of such subsidies."
this definition, the subsidies provided to SOEs are predetermined
to be specific and can be subject to further examination under
the SCM Agreements. Apparently the subsidy rule will restrain
many tools the Chinese government currently uses to foster
and support the SOEs. For example, the debt-equity conversion
scheme to relieve SOEs from burdensome bank loans is very
susceptible to the challenge of forgiveness of due debt or
equity infusion subsidies.
Consequences of Being Subsidized
subsidy can be prohibited, actionable or non-actionable under
the SCM Agreements. When a subsidy is going to be prohibited
by the panel, the panel or the Appellate Body may recommend
that the Member at issue withdraw the subsidy without delay.
If an actionable subsidy is found to have had adverse effects
on another Member, the subsidizing Member shall take appropriate
steps to remove the adverse effects or shall withdraw the
subsidy. The implications of this rule for SOE commercial
transactions will be profound. It injects international trade
law, a public law, into the private domain. For example, in
the Australia - Subsidies to Automotive Leather case, the
Panel required the Australian government to withdraw its subsidies
in the grant contract within 90 days. The enforcement of such
a decision is to require a material modification of the contract.
According to conventional legal wisdom, the effectiveness
and modification of private contracts are governed by private
law alone, not by international law. When the party granting
a subsidy is an enterprise other than government, e.g. a state-owned
bank, the conflicts of public law and private law will be
more salient than they were in the Australia case.
the inception of WTO, the WTO dispute settlement system has
been transformed by a change from its traditional diplomatic
approach to a more legalistic approach. The precedents (especially
those set by the Appellate Body) are, though not expressly
binding, often deferred to in subsequent decisions. Case law
is becoming more and more valuable to Members as a guide to
interpreting and applying the enacted rules.
issue of ownership has sporadically been raised in connection
with other GATT/WTO issues and entered into the forum of dispute
settlements. The methodology of the panels and the Appellate
Body considering how ownership may affect international trade
and how it shall be treated sheds light on our further exploration
of the law of ownership under the new international trade
Can an SOE Action Be Treated as a Government Policy?
the case of Japan - Trade in Semi-conductor, the Panel interpreted
the government measures flexibly. It stated "administrative
guidance" is not a prerequisite to finding a governmental
measure. If there are sufficient incentives or disincentives
to complying with the non-mandatory measure and its effectiveness
is essentially dependent on government action or intervention,
there's no difference between mandatory and non-mandatory
compliance for purpose of Article XI, paragraph 1.
rationale was applied by the Panel of Canada-Periodicals to
hold that the Canada Post rate policy was a governmental regulation
and subject to the obligations in Article III, paragraph 4.
Canada Post is a Crown corporation created and wholly owned
by the government. It was alleged to have violated the national
treatment obligation by charging domestic periodicals lower
rates than imported periodicals. The complainant, the United
States, claimed that the pricing practices of Canada Post
were government regulations. The Canadian government argued
that Canada Post "[o]perate[s] in a competitive environment;
earn[s] a return on equity; [does] not depend on government
appropriation; and finally, provide[s] a reasonable expectation
that it would pay dividends." In the view of Canada government,
its control over Canada Post was not more than the influence
a shareholder might have exerted. The Panel ruled in favor
of the complainant and decided that the challenged pricing
practice was a government measure. The first reason cited
by the Panel was that Canada Post had non-commercial business
dependent on rates set by the Canadian government, so it has
incentives to maintain its pro-domestic price policy on periodicals.
The second reason cited was that because the Canadian government
mandated the commercial nature of the delivery of publications
and also had directive power to instruct Canada Post to change
postal rates, it had control over the Post's pricing policy
objective of China's SOE reform is to establish so-called
modern enterprise systems similar to the management model
of Canada Post- entities owned by the government but for all
practical purposes independently operated in the marketplace.
In this case, the Panel did not doubt the commercial nature
of Canada Post and its independent operation. However, it
viewed the challenged pricing practice as a government regulation
based on the potential control right the government possessed
due to its dual capacity as shareholder and government. The
effect of this test may be magnified in the far more complicated
and intractable government-enterprise and Party-enterprise
relationships existing in China, and therefore makes the business
decisions of Chinese SOEs very vulnerable to WTO challenge.
