3.1 The Non-Discrimination Rule, and Commercial Basis Rule

First, Chapter 17 requires the SOEs and designated monopolies of a TPP party to act on a commercial basis, and not to discriminate, in their purchases and sales of goods and services against suppliers, buyers, and investors of other TPP parties.Footnote ⁴⁸ Thus, the commercial basis and non-discrimination rules apply to SOE purchases in addition to SOE sales.Footnote ⁴⁹ This responds to contemporary concerns about State dominance on the demand side.Footnote ⁵⁰ It means that the commercial basis and non-discrimination rules apply to SOE procurement notwithstanding the fact that TPP Chapter 17 does not apply to ‘government’ procurement. TPP's requirements are akin to regulation under GATT Article XVII. However, TPP's non-discrimination and commercial basis requirements are formulated differently. Unlike GATT Article XVII as interpreted in Canada–Wheat Exports and Grain Imports, discussed further below, TPP's commercial basis rule is not simply about non-discrimination. TPP is also not confined to regulation of the goods trade. Rather, Chapter 17 cuts across sectors – its disciplines extend to services, and further extend to the protection of covered investments.Footnote ⁵¹ As for the non-discrimination rule itself, the standard of treatment is not simply most-favoured nation (MFN) treatment and national treatment (NT) but the more familiar US formula which accords the better of MFN treatment or NT.Footnote ⁵²

By extending the reach of the TPP rule to services and the investment sector, TPP's commercial basis requirement applies to sales and purchases of both goods and services.Footnote ⁵³ Under TPP's non-discrimination rule, a ‘covered investment’ in the assisting Party's territory is accorded the better of MFN treatment or NT in respect of an SOE's sales and purchases of goods and services.Footnote ⁵⁴ We might illustrate this based on the facts of the Canada–Wheat Exports and Grain Imports case. That GATT-WTO dispute concerned the Canadian Wheat Board's export regime and certain requirements imposed upon grain importation into Canada. There the Appellate Body ruled that paragraph (a) of GATT Article XVII lays down the primary rule (i.e. non-discrimination), and that sub-paragraph (b), requiring that an SOE – or ‘STE’ in GATT parlance – acts according to commercial considerations, is but an application of the non-discrimination rule. The significance of this lies in the fact, as the panel had found, that where an SOE has not acted according to commercial considerations, it would thereby have breached sub-paragraph (a) as well. On appeal, it was suggested that the panel had erred in not addressing an analysis of discrimination under paragraph (a) before proceeding to an analysis of paragraph (b), which states that:Footnote ⁵⁵

The Appellate Body's ruling was that the panel had not erred and had analysed paragraph (a), even if not sequentially. In the case of TPP, the two concomitant requirements of non-discrimination and commercial basis under Article 17.4 operate cumulatively. TPP therefore reflects the US position in Canada–Wheat Exports and Grain Imports.

TPP's expansion of its scope of coverage to the services and investment sectors comes from its analogous rule to GATT Article XVII's paragraph (a).Footnote ⁵⁶

In this way, the scope of TPP extends beyond goods exportation and importation. More than that, when coupled with the definitional aspects of TPP – absent a carve-out by the relevant TPP member – TPP extends its reach to listed companies so long as the latter fulfills the 50% ownership-or-control rule discussed earlier. TPP goes beyond NAFTAFootnote ⁵⁷ because, as Fleury and Marcoux also explain, it goes beyond the regulation of designated monopolies.Footnote ⁵⁸ It has been suggested that the change from the GATT ought to be welcomed – despite potentially being overly rigid – since TPP's bright-line ‘50%’ rule would be easier to enforce than the GATT/WTO method of analysing each case on its own facts in determining whether, in fact, the company is an alter ego of the government.Footnote ⁵⁹ But, we shall argue below, this point risks over-simplification.

3.2 Non-Commercial Assistance (NCA) Rule

Secondly, in an extension of WTO subsidies regulation, TPP prohibits ‘non-commercial assistance’ to SOEs which harms another TPP party or its domestic industry.Footnote ⁶⁰ As with the WTO, TPP uses a specificity test. This is notable because, as we shall see, a different approach might have been to treat SOE subsidization as specific per se. Thus, ‘non-commercial assistance’ (‘NCA’) is ‘assistance to a state-owned enterprise by virtue of that state-owned enterprise's government ownership or control’, where the phrase ‘by virtue of that state-owned enterprise's government ownership or control’ is further defined as the explicit limitation of access to such assistance to the Party's SOE, assistance which is predominantly or disproportionately used by the Party's SOE or which otherwise favours the Party's SOE.Footnote ⁶¹

The rule resembles the GATT's measures against actionable subsidies under the WTO SCM Agreement, which defines such subsidies as those which are specific within the meaning of SCM Article 2.Footnote ⁶² TPP's ‘predominant or disproportionate assistance’ test appears also to reflect the WTO SCM Agreement's test for de facto specificity. However, the SCM Agreement would require predominant or disproportionate use by certain enterprises. As Julia Qin has explained, the precise identification of such a class of enterprises is however problematic. The difficulty lies in establishing that alleged subsidization is specifically directed to a group of enterprises to which the SOE, it is alleged, belongs. How shall that group or class be defined?Footnote ⁶³ In practice, as the US–AD & CVD (China) case has shown, one ends up instead quibbling about what the SCM Agreement means by a ‘public body’. TPP avoids this problem by counting ‘SOEs’ as being of themselves a distinct class, rather in the way the Chinese WTO Accession Protocol does.

