1. Introduction
It is now nearly 30 years since Francis Fukuyama published ‘The End of History?’Footnote 1 and ignited a firestorm of debate. While there is no doubt that he offered tremendous insights, today there are several reasons for thinking that Fukuyama wrongly argued that history was over, and both liberalism and democracy were ascendant. Such conclusions were widely dependent on a logic, which, as many critics pointed out, was a bit too reminiscent of Hegelian historical determinism. In retrospect, one of the most surprising omissions in his analysis is the persistent (and, somehow, original) power of the state as an economic actor. State involvement in the economy is currently less obvious but no less important than in the past. It is both pervasive and obscured, but in surveying the economic battlefield today, one can easily conclude that state capitalism still looms large in both developed and developing countries: SOEs, development banks, sovereign wealth funds (SWFs), among many other vehicles of governmental capitalism, have taken centre stage in the global economy.Footnote 2
Both long-term and more immediate factors have made possible the exponential growth of SOEs in market sectors that are traditionally occupied by purely commercial entities. One such long-term factor leading to the prominence of the state capitalism model has been the decades-long rise of China and its SOEs.Footnote 3 More immediately, the impact of the latest financial crisis has led to a significant reconsideration of the state role in the economy. Countries that had liberalized various parts of the economy – when, due to mounting costs of state-led development, privatization was a financial no-brainer – reacted to the economic crisis via increased state ownership interest in strategically important firms.Footnote 4 While this phenomenon is not new, it is notable for its extent: companies that are both state-controlled and organized according to private priorities now participate in a much broader range of economic activities, including but not limited to the energy, mining, transportation, defence, and banking sectors.Footnote 5 At the same time, an increasing number of countries has established SWFs that invest in both real and financial assets on a global scale.Footnote 6 As a result, in today’s closely-knit global society, SOEs and SWFs take up a significant proportion of international trade and foreign market investment.Footnote 7
The conflation of these enterprises’ internal economic governance with the political and legal order of the state creates an assortment of legal issues. The operation of SOEs within the international trading system is especially understudied, even though this area is one of increasing importance, given the transformations of state capitalism around the globe generally, and the size of Chinese SOEs specifically. The increased prominence of SOEs, and particularly the fact that their activities extend from their home countries and into foreign markets, has impelled negotiators of modern PTAs to address these entities, which, unlike their predecessors, have been converted into formidable tools for global competition, shrouded under corporate veils. Within the scholarly literature to date, the dominant narrative holds that, given the stalemate of the multilateral trade negotiations, the inclusion of rules in PTAs addressing the concerns surrounding SOEs is a much-welcomed step forward towards their regulation.
This article contributes to the theme of the development of rules on SOEs in trade agreements recently explored by authors like Petros Mavroidis and Mitsuo Matsushita.Footnote 8 After situating the SOEs within the GATT/WTO framework and highlighting the main unresolved issues at the multilateral level, my interest is in the teleology of the emerging trade rules addressing SOEs. That is, both the scope and operation of trade rules on SOEs are determined by their normative rationales and the policy objectives they serve. The present analysis must, therefore, consider a discourse on the goals that such rules pursue. My attention then turns to how the ‘new’ (preferential) rules depart from the ‘old’ (multilateral) ones. Indeed, despite being rooted in frustration with the old rules, several new provisions on SOEs seem to draw heavily from their predecessors.
My thesis has three intertwined threads. I argue that WTO rules, as interpreted by the Appellate Body (AB), have proved inadequate for dealing with the complexity of SOEs’ trading activities and financial operations. Secondly, I critically re-examine the notion of ‘competitive neutrality’, which is the conceptual underpinning of the emerging trade regulation of SOEs, and suggest that the inclusion of provisions on such entities in modern PTAs is best understood from the perspective of the (recent) history of free trade. This perspective reveals that, like the multilateral rules on subsidies, the new preferential rules on SOEs essentially aim at ensuring free trade under normal conditions of competition. At the same time, these rules raise important questions concerning the nature of government involvement in commercial affairs, and the right of other governments to inquire into such involvement. Finally, I offer a horizontal analysis of the new preferential disciplines in light of the previous discussion of the notion of ‘competitive neutrality’. I therefore challenge the main conclusions of previous studiesFootnote 9 and submit that the search for binding rules has not yet led to a balanced regime, leaving also unresolved some of the tensions emerged in WTO law.
2. SOEs and the law of the WTO
2.1 The treatment of state enterprises in WTO agreements
There is no textual reference to the term ‘SOEs’ in the WTO agreements. Until very recently, trade scholars barely even mentioned SOEs because they were not seen as a WTO problem.Footnote 10 That many provisions of the WTO are applicable to SOEs is not in doubt, but these rules do not apply explicitly to such entities.Footnote 11
To begin, it is worth underscoring that the WTO agreements do not contain any provisions differentiating between approaches to property rights at the domestic level.Footnote 12 In other words, ‘a WTO member is free to establish and maintain SOEs if it wishes to do so’.Footnote 13 Most rules of multilateral trade agreements are, in principle, neutral with regard to the model of ownership or control of companies. Therefore, they apply to distortive measures of international trade regardless of whether they favour domestic private enterprises, or those controlled by the state. Examples include the principles of external and internal non-discrimination, respectively, under Articles I and III of the GATT.Footnote 14 The same can be said for the rules on anti-dumping measures under the Agreement on the Implementation of Article VI of GATT 1994.Footnote 15 Furthermore, the provisions of the Agreement on Subsidies and Countervailing Measures (SCM agreement),Footnote 16 which set out obligations, rights, and remedies regarding government subsidies of goods and the imposition of countervailing duties (CVDs) on subsidized import, are also applied, regardless of whether the enterprise receiving subsidies is private or state-owned.Footnote 17
Yet, to a limited extent, state capitalism is regulated. This is the case when SOEs’ positions overlap with a different legal status (e.g., ‘state-trading enterprise’, ‘monopoly or exclusive service supplier’, ‘public body’). This status, which is contextually relevant within the world trading system, may de facto coincide with state-ownership, but is not synonymous with it. Chief among the provisions regarding the role of states in trade relations is Article XVII GATT.Footnote 18 Under such provisions, each member undertakes that its state trading enterprises (STEs), state-owned enterprises or private enterprises operating under state-conferred monopolies or privileges shall, with respect to purchases or sales involving either imports or exports, act in a non-discriminatory manner and make such purchases and sales solely in accordance to commercial considerations.Footnote 19 Article XVII GATT is, however, of limited use in regulating the booming nature of today’s state capitalism.Footnote 20 Not only is its application restricted to the above-referred commercial transactions, but it is also marked by some uncertainty with respect to the principle of national treatment.Footnote 21 Furthermore, case law has been significantly weakened by the finding that it suffices for STEs to act in a non-discriminatory manner to comply with the provision.Footnote 22 While it is questionable whether in so doing, ipso facto, STEs act also in accordance with commercial considerations and afford competitors adequate opportunity to compete for participation – and economic logic would not support this view of the ABFootnote 23 – this interpretation is by now water over the dam, as ‘there is not one single deviation from this case law’.Footnote 24 Finally, according to the AB, Article XVII GATT does not apply to an STE’s transactions when no foreign enterprises are directly involved.Footnote 25
The scope of Article VIII of the General Agreement of Trade in Services (GATS)Footnote 26 – and, hence, its potential inclusion of SOEs – is even narrower than the provision in the GATT, since it only applies to monopoly suppliers and exclusive service suppliers.Footnote 27 Also, the resulting discipline is weaker. Essentially, Article VIII(1) GATS stipulates that, in the supply of the monopoly service in the relevant market, monopolies or exclusive service providers do not act in a manner inconsistent with that member’s obligations under Article II of the same agreement, which codifies the MFN principle, and its specific commitments. Article VIII(2) prohibits the ‘abuse of [a supplier’s] monopoly position’ when it competes outside the scope of its monopoly rights, if the member country has made a specific commitment to fair dealing. Since the application of the national treatment principle in the GATS is limited to sectors in which a state party has taken on specific commitments, in many WTO members, service providers who enjoy a monopoly in some strategic sectors are not subject to this requirement.