Privatization and Subsidy
the case of United States - Imposition of Countervailing Duties
on Certain Hot-Rolled Lead and Bismuth Carbon Steel products
Originating in the United Kingdom ("US - UK Steel"),
the Panel dealt with the trade impact of ownership transactions
and the privatization of state ownership. For government subsidy
to capital expenditures, the USDOC allocates the subsidy benefit
over the average useful lifetime of the recipient's assets
(the "allocable subsidy"). In its countervailing
duties practice, the United States uses an irrefutable presumption
that the allocable subsidy continues with the asset even after
a change of ownership. Privatization does not trigger a re-assessment
of the existence of a subsidy previously determined to exist.
The Panel decided this case against US practice. In May 2000,
the Appellate Body upheld the Panel's finding that the presumption
that a "benefit" continues to flow from an untied,
non-recurring "financial contribution" can never
be irrefutable. However, today the United States still fails
to observe the Panel's and the Appellate Body's ruling and
persists in its original practice. The USDOC's continued use
of the irrefutable presumption methodology has prompted a
set of dispute settlement proceedings initiated by the European
Union and Brazil. The DSB's ruling is currently under review.
implication of this case is that in the reform of Chinese
SOEs, a viable equity share transaction system for SOE must
be established. No matter in what form the transactions may
occur, they will need to be in compliance with the WTO rule.
A subsidy may be found in privatization, or other types of
Commonality of Ownership
another case, the US - Anti-dumping Measures On certain Hot-rolled
Steel Products From Japan, the arbitrators dealt with the
topic of transactions between related enterprises. The Appellate
Body's observation in this case is noteworthy because it demonstrates
how the WTO Dispute Settlement Body analyzes the trade impact
of common ownership.
this case, the arbitrators were invited to consider whether
a transaction between parties under common ownership is in
the ordinary course of trade. If it is not, the transaction
price between the affiliates will be excluded from the calculation
of "normal price" as provided by Article 2.1 of
the anti-dumping agreement. The Appellate Body stated that,
if the transaction parties have common ownership, despite
their distinct legal personalities, the transaction has actually
occurred within a single economic enterprise. The Appellate
Body stated that: "[t]he lower the degree of common ownership,
implying common control, between the parties to a sales transaction,
the less likely it is that the transaction will not be 'in
the ordinary course of trade.'" This observation is not
a strange one. For example, in tax law, the terms of prices
of transactions between related enterprises will be adjusted
to reflect the actual costs or fair market value of the transactions
in an effort to prevent tax evasion.
China, state-owned or partly state-owned enterprises are very
common. As SOEs, they have common ownership but dispersed
control. They are literally part of a single economic entity
- the government - but the different centers of control are
often in conflict. To view the large number of SOEs all as
related enterprises would be practically impossible in China.
A revisiting of the "commonality of ownership" rule
is needed to deal with state ownership in China.
An Over-Arching Theme?
SOE-related WTO rules discussed above address possible distortion
of the economy by direct government participation in the economy
at different levels of participation. Despite the fact that
there is apparently no coordinated WTO action with respect
to STEs, subsidies and similar issues, an over arching theme
underlying WTO SOE rule-making and interpretation may be discerned:
A hypothetical private market participant is generally used
as the benchmark against which the behavior of SOEs is measured.
For market activities and norms to function as well as the
WTO intends for them to, this ideal market participant has
several important features. It must:
be a profit or wealth maximizer;
(ii) use only commercial factors in making decisions about
sales and purchase, and is not motivated by other non-commercial
considerations. If competing products are identical or similar,
it will not according to government involvement;
(iii) be a savvy and well-informed trader, never buying at
higher price or selling at lower price than the market. It
is so savvy that it has never been taken advantage of by its
(iv) not be specially advantaged compared to others, e.g.
it may not get financing on better than prevailing market
terms and conditions.
leitmotif permeates the entirety of WTO rules relating to
state ownership and we can reasonably expect that in the future,
rule making or interpretation will return to this standard
again and again.
Good Law or Bad Law?
A. The STE Rules
a. STEs and Commercial Considerations
WTO current rules for STE are not irreproachable. The "solely
based on commercial consideration" principle is particularly
precarious. The WTO Background Report indicates that the most
important reasons for the Members to maintain STEs are not
commercial ones, but rather social or economic concerns. According
to the Background Report, the most-often-seen mandates for
income support for domestic producers;
b. price stabilization;
c. expansion of domestic output;
d. continuity in domestic output;
e. increase in government revenue, or decrease in government
f. rationalization and control of foreign trade operations,
including achievement of economies of scale in trading operations,
and improvement of the terms of trade;
g. protection of public health and strategic control;
h. management of important domestic resources; and
i. fulfillment of international commitments on quantity and/or
none of the foregoing factors except (e) may be related to
profit making. It is not clear from the text of the Background
Report and its context how an STE can consider only commercial
factors in making purchases and sales even though its main
mandates are not commercial. The WTO appears to be inconsistent
in allowing the existence of state trading systems, while
requiring STEs to be solely commercially oriented.