As with the SCM Agreement, TPP requires a showing of ‘adverse effect’ to the interests of another TPP Party or ‘injury’ to another party's domestic industry.Footnote ⁶⁴ Using a harm test in trade law acts generally as a check on overbroad regulation.Footnote ⁶⁵ There are therefore two limbs to TPP's harm test under the NCA rule:

1. (a) ‘Adverse effects’. This limb prohibits a Party from causing ‘adverse effects to the interests of another Party’,Footnote ⁶⁶ and requires that Party to ensure that its SOEs do not do so.Footnote ⁶⁷ The rule applies to ‘non-commercial assistance’ given to the production and sale of a good by an SOE, or to the supply of a service by an SOE under modes 1 (cross-border supply) and 3 (commercial presence).Footnote ⁶⁸

2. (b) ‘Injury’. In addition, a Party is prohibited from causing ‘injury’ to another Party's domestic industry through non-commercial assistance given to the production and sale of a good in the other Party's territory provided the domestic industry of the other Party produces a like good.Footnote ⁶⁹

Thus, the ‘injury’ limb (discussed further, below) does not apply to the services sector,Footnote ⁷⁰ whereas the ‘adverse’ effects limb only covers assistance given to SOEs in respect of services supply outside the assisting Party's own territory.Footnote ⁷¹ Thus, the ‘adverse effects’ limb applies only to the international trade in services.

‘Adverse effects’ is also WTO SCM Agreement language.Footnote ⁷² It is defined in TPP in a manner similar to the SCM Agreement's definition of ‘serious prejudice’ caused by an actionable subsidy.Footnote ⁷³ Thus, a relatively high threshold for showing adverse effects is adopted. Again, as with the non-discrimination and commercial basis rules, the NCA rule extends in a cross-cutting way to covered investments and significant price undercutting in the international supply of services. This, as other commentators have also observed, introduces subsidies regulation to the international trade in services and is innovative.Footnote ⁷⁴ It applies where:

1. (a) NCA displaces or impedes imports of a like good of another Party or sales of a like good by an enterprise which is a covered investment.Footnote ⁷⁵

2. (b) The same occurs in another Party's or non-Party's market.Footnote ⁷⁶

3. (c) There is significant price undercutting, price suppression, price depression, or lost sales in the goods sector. Again, the rule also protects the covered investments of investors of another Party, though only in the territory of the assisting Party.Footnote ⁷⁷

4. (d) There is displacement or an impediment or price suppression in the services sector, albeit limited – as we have seen – only to effects caused by services exports through modes 1 and 3,Footnote ⁷⁸ as opposed to effects within the assisting Party's own domestic services market.Footnote ⁷⁹

As for the injury limb, injury is confined to injurious effects in the goods sector. ‘Injury’ is defined in a similar way to harm under GATT-WTO trade remedies law, not least under the WTO SCM Agreement's provisions on countervailing measures – i.e. by reference to material injury, the threat of material injury, or the material retardation of the establishment of an industry. In this regard, consideration shall be given to increases in volume of production and its effect on prices, including significant price undercutting, as well as effects on the like domestic industry based upon an evaluation of all relevant economic factors and indices.Footnote ⁸⁰ As for causation, all relevant evidence shall be taken into account.Footnote ⁸¹ The language of TPP's provision on the existence of a threat of material injury also resembles that of the WTO SCM Agreement.Footnote ⁸²

To illustrate, imagine an auto company which is more than 50% government-owned – Company A of Party A. Company A acquires a controlling stake in another auto company, Company B, operating in the territory of Party B, and in the territory of a third-party. Company A purchases wholly built-up vehicles and auto parts only from Company B and supplies an exclusive service to Company B, say the supply of auto-servicing in the territories of Party A, Party B and a third party at highly discounted rates. Company A would be defined as an SOE under TPP's 50% rule. Its purchases would be discriminatory under TPP – where TPP has fully de-linked the non-discrimination and commercial basis rules under GATT Article XVII – even if Party A could establish that Companies A and B are operating on a commercial basis. Party A now risks a claim of discrimination. Company A's supply of a service within the territory of Party A would be exempted from the NCA rule;Footnote ⁸³ however, its purchases of cars and parts into the territory of Party A, and in Party B, and the third-party would not be, just as its supply of auto-servicing in the territories of Party B and in the third-party would also not be exempted from the NCA rule.