More meaningfully, the WTO rules on government subsidies provide a more focused scope of coverage of SOE activities. As observed, the SCM agreement also mirrors the ownership-neutral philosophy of the GATT/WTO. Although it expresses a preference for privatization in developing countries, it does not impose any obligation regarding SOEs.Footnote 28 However, the application of its provisions to SOEs has proved rather troublesome: in determining the existence of a subsidy, a central issue is the meaning of the term ‘public body’ in the SCM agreement. The question of how to determine whether an entity is a public body becomes particularly challenging when the entity involved is a SOE.Footnote 29 According to the SCM agreement, a subsidy could be conferred by a government, a public body, or a private body that has been ‘entrusted or directed’ by the government to make a financial contribution. But the boundary between a government and a public body is not crystal clear. In particular, it is controversial whether the two terms are functionally equivalent, or the term ‘public body’ covers something that is not covered by the term ‘government’.Footnote 30 Such characterization is relevant for the subsidy assessment under the SCM agreement because, in many situations, the state confers a subsidy not through the government itself but through entities affiliated with or controlled by the government. SOEs could thus constitute a ready means for providing subsidies in a non-transparent way. Indeed, the ‘SOE-as-provider’ problem has led to intense conflict under the SCM agreement and attracted growing academic and policy debate.Footnote 31
Within the limited scope of this article, recall that in 2011 the AB of the WTO emphasized that a ‘public body’ determination involves a careful assessment of the core features of the entity concerned and its relationship with government, and especially whether the entity exercises authority on behalf of government.Footnote 32 Despite a certain ambiguity of the legal standard as formulated by the AB, as well as practical reasons for interpreting the rules on subsidies in a more adaptive way, the adjudicatory body of the WTO has lately reaffirmed the rigid boundary of the existing rules, explicitly rejecting the US argument that government-ownership may be a dispositive factor to making an entity a public body.Footnote 33 Arguably, the cautious approach taken by the AB, which cleared an immediate ‘threat’ for China and other WTO members where SOEs play a significant role, was a justifiable application of the law: the notion of ‘public body’ was understood as an entity that, although not institutionally a part of a government, still functions like one. This reading had an important corollary: the recognition that SOEs can be run as genuine commercial enterprises and operate on a level playing field with private enterprises. The reasoning underlying this reading thus implies that SOEs should not be treated differently simply because of majority-ownership by a government.Footnote 34 The AB’s narrow interpretation seems also to adhere to the original intent of the drafters, which presumably was not to extend the bound of government too widely.
Even if one assumes that the assessment is correct, however, this leaves unaddressed the issues raised by SOEs as pass-through vehicles for subsidies. At the heart of the matter is the following question: what is the standard of proof that a commercial entity is part of the state? Having refuted the formal ownership test, the AB should clarify what else matters.Footnote 35 Case law shows that the AB insisted on drawing a malleable line, providing a multi-factor test to reply to the question above.Footnote 36 Still, the additional evidence that may be required is not entirely clear at present and the AB seems to enjoy a wide degree of discretion in this regard.Footnote 37
It is true then that ‘SOEs-as-providers’ can be captured by Article 1.1(a)(1)(iv) of the SCM agreement that provides for private bodies, which have been entrusted or directed to carry out the functions that constitute potential subsidies (such as transfer of funds).Footnote 38 But not all governmental measures vis-à-vis a private intermediary would necessarily amount to ‘entrustment’ or ‘direction’, since both terms demand a significant degree of command-and-control authority on the side of the government.Footnote 39 Moreover, the use of private vehicles poses more of an evidentiary challenge for Panels, as they have to examine how the ostensibly private conduct can be ascribed to a government entity, which will not necessarily be eager to disclose that relationship to the rest of the world.Footnote 40
2.2 The Protocols of Accession
Recognizing the limitations of general multilateral trade rules, WTO members chose to add customized disciplines on an ad-hoc basis through the contracting process of the negotiation of protocols of accession. As an integral part of the WTO agreements, the country-specific rules contained in such protocols are enforceable through the WTO dispute settlement processes.Footnote 41 Interestingly, while issues related to the non-market economy (NME)-status and SOEs do not only certainly arise in the case of China, its Protocol of Accession includes the most elaborate provisions on NMEs, as well as additional significant constraints on the activities and financial situation of SOEs.Footnote 42 Russia’s Protocol of Accession, by contrast, ‘pales in comparison, as do the protocols of some Gulf countries with elaborate sovereign wealth funds and other state-run entities’.Footnote 43
Even before its accession to the WTO, the role of SOEs in China was considered to be fundamentally incompatible with the world trading system.Footnote 44 The reasons why only state capitalism in China was perceived as such a compelling issue, the extent to which negotiators could anticipate potential problems, and the scope of the provisions concerning the giant state-owned sector and the NME status in the Chinese Protocol of Accession have been extensively analysed elsewhere.Footnote 45 For the present purposes, it suffices to point out that China agreed in its protocol to far-reaching provisions around its domestic trade and economic system.Footnote 46 It committed to ensure that all SOEs operate on commercial basis, and not to meddle with the autonomous operation of these entities.Footnote 47 China also agreed to be fully subject to the general WTO disciplines on subsidies upon its accession,Footnote 48 and, under section 15(d) of its protocol, to be treated until 2016 as an NME concerning price comparability in determining dumping.Footnote 49 Furthermore, section 15(b) of the same protocol permits an importing member to resort to alternative benchmarks in order to calculate the amount of a subsidy if it finds that the prevailing conditions in China are inappropriate to be used as such. In sharp contrast to the special anti-dumping provisions in the Protocol, these alternative benchmarks may always be used by other WTO Members, regardless of the actual conditions within the Chinese economy.Footnote 50
The outcome of 15 years of negotiations, China’s Protocol was probably the most ambitious set of commitments of any country that has joined the international trading system. But the resulting discipline did not prevent recurrent economic tensions between that country and other Members, with controversies emerging concerning subsidies and dumping. Trade with China continues to be highly contentiousFootnote 51 and the role of the Chinese state in the economy is at the core of these concerns.Footnote 52 Fatefully, the issue of SOEs was foreseen but not exhaustively handled in the 2001 Protocol of Accession. As Levy shows, the treatment in the text was very concise, and essentially provided particular China-specific adjustments to existing WTO agreements such as the SCM agreement. The tweaks have, however, proved inadequate to handle the specific problems arising with China’s accession.Footnote 53 In some cases, foreseeable problems were simply not addressed at all. For example, the Protocol did not quell anxieties about the Chinese state sector and did not provide any specific provision for the long-standing issue of SOEs as pass-through vehicles for subsidies.Footnote 54 Also, the discipline on subsidies to SOEs is solely applied to subsidies contingent on the trade in goods. The provisions on regulatory preferences other than subsidies is vague and, again, covers only the activities of SOEs in relation to trade in goods.Footnote 55 Thus, the current state, where virtually no jurisdiction seems to be happy with the treatment of SOEs, does not come as a surprise.Footnote 56