The Commerciality of An Enterprise
underlying rationale for the GATT Article XVII is that the
government-sponsored enterprises must act like private enterprises
in the market. However, commercial considerations are not
the only factors influencing private enterprises. Many private
enterprises' restrictive business practices are meant to defeat
the trade liberalization objectives of GATT. Professor Jackson
has mentioned that, even in U.S. where competition law is
most seriously enforced, "buy domestic" is not an
unusual practice for American companies. Actually the for-
and only-for-profit conception of corporate purpose, established
in the famous Dodge v. Ford Motor Co. case at the beginning
of last century, has been, if not abandoned, substantially
modified over the last century. Companies are allowed and
even encouraged to have some social responsibilities in addition
to maximizing wealth for their shareholders.
it may be questioned how commercial is "commercial"
under this principle. A particular transaction may be commercially
better than another but may not necessarily be better if measured
against the long-term or firm-wide goals of the enterprise.
Managers should have the freedom to consider transactions
in light of the enterprise's operation as an ongoing concern
rather than treating each deal as completely unrelated to
any other. If the non-discrimination obligation is applied
so as to require that STEs must not be taken advantage of
in any transaction they enter into, it would tend to treat
STEs as different from customary market operators, who of
course make mistakes.
Corporate Law Approach
under general corporate law, short of self-dealing or fraud,
courts will normally look into the substance of the directors'
decision only when the negligence of the decision-makers is
egregious. Otherwise, the management or directors' decisions
are generally deferred to as business judgment. Needless to
say, international trade law is different from corporate law,
but the question may be asked as to why a court judge cannot
decide whether a business decision is in the best interest
of the company, but a trade arbitrator may decide the commerciality
of an STE or SOE business decision?
The International Law Angle - When Does State Responsibility
customary international law, state responsibility arises when
a wrongful act is committed by a governmental organ, no matter
whether a legislative, executive, judicial or other organ.
A state is also responsible for the acts of persons who are
not state organs but have the power to exercise elements of
governmental authority. In addition to situations involving
the exercise of governmental authority, a state will be held
liable for the conduct of a person if that person is "in
fact acting on the instructions of, or under the direction
or control of, that State in carrying out the conduct".
SOEs generally do not carry out any governmental function
that can be attributed to the delegation of authority by the
State, and most corporate law regimes generally require a
State shareholder to let the company make decision independently
rather than commingling the shareholder's will with the company's.
Therefore, to impute an SOE's misconduct in business activities
to its state shareholder is, in the absence of government
instruction, direction or control, not just unreasonable as
a matter of fact, but also apparently unjustified in general
international law practice.
Subsidy Rule-Compared with European Community State Aid Rules
rigidity of the WTO subsidy rule can be seen if compared to
the European Union's rule concerning state aid. Under EU treaties,
a state government is free to invest in commercial enterprises
or to provide other sorts of support, but it must not distort
competition. The so-called market economy investor principle
requires the state government to behave like a private investor
if it wants to inject money into a company. Under this rule,
there is no state aid if the government investment is under
"terms which a private investor would find acceptable
in providing funds to a comparable private undertaking when
the private investor is operating under normal market economy
shown by the case of Credit Lyonnais and Westdeutsche Landesbank,
this rule is better at taking into account the particular
circumstances under which the state makes its investment decision,
especially when the recipient of government money is an enterprise
making a loss or one threatened by insolvency. For example,
the Commission will "take into account certain strategies
of a holding or group interest of an investor and to distinguish
between short and long term interest of an investor."
Moreover, EU treaties provide for a wide range of exceptions
to the state aid rule. The EU rule concerning state aid is
more flexible and better defined, thus enabling-member states
to support domestic and intra-EU economic and social objectives.
In the much more heterogeneous and less integrated universe
of the WTO, there is no good reason to have a more rigorous
and restrictive rule for Members' direct participation in
Implications for Chinese SOE Reforms
the disputable general applicability of WTO rules to STEs
and SOEs, these rules have been accepted by China as part
of its accession to the WTO. I cannot second-guess how and
why China agreed to SOE terms that are critical to its state
economy. However, it is clear that some sort of trade-off
was made during the marathon negotiations. Furthermore, the
"solely commercial consideration" principle seems
compatible with the Chinese government's goals in reforming
SOEs, namely to remold SOEs as profit-oriented enterprises.