3.3 Transparency

In addition, Chapter 17 contains transparency disciplines (e.g. concerning the extent and nature of government ownership and control).Footnote ⁸⁴ These are GATT-plus transparency disciplines,Footnote ⁸⁵ and we will go on to discuss a key point about these obligations in the section immediately below.

4.1 The Sino-US Definitional Divide

In this section, we show how TPP's approach to the definition of an ‘SOE’ emphasizes form over function. Recall the WTO Appellate Body's view that government ownership of an enterprise does not automatically equate with ‘control’ of that enterprise. In the WTO US–AD & CVD (China) case, China challenged trade remedy action by the US against a range of Chinese products. The US argued that an SOE is a ‘public body’ for the purposes of the WTO SCM Agreement which defines a financial contribution as that made by a government or a public body. Article 1(1)(a)(i) of the SCM Agreement states that a subsidy exists if ‘there is a financial contribution by a government or any public body within the territory of a Member’. The US argued that Chinese SOEs qualify as ‘public bodies’ under the WTO SCM Agreement because they are ‘controlled’ by the Central Government by virtue of the latter's majority ownership of those SOEs. China argued that an SOE is not a ‘public body’ under the WTO SCM Agreement if it is not specifically entrusted with governmental functions.Footnote ⁸⁶ The WTO panel agreed with the US.Footnote ⁸⁷ According to the panel's view, transactions entered into by SOEs can be scrutinized for unlawful subsidization. If that recommendation had been adopted by the WTO Dispute Settlement Body, transactions by all government majority-owned Chinese SOEs would have fallen under scrutiny.Footnote ⁸⁸ China however appealed, the Appellate Body reversed the panel's ruling and accepted China's argument instead that SOEs are not public bodies simply on the basis of majority shareholding.Footnote ⁸⁹ Rather, a case-by-case approach will be required. What TPP does is to reverse the Appellate Body's ruling and commit TPP parties to the US’ view in that case.

The Appellate Body's requirement that a public body is one which ‘possesses, exercises or is vested with government authority’ turns upon the facts. The test is to be applied on a State-by-State, case-by-case basis.Footnote ⁹⁰ What will matter is a ‘proper evaluation’ of the entity's ‘core features’ as well as the nature of its relationship with the government.Footnote ⁹¹ It does not mean ownership as under the TPP becomes irrelevant in the WTO context, merely that it is hardly decisive however extensive that ownership may be.Footnote ⁹² This method of analysis is familiar. There is a similar international debate over the entitlement of State agencies to foreign State/sovereign immunity. Under the Anglo-Commonwealth common law doctrine (e.g. in Singapore, Malaysia, Australia, and New Zealand as TPP/CPTPP signatories), analogous questions arise under foreign State immunity laws. Sovereign ownership of a ship grants it immunity.Footnote ⁹³ While that may serve for ships, what if an entity were a separate and independent legal person altogether under the law of that foreign sovereign? What if it was the Soviet Tass News Agency of old, or in another well-known case the grain trading department of the Spanish Government? In the latter case, not only was the entity a separate legal person, as was the Tass News Agency,Footnote ⁹⁴ the transaction in question was also purely commercial.Footnote ⁹⁵ The English Court of Appeal had held – with Lord Justice Singleton famously dissenting – that the grain trading department's separate legal personality did not matter. After all, evidence by the Spanish ambassador and a Spanish law expert had shown that the entity was still a part of the Spanish State.Footnote ⁹⁶ The idea that what matters is what the law of that foreign sovereign State actually says gained ascendancy as a result.Footnote ⁹⁷ Returning to our present discussion, the fact that the SOE may be a separate legal person under its forum law is not necessarily the end but only the beginning of the inquiry. For the WTO Appellate Body in US–AD & CVD (China), it is the possession, exercise, or vesting of governmental authority that counts.Footnote ⁹⁸