3. A tale about goals: From ‘ownership neutrality’ to ‘competitive neutrality’?
When multilateral WTO trade negotiations stall and the dispute settlement system offers only partial solutions, the main path for states to craft new legal rules is to venture outside of the WTO altogether by negotiating PTAs. Essentially, the present proliferation of PTAs while in part, no doubt, reflects paralysis within the multilateral system, also defines new international disciplines perceived as necessary to underpin twenty-first century international trade.Footnote 57 In the past five years, regulation of SOEs has played an increasing role in PTAs signed by major trading powers such as the US, EU, Australia, Canada, and Japan. Understandably, the growing emphasis on trade rules on SOEs does not only reflect a sudden increase in awareness of their importance. Rather, like most institutional and material changes, it arises also from an ideational shift.Footnote 58
In a time when the multilateral framework governing international economic relations is under pressure,Footnote 59 and the backlash against multilateralism and the legalization of international politics has stimulated a robust return to bilateralism in the trade arena, the way modern PTAs treat SOEs marks a revival of neo-liberalism. As definitions of ‘obstacles to trade’ and ‘unfair trade practices’ expand, the law embraces the technical language of competitive markets and economic efficiency, and trade rules widen their mandate. From the WTO’s ownership-neutral position, which embodies the basic principle of international law that each state has the sovereign right to freely choose its own political, social, and economic system, the arguably new perspective of ‘competitive neutrality’ has emerged and inspired negotiators in making new legal rules on SOEs in PTAs.
This notion was originally elaborated through soft law instruments under the aegis of the OECD,Footnote 60 then entered the international trade and competition discourse through applied research published by the same institution, as well as policy documents of countries such as the US and Australia.Footnote 61 It emphasizes inefficiencies and allocative distortions arising out of public ownership and impairment of the competitive process.Footnote 62 In limited cases, the term ‘competitive neutrality’ explicitly appears in the text of PTAs,Footnote 63 while related concerns have repeatedly accompanied the negotiations of the most advanced agreements. Eventually, ‘competitive neutrality’ has come to underpin the movement toward trade regulation of SOEs. The idea essentially ‘implies that no business entity is advantaged (or disadvantaged) solely because of its ownership’.Footnote 64
That international law in the form of trade agreements has also served as a ‘vehicle for transmitting the economic doctrines, vocabularies, concepts and practices’ through which industrial and post-industrial society ‘explains (to itself and to others) why forms of market relations should be preferred to other relations’Footnote 65 seems today indisputable. However, what strikes the observer regarding ‘competitive neutrality’ is that the repeated (and somewhat uncritical) practice of recounting the development of new trade rules on SOEs through such an abstract idea seems eventually to determine its own normative stakesFootnote 66 and securing it as the normative foundation of the emerging trade disciplines of SOEs.Footnote 67 Like several other legal concepts, ‘competitive neutrality’ is, indeed, a highly condensed form of rhetorical material and, through the practice of repetition among trade lawyers, it has come to seem real and part of legal routine in current trade negotiations.Footnote 68
Even disregarding exceedingly biased positions,Footnote 69 as well as more mature pieces of scholarship that, nonetheless, deliberately sidestep the thorny question of whether the competitive neutrality argument is sufficiently substantiated from a trade policy angle,Footnote 70 the impression is that the proponents of new trade rules on SOEs assume that the concerns raised by competitive neutrality arguments are valid, largely focusing on the overt and covert benefits SOEs may receive and the uneven playing field their privately-owned competitors may consequentially face. Oft-quoted lists of such preferential treatment include: outright subsidization; tax reduction and exemptions; concessionary financing and guarantees by the government and/or governmental financial institutions; regulatory advantages; monopolies and advantages of incumbency; low-cost capital from state-controlled banks; captive equity; exemption from bankruptcy rules; favourable dividend policy; and access to raw materials, information and other inputs advantages.Footnote 71 Yet, in raising the ‘competitive neutrality’ argument, most authors unfortunately fail to address two central issues. First, at the macro-level, they do not correlate the emerging trade rules on SOEs with the understanding of the world, values and priorities that underlie these rules. Nor do they seem to question or contextualize the policy design those rules entail. Second, and more specifically (although with some notable exceptionsFootnote 72), they neglect to examine whether the new rules address the tensions arisen in WTO law. While the latter issue must be addressed by analysing the relevant treaties, the former lends itself to immediate reflections.