The consequences arising from the difference between commercial
enterprises driven by the market and SOEs driven by the law
was not fully appreciated by the negotiators. It must also
be noted that the commitments made in the Protocol and the
Working Party Report are specific to China only; this will
make it very difficult to curtail any deleterious effects
through future multilateral negotiations.
Sole Commercial Consideration and the Strategic Transition
of Chinese SOEs
the large scale of the state-owned economy in China and the
government's strategy of adhering to public ownership in the
future, the WTO's current rules for SOEs and their future
development may have a profound impact on Chinese economic
reforms. The most recent focus for SOE reform has been to
concentrate state-owned resources on strategically important
industries while retreating from other market sectors. The
strategically important industries include those in which
private investors are not active enough or for which the market
is otherwise incapable of meeting capital needs. The main
strategically important industries are those associated with
national security, natural monopolies, suppliers of crucial
products and services, and the high and new technology industries.
The strategic importance of these industries implies that
commerce cannot be their only consideration. How the SOEs
will accommodate both the solely commercial consideration
principle as well as other general social and economic causes
associated with their strategic significance will be a vital
challenge for the strategic transition of the SOEs and Chinese
compliance with WTO rules.
Government as Shareholder-the Dilemma of Its Dual Role
shown by the case of Canada - Periodicals, the government's
dual role as shareholder and regulator puts the SOE in an
awkward position, easily open to trade law claims. Under the
holding of this case, an enterprise pricing policy can be
deemed to be a governmental measure subject to WTO discipline.
This case should set off alarm bells for deeply entangled
government, Party and enterprises in China. In many circumstances,
the line between government as shareholder and government
as regulator has been blurred.
theme of the twenty-odd years of SOE reform in China has been
to separate the enterprises from government, even while the
government remains the ultimate decision-maker with regard
to important business decisions and the appointment and removal
of the management of SOEs.. The separation of government and
SOEs has always been the main objective of Chinese SOE reforms
and has proved to be a difficult task. When the government
closely controls the management of SOEs, business is suffocated
by bureaucracy, but if the government relaxes its hands, the
SOE suffers from all the problems associated with insider
control. The current situation is complicated. Chinese accession
to the WTO will open the door for others to allege that many
SOE business decisions are government measures subject to
WTO rules. The relationship between government and business
in China will be regulated in accordance with a new norm.
more fundamentally, by imposing direct obligations on thousands
of Chinese state-owned enterprises, the WTO may change the
current operating environment for SOEs. As enterprises, SOEs
may not be brought directly before Dispute Settlement Bodies
in Geneva, so the government will have to bear the result
of any claim based on SOE misconduct. However, implementation
of rules affecting SOEs and compliance with Panel or Appellate
Body rulings related to SOEs will inevitably require the Chinese
government to intrude into SOE transactions. For example,
the Chinese government might be required to bring WTO-inconsistent
SOE deals into compliance with WTO rules. Thus, the impact
on SOEs will not be restricted to governmental policymaking
or implementation only, but also to the day-to-day operations
of SOEs. Should an SOE consider whether a proposed transaction
is based solely on commercial considerations and is otherwise
compatible with WTO law? Should a prospective business partner
of an SOE consider whether the transaction will be challenged
under WTO rules? This is no longer a hypothetical question.
issues surrounding the impact of the WTO on SOEs have not
been well explored, and even only sporadically raised. Many
of the observations I have made here are only my personal
speculations. The future development of WTO rules affecting
SOEs will depend on many factors. For example, whether rules
affecting SOEs become a particular focus of the WTO will depend
largely on how Chinese SOEs, taken as a whole, influence the
level and direction of China's international and domestic
trade. As long as the SOEs continue to suffer from the chronic
illness of inefficiency and lack of competitiveness, it will
be less of an issue, but if the Chinese government's goal
of revitalizing the SOEs is reached and SOEs can effectively
compete for the huge Chinese market with foreign traders and
investors, its vulnerability under WTO rules will open a convenient
door for previously unexpected WTO non-compliance challenges.
it is still too early to have a full-fledged discussion on
how the accession of China to the WTO will affect the already
dire situation of Chinese SOEs, but many crucial issues are
readily apparent and deserve an intensified and broader attention
from the Chinese government, Chinese SOEs and those who care
(The author is a legal counsel at Yahoo! China Inc.)