TPP, however, resembles the American position under section 1603 of the 1976 US Foreign Sovereign Immunities Act; namely, that an ‘agency or instrumentality’ of a foreign State includes a company or corporation (i.e. a separate legal person) which has the majority of its shares owned by a foreign State or its political subdivisions.Footnote ⁹⁹ The definition is capacious. It goes beyond entities which merely engage ‘in a public activity on behalf of a foreign government’.Footnote ¹⁰⁰ The Anglo-Commonwealth rule, which will be familiar to lawyers in Malaysia, Singapore, Brunei, Australia, and New Zealand, is as we have seen quite different – a separate entity is not immune under State immunity laws (i.e. it is not considered to be a part of the foreign State) unless ‘the proceedings relate to anything done by it in the exercise of a sovereign authority’, and ‘the circumstances are such that a State … would have been immune’.Footnote ¹⁰¹ In other words, if a separate entity, which is distinct from the government and is capable of suing or being sued in its own name, were to be considered a part of the government, then it must be vested with governmental authority. This rule has shown great subtlety, such as to treat State direction itself as not being dispositive – which it cannot be where an entity displays mixed characteristics, doing some things governmentally and other things commercially. The court asks – where a particular transaction is called into question and the entity demonstrates a mixture of governmental and commercial characteristics – if the act is traceable to a sovereign or governmental interest, taking into account the surrounding context. TPP appears to reject that kind of case-by-case, flexible method. Rather, its definition of government ‘control’ is formulaic in a manner that reflects the US Foreign Sovereign Immunity Act's definition of an ‘instrumentality of a foreign State’.Footnote ¹⁰² While TPP excludes non-profit enterprises, it does not mean that for-profit SOEs cannot, in fact, undertake governmental functions. Absent TPP's explicit carving out of entities exercising public functions, of which there are many, TPP's rule may still apply but for ‘any service supplied in the exercise of governmental authority’, which is also exempted from Chapter 17's scope.Footnote ¹⁰³ Beyond that, TPP looks to the nature of an entity as defined by its ownership and regular control.

What if several companies are controlled by the government through the holding of stocks or voting rights? Should they be considered a single economic entity and an SOE?Footnote ¹⁰⁴ Or is TPP's ‘50% rule’ potentially open to evasion through inter-locking and indirect ownership structures? Likewise, if the government is a minority shareholder, say with only 15% of the outstanding stock of a company, but the other shareholders are dispersed with none holding more than 5% of the stock, then unless they form a coalition the government could still exercise effective control.

4.2 Cross-Holdings, ‘Control’ of the ‘Exercise’ of Voting Rights, and Board Control

In short, how might TPP address related parties, and where Leviathan acts as a minority shareholder? We hold that TPP addresses the issue by defining an SOE, not only in terms of formal share ownership but also by reference to ‘de facto control’. It is by so doing that TPP seeks to address the various indirect ways in which the State might act as a minority shareholder.

Article 17.1, as we have seen, includes in paragraph (b) the ‘control and exercise’ of more than 50% voting power, and, alternatively. in paragraph (c) a power of appointment in respect of the majority of the board or equivalent management body. Thus, even where a government owns only 50% or fewer shares, it could have ‘more than 50% voting power’ or a ‘power of appointment in respect of the majority of the board or the equivalent’ under a special share such as a ‘golden share’.Footnote ¹⁰⁵ What about the case where, in the absence of a golden share, where the company's stock is widely dispersed, the Government holds a block of, say, only 20% of ordinary shares?Footnote ¹⁰⁶ It has been argued, elsewhere, that a chief benefit of TPP's ‘50%’ rule is that it will be easier to administer when compared to the GATT–WTO rule. However, this is not necessarily so. Structures of ownership and control in respect of SOEs are potentially very complex, and we still lack adequate analytical frameworks to understand them.Footnote ¹⁰⁷ Arguably, the TPP also captures de facto control of the exercise of voting rights under Article 17.1(b),Footnote ¹⁰⁸ thereby requiring inquiry into inter-locking and indirect ownership structures, as well as other forms of indirect ‘control’ such as through building shareholder coalitions, including coalitions between government and other quasi-State actors such as pension funds.Footnote ¹⁰⁹ Whether ‘de facto control’ exists is often not apparent even in the case of seemingly obvious examples of SOEs.Footnote ¹¹⁰ Thus, TPP's bright-line 50% rule is either too crude if it were only to count formal ownership, voting rights, or golden shares, or it remains vague and open-ended where the rule also captures de facto control.

At the same time, TPP is under-inclusive where the company's stocks are widely dispersed but the government can exert effective control through a minority shareholding falling below the exercise of ‘more than 50% voting power’. Where the other stockholders are private individuals holding no more than 5% for the purpose of receiving dividends, while the government holds 15%, the private stockholders are unlikely to have much incentive to form a coalition. In short, the TPP's definition of an SOE needs still further work. However, TPP's transparency obligations facilitate the administration of the 50% rule and improved understanding of the structures of State capitalism. Difficulties with lengthy investigations of inter-locking corporate structures – including complicated pyramidsFootnote ¹¹¹ – and the fact that sovereign wealth funds may choose to invest in private companies, which are relatively intransparent, rather than in public companiesFootnote ¹¹² ought, at least in principle, to be ameliorated by the requirement imposed on TPP parties to disclose relevant information. Aside from listing SOEs,Footnote ¹¹³ and supplying information on the legal regulation of SOEs and of non-commercial assistance provided,Footnote ¹¹⁴ TPP parties are required also to disclose information relating to their cumulative shareholdings, including shares held by SOEs and designated monopolies, special or golden shares, government officials serving on boards and – for the purpose of the SOE size threshold requirement – annual revenues and total assets.Footnote ¹¹⁵ It does not mean – nor should it – that TPP parties are compelled to disclose confidential or sensitive information, but if they do not an adverse inference rule will apply.Footnote ¹¹⁶