Whether or not SOEs are a trade policy problem – and some authors seem sceptical that SOEs raise issues that can be addressed by trade agreementsFootnote 73 – one point is abundantly clear: many analysts believe that SOEs, especially Chinese SOEs, distort the terms of competition. Also, we know that the USA and the EU perceive a trade policy problem. Discipline of SOEs was an explicit objective articulated by the trade promotion authority granted to President Obama in 2015. In this case, the aim was to eliminate both trade distortions and unfair competition ‘through disciplines that eliminate or prevent discrimination and market-distorting subsidies and that promote transparency’.Footnote 74 On November 30 2018, under the Trump administration, the US concluded the US-Mexico-Canada Agreement (USMCA),Footnote 75 which includes a new comprehensive chapter on SOEs that expands their definition, including minority ownership conditions,Footnote 76 and otherwise largely mirrors language in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).Footnote 77 On the other side of the Atlantic, the recent European Commission concept paper on WTO modernization emphasizes the opportunity for the EU to propose ‘rules capturing other market-distorting support provided by SOEs when used as vehicles to pursue government economic policies rather than focusing on their own economic performance’.Footnote 78
Having this in mind, the ‘competitive neutrality’ position reveals a clear ideological connotation (of the free market variety).Footnote 79 Indeed, the debate on regulating SOEs through trade agreements seems better understood if deciphered according to a slightly different key, which, from a conceptual point of view, is not overly new. Whereas the free trade project is traditionally represented as ‘a part of a play of power between states’,Footnote 80 the philosophy of free trade has, since the eighteenth century, been regarded also as a project of remaking the state. Inevitably, the design of the structure of global trade governance has implied attempts to shape the state itself, in order to achieve desirable forms of governance (i.e., regulation and administration of life) within states.Footnote 81 Trade regulation of SOEs should be, in particular, situated within the ambit of the challenges that emerged immediately after the conclusion of the Uruguay Round and, particularly, the objective of creating the conditions for internationally contestable markets.Footnote 82 Since then, international trade law theorists have begun to use Baumol’s notion of contestable marketsFootnote 83 in an international context, asserting that the contestability of markets is one of the chief objectives of the multilateral trade system. Explicitly, a market is ‘internationally contestable’ when the competitive conditions allow access without obstacles to goods, services, ideas, investments, and persons involved in commercial transactions, coming from other countries. In short, it is a market in which ‘the competitive process … is unimpeded by private or public anticompetitive conduct’,Footnote 84 including any advantage governments secure for enterprises under their control.Footnote 85
There is a further historical continuity here. The multilateral discipline on subsidies resulting from the Tokyo (1973–1979) and Uruguay (1986–1994) rounds were primarily driven by the US agenda to find ways of countering the policies of states that provided support to agriculture and industry.Footnote 86 Similarly, the writing of new international rules on SOEs is part of the liberalization strategy pursued by polities, like the US and the EU, with a high degree of bargaining power vis-à-vis a phenomenon that is taking up significant proportions not only in China but also in other countries. Like the SCM agreement in 1994, the formulation of rules on SOEs in modern PTAs shows a continuity with the recent history of free trade, traditionally framed as a struggle against protectionism and militant economic nationalism, while trade liberalization itself is full of political implications about the relations between the state, market, and society. In essence, both sets of rules aim at ensuring the free trade of goods and, in case of rules on SOEs, services under normal conditions of competition. Also, they both raise fundamental questions concerning the nature and degree of government involvement in commercial affairs and the right of other governments to inquire into such involvement. SOE trade regulation is, indeed, ultimately more than a legal issue: the causes of trade-and-competition problems produced by SOEs have systemic roots; most importantly, a government’s conception of its role in the economy. Therefore, the negotiation of trade rules on SOEs inevitably means addressing this underlying system of causes. One may well ask if this system of causes reaches into questions of how capital should be formed and whether or not SOEs should be dismantled. These are fundamental choices of domestic policy making, and international law cannot, nor should it, prescribe such basic choices if it is to remain effective. New trade disciplines on the subject can, at best, control the negative spill-overs from government influence on SOEs. As discussed below, this necessarily translates into articulated provisions of prophylactic nature intended to limit the mode of state intervention in the economy.
Clearly, this raises the central issue of new limitations for states as political entities able to intervene in the economic domain. SOEs are, indeed, not limited to being potential agents of productive and technological development, instruments for carrying out macroeconomic stimulus at home or advancing economic interests abroad. They also perform important socio-economic functions in both advanced economies and developing countries.Footnote 87 The same proponents of the idea of competitive neutrality normally concede that various societal roles are imposed on or are expected from SOEs, and that state ownership is often used to correct market failures (especially in sectors with a strong element of natural monopoly, where the potential abuse of which by private operators would be difficult to address through regulation), meet distributive objectives (e.g., to ensure universal service provision,) and, in emerging economies, as agent of developmental policies.Footnote 88 Any balanced trade discipline on SOEs cannot avoid attempting to integrate this. As explained below, in keeping with the underlying liberal imprinting, this tension is reflected in the relationship between general rules and exemptions/exceptions.
4. The emerging PTA disciplines: An overall assessment
4.1 Different patterns of trade regulation of SOEs
In order to fully capture the approaches of contemporary PTAs in establishing more sophisticated trade disciplines on SOEs, it is essential to understand how the concepts and principles that shape the new rules came to be developed and enshrined in specific treaties. Particularly clarifying is the recognition that there are two goals at work here simultaneously. On the one hand, negotiators seek the creation of the conditions for internationally contestable markets, while simultaneously permitting domestic constituencies to maintain sufficient policy space for using SOEs to contribute to important public goals. The emerging rules must be examined in light of this dual purpose, and only then can we determine whether they address the tensions existing at the WTO level.