Thus, TPP seeks – or so we argue – to address the various indirect ways in which Leviathan acts as a minority shareholder, be it as minority stakeholder in the nurturing of a post-privatization (or post-disinvestment) State champion, debt-for-equity swap participant or pyramid holding company.Footnote ¹¹⁷ TPP does not apply the non-discrimination and commercial basis rules to the actual acquisition of such minority, or indeed to majority, stakes.Footnote ¹¹⁸ Two illustrations may help. Both involve pyramid state-owned holding companies. Such companies:Footnote ¹¹⁹

First illustration. Consider, firstly, Malaysia's carveouts to TPP's (and CPTPP's) Chapter 17 disciplines. To what extent will these shield SOEs that are State or SOE minority owned? Malaysia has carved out, under Annex IV, certain SOE purchases of goods and services from local enterprises, albeit capped in some (but not all) cases at 40% of the SOEs’ annual budget.Footnote ¹²¹ Similarly, it reserves the right to provide NCA to certain Malaysian development banks and financial institutions – i.e. where these offer preferential financing to businesses under Malaysia's racial affirmative action programme. The carveouts operate through the positive listing of the SOEs in question in Annex IV to the TPP Agreement. In this way, the SOEs are exempted from the non-discrimination, commercial basis, NCA, and other disciplines. But what happens if an entity which is minority owned is – unlike the holding company itself – unlisted in the carveout? In such a case, the rule on de facto control through (even minority) cross-holdings will apply, excepting cases where the entity is merely the beneficiary of what otherwise would be the discriminatory acts of the holding company or is only a recipient of the latter's bounty. TPP disciplines would still apply, mutatis mutandis, to the unlisted SOE and to its indirect minority holdings – however indirect, presumably – as long as the de facto ‘share or board control’ rule is satisfied. The fact that the Malaysian and other similar carveouts list a whole range of SOEs is perhaps proof of the veracity of this point.Footnote ¹²² Thus, one can fall below the 50% share ownership threshold and still be captured by TPP disciplines as long as the conditions for de facto control under Article 17.1(a) and 17.1(b) are satisfied.Footnote ¹²³ This, it would appear, is the significance of also having Chapter 17's chapter-specific annexes, as opposed to the ‘whole agreement’ Annex IV carveouts referred to above. In the chapter-specific annexes, Singapore, for example, states that the non-discrimination, commercial basis, and NCA rules ‘shall not apply with respect to a state-owned enterprise owned or controlled by a sovereign wealth fund of Singapore’.Footnote ¹²⁴ Malaysia uses the same formula (‘owned or controlled’) in carving out ownership and control by Permodalan Nasional Berhad (the ‘Malaysian State Fund’) in its chapter-specific annex.Footnote ¹²⁵Permodalan Nasional has stakes in some of Malaysia's largest publicly listed companies. What, presumably, these chapter-specific carveouts seek is the immunization of indirect holdings that are traceable to these State/sovereign wealth funds.

Second illustration. To take China's SASAC as a second illustration, let us assume that the TPP or the CPTPP regime one day applies to China. The following scenario which appears in the latest US Section 301 report on China would be captured by TPP's rule against regulatory bias. One allegation in that report is that China's SASAC – the State-owned Assets Supervision and Administration Commission of the State Council – ultimately controls the Chongqing Changan Automobile Company which is listed on the Shenzhen Stock Exchange. The allegation is that Changan abjures grantback clauses in the technology licensing agreements attending its joint ventures (JVs), thus acquiring improvements upon the foreign-owned technology of its JV partner. The prohibition of grantback clauses is not uncommon in the regulation of technology licensing contracts.Footnote ¹²⁶ However, the allegation is that China manages market access to its foreign investment market by restricting market access once companies like Chongqing Changan have acquired a sufficient competitive edge technologically.Footnote ¹²⁷ Absent a suitably designed carveout of the kind discussed above, China would in such a hypothetical example violate the rule against regulatory partiality.

4.3 Non-Regulation of Non-Profits and Tolerance of Designated Monopolies: Comparisons with Competition Regulation

We now turn to a noticeable ‘gap’ in TPP. This lies in TPP's non-regulation of non-profit enterprises – i.e. the non-regulation of what are sometimes called ‘altruistic’ enterprises. We have seen that TPP only covers profit-making/business entities. This risks ignoring the impact which non-profit entities can have on the market, as well as their ability to abuse a dominant position. A second TPP feature is that designated monopolies are allowed to operate within certain markets provided any adverse effects are ring-fenced from other markets.

The TPP framers’ decision to depart from a competition law model may explain much. But that at best explains the outcome, not the underlying reason to preclude harmful non-profits. TPP Chapter 17's purpose is to impose effective control over SOE activities and to avoid adverse effects on other Parties or material injury to their domestic industries. However, a non-profit entity which is government-controlled may as easily engage in similarly harmful acts. For example, a non-profit cooperative, a substantial portion of whose shares are owned by a government, can engage in dumping or predatory practices aided by governmental NCA. This is as harmful as when engaged in by profit-seeking enterprises owned by the government. But if the mischief sought to be addressed by the rule were to determine its scope, it would have been better for Chapter 17 to apply to any ‘enterprise’ or ‘undertaking’. That is commonly the ‘functional’ approach used in competition law when defining an ‘undertaking’ or ‘person or combination of persons’ and although it would include profit-seeking enterprises it is not limited thereto.Footnote ¹²⁸ All business transactions causing an important impact in the market will be included. There is, after all, little difference between the discriminatory and anticompetitive activities of profit seeking entities and non-profits insofar as their respective market effects are concerned.

To illustrate, here is an example from Japanese competition law which, as we have said, is not untypical of competition regulation. The example involves the Japanese Supreme Court's decision in the Slaughter House Case in which the issue was whether (a) the Municipality of Tokyo could be regarded as an enterprise and thus was qualified as a subject of competition law and (b) its below-cost offering of meat slaughtering services could be regarded as a predatory practice.Footnote ¹²⁹ The municipality owned and operated a slaughter house for processing large-sized animals (cows, oxen, horses, etc.) and meat production. It offered slaughtering services at an extremely low price as the operation was not intended to be profit-seeking. Rather the aim was to provide meat for Tokyo residents at low prices – i.e. to provide food for a public purpose. In fact, the municipality ran the slaughter house at a large deficit. The loss incurred was compensated by a subsidy from the municipality, which made up about 80% of the total running cost of the business. Its competitor (one of several private companies offering slaughtering services in the Tokyo metropolitan area) complained that this operation amounted to predatory pricing which harmed the Tokyo Slaughter House's competitors. A heavy business loss was incurred as a result of the below-cost offering of slaughtering services by the municipality. The Tokyo District Court held that the operation of the slaughterhouse by the municipality amounted to predatory pricing and that the municipality should be held accountable for damage to its competitors. It granted the plaintiff recovery in damages. The Tokyo High Court and the Supreme Court reversed that decision on the ground that the plaintiff's damage was caused largely by factors other than the low pricing of slaughtering services by the municipality. For example, if one takes as the relevant market the whole eastern part of Japan rather than just the Tokyo Municipality Area, there were many other slaughter houses operating at lower prices than that offered by the plaintiff, and it was competition from these other providers which had harmed the plaintiff's business. The Tokyo High Court and the Supreme Court came to the conclusion that a sufficient causal link had therefore not been established. Although relief was denied, what is noteworthy is that the Supreme Court recognized that the activities of the Tokyo Municipality, a non-profit-seeking body, could still be regarded as those of an ‘enterprise’ or ‘undertaking’ and were therefore subject to competition law disciplines. Had causation been proven, the Municipality would have been held liable.

There is a second notable feature in TPP's SOE disciplines when compared with competition regulation, Namely, that TPP allows designated monopolies to operate so long as any adverse effects are ring-fenced – i.e. so long as their actions do not adversely affect other markets. Recall that GATT Article XVII prohibits discrimination by STEs under sub-paragraph (a), and requires under sub-paragraph (b) that purchases and sales relating to exports and imports take place on a commercial basis, thereby allowing competition. However, according to the Appellate Body in Canada–Wheat Exports and Grain Imports, paragraph (b) does not require STEs – operating commercially – to compete for sales. It only prohibits STE discriminatory practices when making an item available for sale.Footnote ¹³⁰ Thus, SOEs, designated monopolies and marketing boards are allowed to operate (i.e. as monopolies) so long as they do not operate in a discriminatory way. In this way, they still operate on a ‘commercial basis’. Put differently, most favoured nation (MFN) treatment and national treatment (NT) standards apply, but there is no ‘market access-type’ obligation under GATT Article XVII. It may be for similar reasons that TPP eschews requiring SOEs to be pro-competitive rather than merely seeking to limit the scope or redress the impact of certain harmful effects. It is an admission that SOEs cannot wholly be subjected to competition.

In contrast, Article 17.4.2(d) of TPP states, that:

The footnote to that provision, Footnote 14, states that ‘For greater certainty, a Party may comply with the requirements of this subparagraph through the enforcement or implementation of its generally applicable national competition laws and regulations, its economic regulatory laws and regulations, or other appropriate measures.’Footnote ¹³¹

To understand this, observe that a conceptual issue would have arisen once TPP adopted a cross-cutting approach and extended SOE disciplines to the services sector. Unlike regulation under GATT Article XVII, in the services sphere a national treatment restriction amounts to a market access restriction. Thus, had the GATT approach been extended straightforwardly to services trade regulation, the national treatment discipline would have secured market access by curtailing designated monopolies. TPP adopts however a compromise position of leaving such monopolies intact – regulating them through an anti-discrimination rule in the monopolized market while concomitantly regulating their potentially harmful effects in ‘non-monopolized markets.