Given the stasis of multilateral negotiations and the possible formation of a less multilateral and more unpredictable new geo-economic order,Footnote 89 bilateral and megaregional trade agreements represent the natural outlet for the new rules concerning SOEs. So far, studies on the topic have mainly focused on single treaties, often resulting in in-depth considerations of the TPP chapter on SOEs, which is commonly taken as a model for the emerging rules in international economic law.Footnote 90 Instead, the present section offers a horizontal assessment of the rules contained in several modern preferential agreements analysed in light of the aforementioned dual rationales. The focus is on the key novelties introduced by these treaties and what I consider, upon closer inspection, to be their main technical weaknesses. Particular attention is devoted to PTAs negotiated by the US and the EU in their attempts to broaden their economic influence and, together, to export elements of their respective market models. Together with China, these are the largest global economic powers, and the US and EU are indeed the predominant initiators of the trade rules on SOEs, with the radial pattern of their PTAs including countries from every region of the world.Footnote 91
We can deduce three broad scenarios for regulating SOEs in PTAs: no additional specific discipline; an intermediate and varying approach, as taken by several PTAs, with few specific rules on SOEs; and the ambitious regulation shaped, for example, by the TPP. The first scenario characterizes inter alia recent treaties negotiated by China,Footnote 92 and agreements concluded by states with similar market-based economies, (when SOEs were still not perceived as a significant trade policy issueFootnote 93), or countries situated in common regional areas, where none of the proponents effectively insisted on the inclusion of additional specific commitments.Footnote 94
The second scenario is more diverse. SOE trade disciplines in this group can be roughly divided into two sub-categories. The first includes the many treaties that, similarly to the North American Free Trade Agreement (NAFTA),Footnote 95 incorporate, with a varying scope, the obligations for state parties to ensure that SOEs (occasionally covered by general notions like ‘public undertakings’Footnote 96), designated monopolies (no matter whether private or public-owned), and other enterprises granted special rights, do not discriminate either in the sale of goods or services to covered investments,Footnote 97 or, more comprehensively, against goods, services, or investments from the other parties, and act ‘in accordance to commercial consideration’.Footnote 98 Also, these SOEs should not use their position or the entrusted rights to engage, either directly or indirectly (e.g., through their dealings with parents, subsidiaries, or other undertakings with common ownership) in anti-competitive practices that adversely affect investments, trade in goods or services of the other parties, in a market where such undertakings have no special or exclusive rights. Several bilateral agreements concluded by the US,Footnote 99 EUFootnote 100 and other trading powers like Canada, Japan, Australia, Singapore, and South Korea belong to this first sub-category.Footnote 101 Notably, this regulatory framework features also in the CETA and, according to leaks, the drafted texts of the Trade in Services Agreement (TiSA) and EU-Mercosur FTA.Footnote 102
The second sub-category in this middle scenario includes the SOE-related flexible disciplines on ‘competitive neutrality’, promoted especially by Australia and featuring treaties like the Singapore-Australia FTA,Footnote 103 KAFTA,Footnote 104 Japan-Australia Economic Partnership Agreement,Footnote 105 and the Korea-Singapore FTA.Footnote 106 These agreements attempt, with varying degrees of deference, to translate into legal texts the common recognition of the importance of creating a level playing field among state and private enterprises.Footnote 107
The third and most advanced scenario has been incorporated in the CPTPP, the USMCA, and the proposed text of the Transatlantic Trade and Investment Partnership (TTIP),Footnote 108 the fate of which remains extremely uncertain. These agreements establish an independent chapter on SOEs, which seeks to incorporate the traditional disciplines inherited from the GATT and NAFTA (i.e., the concepts of non-discrimination and commercial considerations), as well as the new framework labelled as non-commercial assistance (NCA), the main aim of which is to prevent adverse effects or injury to the interest of other parties as a result of advantages that SOEs obtain because of their proximity to the government.
Some general patterns emerge from a preliminary analysis of the rules under discussion. To begin with, when it comes to SOE regulation, there does not appear to be an ‘American model’, a ‘European’ one, or one specific to any other WTO member. Rather, what emerges is a fragmented regulatory scheme, with significant overlap concerning some of the obligations established and the set of exceptions granted. The diachronic evidence shows also that the trend has been towards strengthening and expanding SOE rules, which have evolved from earlier experience and have been adapted, sometimes unsystematically, to broader uses. Moreover, despite their differences, the relevant disciplines exhibit a prophylactic nature. As detailed below, they are designed to limit the mode of state interference in the economy, imposing on SOEs obligations to which private enterprises are not subjected. To accomplish this, they aim at affecting the incentives for governments whose economies may rely on SOEs. Another important pattern is that they broaden the focus from state enterprises exclusively involved in international trade to include those carrying out any commercial activity – even if trading is only domestic. Critically, this expansion normally also covers services. Both these general features, which go manifestly beyond WTO law, serve the chief normative goal of the international contestability of markets. For this reason, I will devote considerable attention to them when analysing the substantive obligations on SOEs. Finally, in a number of recent PTAs, SOE rules interact with other ‘WTO+’ and/or ‘WTO-X’ provisions that, while not specifically applicable to SOEs, expand the multilateral legal discipline in the area of subsidy control and, outside the WTO mandate, in the competition law field. The relative importance of such provisions varies with the specific treaty and area. Agreements that include competition law rules differ in both depth and scope, but generally deal with obligations to promote competition, enactment of competition law, and co-operation and settlement of disputes.Footnote 109 As to the position of SOEs, competition rules are generally rather moderate, typically prescribing that each party’s competition law shall apply also to its state enterprises, designated monopolies and other undertakings granted special rights.Footnote 110 On the contrary, WTO+ provisions on subsidy control, when they cover trade in services (largely absent from the WTO agreements) or establish categories of subsidies immune from challenges, may also have a significant impact on SOEs, at least in cases where the latter receive financial aid from their government.
4.2 Definition of SOEs
The relevant chapters almost invariably contain a legal definition of an SOE or its functional equivalent. The picture is, again, rather mixed. PTAs may capture SOEs through general notions like ‘state enterprises’ and ‘public undertakings’ and explicitly refer, for the obligations of non-discrimination and commercial considerations, to the Understanding on the Interpretation of Article XVII GATT or, when appropriate, to Article VIII GATS;Footnote 111 these base their definition on a combination of a delegation of a governmental authority and government ownership/control;Footnote 112 solely on delegation of governmental authority;Footnote 113 or solely on government ownership/control.Footnote 114 The most advanced texts also detail these latter notions.Footnote 115
Pursuant to Article 17(1)(3) CPTPP, for instance, an SOE is an enterprise which is primarily engaged in commercial activities and has one or more of the following features: the contracting party (i) directly owns more than 50 per cent of the stocks of the enterprise; (ii) controls the enterprise through the ownership of more than 50 per cent of its voting rights; or (iii) has the right to appoint the majority of the members of the executive board or any other decision-making body. Article 13(1)(h) EUJEPA widens this definition, adding that an SOE is also an enterprise in which the government has the power to legally direct its actions or otherwise exercises an equivalent degree of control in accordance with its laws and regulations.Footnote 116 This test closely resembles that of the ‘government’s decisive influence’ previously provided, solely for Singapore, in the US-Singapore FTA.Footnote 117
The most comprehensive notion of control is, however, embodied in Article 22(1) USMCA, which expands the definition of the CPTPP by including also indirect ownership of more than 50 per cent of share capital and – again echoing the ‘decisive influence’ test – the power to control the enterprise through any other ownership interest, including indirect or minority ownership. A footnote to the same provision clarifies that this power exists if, through an ownership interest, the government can determine or direct important matters affecting the enterprise, excluding minority shareholder protections and that, in determining whether a party has it, all relevant legal and factual elements shall be considered on a case-by-case basis.