To illustrate, consider the case relating to the Nippon Telephone and Telegraph Company, Eastern Japan (NTT) as an example of the situation envisaged in Article 17.4.2 (d). This was a Japanese Supreme Court decision. The case arose out of a claim that the NTT, which held a predominant share in telephone networking services, had engaged in predatory pricing in its connection charges.Footnote ¹³² NTT was originally a part of the Government (specifically, the Ministry of Telecommunications and Posts). It was however privatized and converted to a private company with the central government and local governments owning 35.26% of its stock. NTT owned most of the local telephone networks in the country and held a predominant position. Competing companies had their own facilities for local telephone networks but were required to lease and obtain connections to NTT's telephone network in order to operate and sell telephone services to urban consumers. Thus, telephone networks owned by NTT were ‘an essential facility’ necessary to any company intending to enter city telephone markets. NTT was obligated to grant connections to local telephone networks to competing companies under Japan's Telecommunications Law. However, NTT and competing telephone companies were also competitors in the telephone retail market. However, NTT had set its connection charges to be collected from competing companies at a level higher than what NTT itself charged telephone users/consumers in the cities. As a result, companies could not possibly compete. What NTT charged consumers was lower than the connection charge which NTT's competitors had to pay to NTT. NTT's practice was held to amount to predatory pricing by the Japan Fair Trade Commission (JFTC) and that decision was upheld by the Japanese Supreme Court. The NTT case illustrates how a company with a market dominant position in one market (the market for connection and access to local telephone networks) leverages its position to squeeze out competitors in another market (the consumer market for telephone services). It explains TPP's rule which, while allowing ‘designated monopolies’ to continue to operate, seeks to curb the effects of their activities in ‘non-monopolized’ markets.

4.4 Interaction with Domestic Law and the Applicable Law Problem

TPP piggy-backs on domestic law and domestic courts. Here too lie unresolved questions.

TPP envisages that States Parties shall grant civil jurisdiction to their own courts to render judgments on the behaviour of other TPP Parties’ SOEs. Article 17.5.1 states, that:

The savings clause in the second sentence only serves to emphasize that SOEs are broadly speaking precluded from claiming foreign sovereign or State immunity. The concept is clear but the rule is too trim and raises questions about whether preclusion of immunity goes beyond the usual rules for the application of a restrictive immunity doctrine. Consider the case where an SOE can show that a particular foreign sovereign activity against which civil suit is brought would ordinarily have enjoyed immunity. Such cases may be covered by some other exclusion in TPP, such as the exemption of central banks, but this may not always be so. If a specific transaction is called into question, the normal application of foreign sovereign or State immunity rules may consider the critical act to be sovereign and not commercial in nature under a restrictive immunity doctrine, but TPP only exempts the supply of a service in the exercise of governmental authority.Footnote ¹³³ Such situations are probably covered by Article 17.5.1, above. However, similar problems will arise if a domestic law doctrine of Act of State exists. At least according to the Anglo-American and Anglo-Commonwealth common law view, an Act of State does not prevent jurisdiction but merely counsels against the court's exercise of jurisdiction in cases where otherwise a foreign sovereign's actions within its own territory may be called into question by the forum court.Footnote ¹³⁴

Secondly, what is the applicable law since Chapter 17 itself applies but does so only to TPP Parties? Imagine a common law action brought for restraint of trade in a TPP/CPTPP country where the defendant is a foreign SOE. How will the double-actionability rule in tort conflicts be addressed? This rule generally requires an alleged tort to be a tort under both the law of the forum and of the place of the tort. While a specific action of a foreign SOE may be a tort when committed abroad, it is unlikely to amount to a tort in its home State. Or imagine an instruction by Government A to an ordinary (non-State-owned) commercial bank in State A to finance a particular transaction. Say that transaction amounts to NCA causing harm to other financial institutions in State B, which as with State A is party to TPP/CPTPP. Imagine that TPP/CPTPP is incorporated into the domestic law of State B and rights arising under the treaty are made subject to civil action. Assume a civil claim can now be brought in State B against the bank in State A for violation of the NCA rule. The bank could argue that it enjoys foreign State immunity. Imagine that under the law of State B, immunity would ordinarily apply to that transaction, yet is it not TPP's intention to lift the immunity of foreign SOEs in such civil claims? The correct view, we would suggest, is that the matter should be resolved according to the State immunity rules in State B.