While the other methods revolve around a functional test that traces the state-attribution approach championed by the WTO AB or, for the pertinent obligations, refer to the definition adopted at the GATT/GATS level, the notions incorporated in the CPTPP, EUJEPA, and USMCA agreements shift away from such tests. These PTAs adopt clear-cut rules based exclusively on quantifiable proxies, including SOE size and threshold revenues,Footnote 118 and eliminate uncertainties by positing a clear binary means of assessing the commercial nature of SOE activities for the application of the relevant rules. As a result, they address the two main problems affecting the relevance and applicability of the pre-TPP rules to the current developments in international trade: the lack of unambiguous tests provided to determine ex-ante government control, and an implicit requirement of state action. However, such clear-cut definitions may be counterproductive and in fact weaken SOE disciplines. To begin with, the quantitative thresholds defining ownership/control in the CPTPP fail to consider the many other, lower levels of ownership or board appointment that can actually be structured so as to retain governmental control, as well as, (with the sole exception of the USMCA), situations of indirect control. Furthermore, there is no provision on interlocking directorates.Footnote 119 More generally, rigid rules provide actors with incentives to reframe a control/ownership pattern in order to dodge their application – not an implausible hypothesis, given contemporary corporate practices. Finally, the threshold revenues that SOEs must reach before the provisions apply are problematic, given the many ‘inventive’ accounting techniques that could be used to avoid meeting these minima. Alongside transfer pricing manipulations, this can result in transfers between related entities that may not appear as revenue.
4.3 Exemptions, reservations and specific exceptions
The above-referenced definitions are also considerably limited by the provisions regarding the scope of SOEs disciplines and other exceptions. While at the bilateral level, prior to the negotiations of the TPP, very limited exemptions existed,Footnote 120 the CPTPP rules on SOEs are subject to general exemptions on scope, as well as a wide range of specific limitations in the form of reservations and individual exceptions. With varying intensity, exemptions also exist in subsequent PTAs, including the CETA, EUJEPA, EUVFTA, and USMCA. In addition, extensive derogations have been included in proposed texts of the TTIP,Footnote 121 as well as the leaked texts of TiSA and EU-Mercosur FTA. Of recent PTAs, only two establish specific exclusions: the EUVFTA, which includes in Annex 11A specific exceptions for Vietnam, and the USMCA, which also incorporates party-specific annexes.Footnote 122
As to the exemptions on scope, Article 17(2) CPTPP contains several predictable provisions, such as the exemptions of government procurement and services supplied in the exercise of governmental authority with an express reference to the GATS.Footnote 123 Yet, other provisions may be more unexpected, as they are at variance with market economy principles – and, a fortiori, if one accepts it, with the rhetoric of competitive neutrality.Footnote 124 Examples include the exemptions of activities for the purpose of the resolution of failing or failed financial institutions, which de facto amounts to an exemption from bankruptcy rules; SOEs that a sub-central government owns or controls;Footnote 125 and pensions funds. The same holds true for the non-applicability of the obligations towards non-discrimination and, especially, commercial considerations towards SWFs.Footnote 126 Keeping in mind that many Asian countries are actively discussing the potential transformation of their SOEs into SWFs,Footnote 127 it is not particularly difficult to imagine the future implications of such an exclusion. Not least, consider the CPTPP’s exemption from the rules on non-commercial assistance (NCA) for services supplied by an SOE within its domestic market.Footnote 128 A result of intense negotiations, this compromise muddles all domestic services, irrespective of whether they have public goals or not, and seems to flatly contradict free market principles and the objective of the international contestability of markets.
Clearly, the very definition of services supplied in the exercise of governmental authority, which supposedly safeguards the sovereign power of states to carry out public functions, reveals the neoliberal vision of a laissez-faire economy, (minimalist) state, and society. As in the GATS, the discipline does not apply to services that are supplied neither on a commercial basis, nor in competition with one or more services suppliers. This exemption has attracted intense criticism for its limited scope in that many predominantly government-provided services, for example health care, education, and water distribution, are provided in actual or potential competition with private providers, and so may fall outside its scope.Footnote 129 Not surprisingly, the proposed text for the TiSA, which incorporates the same exemption in Article I-1:3, has been recently cited as a tool to further reduce the area of public services. For these reasons, Uruguay eventually withdrew from the TiSA negotiations.Footnote 130
As noted, the CPTPP is rather unique, as reservations and several specific exceptions contained in the annexes create further carve-outs. One also needs to consult the annexes and side agreements to see which enterprises are not included. In fact, there are more pages devoted to exceptions (70% of the total; about 100 pages) than there are to the general rules themselves. Reservations can be made in Annex IV, in the form of schedules of non-conforming measures to the main obligations of non-discrimination, commercial considerations and non-commercial assistance. This is not geographically limited, and includes exceptions listed by countries across the spectrum of different levels of economic development. In fact, almost all members (except Singapore and Japan, but including the USA, on the occasion of its signing of the original TPP), have included such a schedule, ranging from a minimum of one non-conformity activity (Australia) to a maximum of 14 (Vietnam). In addition, both Singapore and Malaysia have attached an Annex to Chapter 17 CPTPP with specific exceptions, which allows SOEs from both countries to ignore the CPTPP obligations, provided that they adhere to certain guidelines. Overall, one may even question whether ‘competitive neutrality’ – recte, its revised version proposed here – is present as a driving force in the text of the treaty. It may well be that, having underpinned the negotiations of the new discipline, that normative concept was subsequently watered down by the impelling necessity of several parties to exclude, from the application of this discipline, strategic sectors and even individual entities.
This complex legal framework reflects the legitimate utility and role of different SOEs in diverse states – including a mix of western and non-western, developing and developed, large and small states, and market and non-market economies – as well as the different types of SOE disciplines. However, looking at the extensive number and occasional arbitrariness of the carve-outs, the question arises whether their totality renders most of the substantial provisions unusable and how far, given the required consent among the CPTPP’s 11 parties, these provisions can be changed if, in five years, the treaty is reviewed as foreseen in Article 17(14).
4.4 Substantive obligations: A critical evaluation
The CPTPP, USCMA, and, to a lesser extent, EUJEPA and CETA are the first international treaties that deal with SOEs comprehensively, addressing some of the issues unsolved at the WTO level. But reading the substantive rules with a sceptical lens also reveals a number of limitations, ranging from use of excessive deference to the parties, inadequate enforcement mechanisms and even insufficient clarity in the formulation of central legal tests.
The obligations of non-discrimination and commercial considerations are present in most recent PTAs. In subjecting SOEs to such requirements, the relevant provisions are plainly rooted in the GATT STE rule. Yet, important changes have appeared in the new preferential rules. First, at least in the latest PTAs, obligations extend to trade in services and investments from other parties.Footnote 131 Second, as noted above, with a view to favouring the international contestability of markets, they also cover SOEs’ activities within domestic territory. Third, the new rules dissolve any uncertainty with respect to the principle of national treatment, which is now explicitly incorporated, avoiding the confusion that exists concerning GATT Article XVII. Fourth, the same provisions, as they read, reverse the AB’s interpretation of the same rule. As observed supra, the AB has long interpreted the duty of non-discrimination treatment and the commercial considerations rules as illustrative of each other. In contrast, the new PTAs put them in two distinct provisions with no logical link between them.Footnote 132 A plain literal and contextual reading of these provisions would command that an SOE cumulatively satisfy both requirements in order for the party to comply. Moreover, in defining ‘commercial considerations’ as equivalent to those factors that a privately-owned enterprise in the same business or industry would also consider,Footnote 133 these agreements incorporate a standard, absent in WTO law, that determines whether a firm’s buying or selling behaviour is commercially sound.
Elements of the new disciplines, however, seem to relax the standards of non-discrimination expected of SOEs. Thus, for example, insofar as the obligation to act in accordance with commercial considerations is concerned, the CPTPP seems to allow SOEs the right to sell at different prices and even allows them to refuse to sell,Footnote 134 which at first glance seems to authorize violations of MFN and national treatment. However, contrary to what has been claimed elsewhere,Footnote 135 I deem that these provisions do not introduce a systemic loophole in SOE rules. Instead, they seem to reduce the bias against SOEs: privately-owned enterprises, by definition, are not subject to a duty of non-discrimination. In fact, as for ownership-neutrality in the GATT/WTO, it is only the motivation and behaviour in the market that matters. If a state-owned firm behaves in a commercial manner, the argument might go, its ownership structure would be irrelevant. Hence, like its privately-owned competitors, it should enjoy contractual freedom.
The main difficulty with the obligations of commercial considerations is that there is no clear-cut economic test to determine whether a firm’s behaviour is commercially rational, despite any provided clarifications.Footnote 136 Actions such as selling at very low prices to hook customers can be practiced by commercially motivated firms and those with further motives alike. It would be easier to test between conduct and motivations if there were a clear alternative hypothesis: what, precisely, is it that SOEs would do if they did not act commercially? The answer is likely to vary with the relevant market and business. Given the silence of the legal texts and the potential intricacy of relevant cases, the examination of single instances of conduct would greatly benefit from the progressive stratification of interpretative practices (read: case law) at either the international or domestic level. However, at this time, no PTA is endowed with a functioning dispute settlement mechanism, and to devise whether they could ever work on a regular basis is impossible. Moreover, while in some cases PTAs allow for adjudication of disputes regarding provisions on SOEs before domestic courts, they also concede that a party is not required to provide jurisdiction where it does not provide it over similar claims against private enterprises,Footnote 137 which is rarely the case for the obligations under discussion.
The CPTPP and USMCA are the only treaties that incorporate the legal framework on non-commercial assistance (NCA). While these rules are considered a genuine innovation not previously covered in earlier trade agreements,Footnote 138 the NCA discipline as a whole should be essentially evaluated as an expansion of the WTO-based approach. This is because the new rules espouse the basic principles of the SCM agreement and simultaneously extend those disciplines to cases not covered by the same treaty, such as NCA provided with respect to trade in services. Several of the overt and covert advantages SOEs may enjoy over private enterprises, in fact, boil down to a direct or indirect subsidization by the government. The new rules prohibit a contracting party from causing an adverse effect or injury to other contracting parties through NCA – generally defined as any assistance to an SOE by virtue of its government ownership or controlFootnote 139– in purchase, and sale of goods and services and investments. Alongside a detailed definitional clause on NCA, the CPTPP and USMCA include substantive disciplines regarding the concepts of adverse effects and injury, exceptions to NCA rules, and procedural provisions to ensure implementation of the same rules that introduce mechanisms analogous to trade remedies.Footnote 140
The CPTPP and USMCA lay out very specific instances where NCA is deemed to adversely affect the interests of another party or cause injury to its domestic industry, making investigations of the violation easier. Indeed, the two treaties define these conditions more narrowly than the SCM agreement.Footnote 141 Despite the fairly lengthy character of these provisions, the bottom line is that the substantive discipline does not generally inhibit NCA as such. Instead, the new rules aim at controlling certain negative effects that may arise from the same assistance. If a given form of NCA is causing adverse effect or injury to another party, the providing country needs to take appropriate action to remove those effects or withdraw the assistance concerned. Otherwise, it will be confronted with the countermeasures permitted under the two treaties’ dispute settlement procedures. However, the USMCA also contains an unconditional prohibition to three qualified forms of NCA provided to an SOE primarily engaged in the production of goods other than electricity.Footnote 142
As for the procedural provisions, while the CPTPP and USMCA rules do not contain a mechanism of countervailing duties, they also do not clearly indicate an alternative approach. For example, they do not incorporate a mechanism somewhat akin to the undertakings system envisaged under Article 18 SCM agreement. In essence, the complaining party is given wide discretion and control over all the counteracting processes. The CPTPP and USMCA do not introduce any revolutionary mechanism in this respect, but, in attempting to ease the evidentiary issues, they both provide that, in case of non-co-operation in the information-gathering process by the respondent, the panel established to settle the dispute should draw ‘adverse inferences’ in making findings of fact and in its initial report.Footnote 143 In terms of countermeasures, the two treaties provide that a successful party may ‘suspend benefits of equivalent effect’.Footnote 144 This seems equivalent to the SCM agreement, which allows a successful party to take ‘appropriate countermeasures’ or ‘countermeasures commensurate with degree and nature of the adverse effects’.Footnote 145
Of importance in the new regime is the use of the word ‘indirectly’ to qualify the provision of NCA to SOEs.Footnote 146 As was clarified in a footnote to Article 22(6) USMCA, which echoes Article 1.1(a)(1)(iv) of the SCM agreement, ‘indirect provision includes the situation when a Party entrusts or directs an enterprise that is not a state-owned enterprise to provide non-commercial assistance’. Even more significantly, both treaties specify that SOEs and state enterprises, just like states themselves, are prohibited from providing NCA to other SOEs when it causes adverse effect or injury to another party.Footnote 147 SOEs cannot thus serve as ‘pass-through’ vehicles for direct and indirect subsidization to other SOEs, even when they would not match the definition of ‘public body’ under the current interpretation of SCM agreement by the AB. Thus, the prime benefit of the new NCA rules is their application to cases where governmental assistance slips through the net of SCM agreement. Another such case is when SOEs engage in trade of services: in the absence of WTO comprehensive subsidy disciplines connected to trade in services, the impact of the CPTPP and USMCA rules in this area is, for the respective parties, potentially enormous.