Piggy-backing on municipal law raises potentially far-reaching complexities. They have to do with the interaction of international treaty and domestic laws. The area of greatest difficulty is where municipal norms overlap with TPP regulation. This is where situations of conflict will arise. An even more interesting question arises when we consider allowing domestic civil claims against the State Party to TPP, which is obliged to incorporate TPP disciplines into its domestic law. TPP as we have seen requires administrative impartiality in regulating both SOEs and non-SOEs. The non-discrimination rule is applied not simply to a party's SOE but to the domestic regulation of SOEs. A simple example would be where a national competition authority is challenged for not being evenhanded.Footnote ¹³⁵ A more direct example would be where an SOE's activities are supported by discriminatory State regulation. Thus, to take a contemporary allegation, Washington accuses China not only of discriminatory purchases through its three largest state-owned airlines, but because aircraft purchases in China require State approval, the Chinese Government acts, allegedly, in a discriminatory fashion.Footnote ¹³⁶ Will these kinds of claims become common in TPP States? The answer is that Article 17.5.1 merely states that ‘Each Party shall provide its courts with jurisdiction over civil claims’ directed ‘against an enterprise’. Article 17.5.1 does not appear to require the creation of public law rights. An inter-State and, where applicable, investor–State action under TPP (or CPTPP) might be brought instead.Footnote ¹³⁷ This brings us to the issue of investors’ rights under TPP Chapter 17.

4.5 Covered Investments and the Asymmetrical Treatment of Domestic and Foreign-Invested SOEs

TPP adds to the range of foreign investors’ rights without going so far as to permit redress through investor–State arbitration. Rather, it would allow such rights to be vindicated through domestic and inter-State dispute settlement. Thus, Chapter 17 secures certain rights for SOEs when operating investments abroad. This effect may be a little surprising, but TPP/CPTPP accord for both purchases and sales of goods and services the better of MFN treatment or NT to a ‘covered investment’ in the assisting Party's territory.Footnote ¹³⁸ A covered investment is also protected under TPP's/CPTPP's NCA rule. Here, a covered investment in the assisting Party's market is protected against market displacement or impediment of its like product.Footnote ¹³⁹ It is protected against price undercutting, price suppression, price depression, or lost sales in the goods sector.Footnote ¹⁴⁰ Thus, while SOEs face increased regulation at home, when they are investors abroad their investments will enjoy expanded rights in another TPP Party's market.

This can also be appreciated in light of the current debate in investment law circles about SOEs and sovereign wealth funds (SWFs).Footnote ¹⁴¹ There is an interesting issue about whether SWFs should be treated as if they were like private investors under investment treaties.Footnote ¹⁴² It is sometimes suggested that SWFs cannot be granted all the rights of a private investor.Footnote ¹⁴³ Others counter that there is no reason in principle to distinguish between different investors simply on account of ownership structure. In this regard, TPP Chapter 17 draws no distinction, at least within the framework of Chapter 17, to the covered investments of sovereign-owned and private investors.

TPP's and CPTPP's Chapter 17 disciplines therefore appear to create additional investment rights. Unsurprisingly, TPP was designed to be pro-investment, addressing the new ‘trade issue’ of the inter-relationship between trade and investment in a way which demonstrates an early ambition of its negotiators that the treaty should become a ‘Twenty-First Century’, ‘cross-cutting’ agreement. Thus, TPP applies to the behaviour of SOEs and designated monopolies which ‘affect trade or investment between the Parties’. The key words are ‘or investment’, without distinction between the investments of SOEs (including SWFs) and of private investors.Footnote ¹⁴⁴ The treaty's non-discrimination and commercial basis rules, and its NCA rule extend to protect covered investments beyond the usual investment protection standards – such as outlawing uncompensated expropriation, and the assurances of fair and equitable treatment and full protection and security. Chapter 17 therefore is also a blueprint for a new kind of investment protection against harm to investors and investments by host State SOEs and designated monopolies. However, it is arguably incomplete – having drawn the distinction between SOEs and purely private enterprises it arguably suffers from a lack of attention to the investment law debate about foreign investment through SOEs.

Care must be taken in understanding how TPP or CPTPP creates expanded investment rights. Chapter 17 rights are not susceptible to investor–State dispute settlement under Chapter 9 of TPP or CPTPP).Footnote ¹⁴⁵ Strictly speaking Chapter 17's extension of SOE disciplines to the protection of a TPP/CPTPP Party's investors’ covered investments protect only the legal rights of TPP/CPTPP Parties inter se, and only inter-State dispute settlement applies to Chapter 17 disputes.Footnote ¹⁴⁶ This will not, strictly, preclude a TPP/CPTPP-country investor seeking to argue that its rights under Chapter 9 are also violated, for example by relying (also) on a breach of a Chapter 17 right to establish the breach of fair and equitable treatment, or indirect expropriation. However, breach of a Chapter 17 right per se cannot amount to a Chapter 9 breach.Footnote ¹⁴⁷ In such cases, resort to inter-State dispute settlement will have to be carefully considered against the difficulty of making an investor–State claim. A forum selection exercise will be involved.