Yet, the NCA rules are not without problems. To the extent that they overlap with the SCM agreement, new rules may be redundant and co-ordination between the two regimes problematic. Moreover, some important lacunae remain under the NCA rules, even when they are combined with the SCM agreement. While the CPTPP rules seek to cover NCA that may remain uncaptured by the SCM agreement (e.g., assistance provided by an SOE not vested with governmental authority), they do not contemplate the situation where the assisted exports adversely affect the industry of another party operating within that party’s domestic market, i.e., the case that would be subject to countervailing duties under the SCM agreement.Footnote 148 Thus, if assistance is provided in a form that does not fulfil the definition of ‘subsidy’ under the latter treaty, the importing party may have no means to address the adverse effects upon its domestic industry emanating from assisted exports.Footnote 149
More basically, the CPTPP and USMCA rules do not cover situations where assistance is provided by SOEs to private enterprises. The ‘SOE-as-provider’ problem is thus only partially addressed. Under the two agreements, these entities could still represent means for providing subsidies in an opaque way where the final recipients are private enterprises and the SCM agreement does not apply. Finally, some of the NCA provisions in the two PTAs are quite complex and introduce for the first-time central concepts such as the ‘adverse effect’ requirement and the ‘cause injury’ standard. And then there are further provisions that provide exceptions to those injury standards.Footnote 150 This reduces the utility of reference to past WTO practice. As history of the SCM agreement shows, however, many central terms and methodologies were clarified and developed through the interpretation of the Panels and the AB. The same is likely to be true for the treaties under discussion, and, for this reason the new NCA rules require the concurrent development of a solid dispute settlement mechanism. If this is not achieved, the SOE regulation under such treaties will result in a lex imperfecta,Footnote 151 with individual parties interpreting more obscure terms in accordance with their preferences and interests.
5. Conclusions
Legal officials, especially those involved in the negotiations of international treaties, confront ‘the luxuriant growth of a hundred legal traditions’ and their role is often to ‘assert that this one is law and destroy or try to destroy the rest’.Footnote 152 This course is manifest in the adoption of rules on SOEs in modern PTAs. The directives incorporated in such rules are designed to ensure that SOEs within the respective parties do not alter the terms of competition in domestic and international markets at the expense of foreign firms. The re-examination of the normative concept of ‘competitive neutrality’ shows that the resulting disciplines provide continuity to the recent history of free trade. In the absence of compulsory rules regarding property ownership for parties to comply with, they reduce the incentives for state intervention in the economy by imposing on SOEs obligations to which private enterprises are not subject. Furthermore, in shaping the external legal substructure for the operation of SOEs, the new international trade rules limit the mode of the state intervention in the economy also within states.
Beyond clarifying the goals, understanding of the world and policy implications that underlie the emerging trade rules on SOEs, if critical thinking has a contribution to make in this area, it is above all in testing the new rules vis-à-vis such goals and the issues that remain unaddressed at the WTO level. At the broadest level, when preferential trade rules on SOEs are adopted, the conduct of third parties remains beyond their influence. This is most importantly true for China’s SOEs. Although distinguished scholars suggest that PTAs may serve as ‘a building block for future multilateral trade deals’,Footnote 153 norms eventually arise in social interaction and if the ultimate ‘owners’ of the SOEs are not part of such an interaction, new agreements will fail as a means for dealing with those entities. One may concede that ‘[e]ven if such rules will not bind China at present, they offer a chance to establish norms, linked with additional preferential trade access for those that choose to accept them’.Footnote 154 However, China is also setting its own norms in PTAs and the related commitments on SOEs are immaterial, if not wholly absent.Footnote 155 Thus, unless a new compromise is found in the WTO,Footnote 156 both coexistence and competition between state capitalism and liberal capitalism seem inevitable.
More narrowly, as shown above, the most advanced PTAs provide for a set of provisions that deal with SOEs’ commercial and financial activities more comprehensively than the WTO agreements. Yet, my analysis reveals that the search for binding rules has not led to balanced and, likely, effective regimes. The adoption of international trade rules to control the negative spill-overs from government influence on SOEs affecting firms from other countries is an extremely difficult normative exercise, and some of the analysed weaknesses are particularly emblematic of this. For instance, the extensive number of exceptions and carve-outs included in the analysed PTAs confirms that countries have different views on the legitimate role of the state, and which of those purposes should be subject to international discipline. Acceptance of such difference is embedded in the new trade regimes. But some of the exclusions are at odds with their economic rationales and may undermine the anticipated benefits of the new regimes. Conversely, the stringent terms of few other rules might hinder the operation of SOEs as policy instruments driven by public policy goals – which is, after all, their principle raison d’être. This is, above all, the case of the exclusion from the NCA rules of (only) public services supplied neither on commercial basis, nor in competition with one or more services suppliers.
Moreover, the way only two treaties – the CPTPP and USMCA – deal with the issue of SOEs as pass-through vehicles for subsidies is problematic when measured against the telos of the contestability of international markets. As mentioned, NCA rules do not cover situations where assistance is provided by SOEs to private enterprises. Given the web of networks and relations, whether formal or informal, that exists in certain countries between the state, SOEs, private enterprises, financial institutions, investment vehicles, etc., this might not be merely a minor shortcoming. Against this backdrop, it is easier to understand why in its concept paper on WTO modernization, the European Commission insists also on the opportunity for the EU to propose ‘a clarification of what constitutes a public body’ under the SCM agreement.Footnote 157 In a historical moment where traditional distinctions between ‘public’ and ‘private’ break down in practice and a shared understanding of what constitutes a ‘governmental function’ is lacking, a more adaptive interpretation of ‘public body’ is at least worth considering.Footnote 158
Another issue, noted here only briefly, is that the transparency provisions in the SOE chapters of the most advanced PTAs will be quite burdensome. However, the institutional designs of such provisions do not offer a useful corrective to the scarce information we have about the extent to which state action – the only thing subject to international trade rules – alters the terms of competition in relation to the operation of SOEs.Footnote 159 In a somewhat ironic isolation, Wolfe raised a valid point when he opined that, in the absence of reliable data, concerns with the potential for negative spill-overs on the trading system as a result of SOEs’ operations may appear to be ideological rather than empirical.
To conclude, if, for a moment, we venture beyond the analytical account to the normative, it is problematic to make general prescriptive claims on how the new SOE disciplines should be improved assuming the dual purpose discussed above continues to hold. This is because key adjustments, like a rationalization of the carve-outs, are obviously highly contextual, and depend on the different needs of the parties to the various PTAs and their views on the legitimate role of the state. There are few corrections though, which are implied in the foregoing discussion. In the limited cases NCA obligations are present in PTAs a better co-ordination with the SCM agreement is worthwhile. Also, the extension of the same obligations seems desirable when, through an SOE, the assistance is provided to a private entity. Finally, a concerted effort to develop new and more penetrating rules of transparency would be of great benefit. More transparency on the structure and spill-over effects of SOEs would foster a common understanding of the problem and, prospectively, ease the design and implementation of relevant rules.
