Disciplines on State-Owned Enterprises in International Economic Law: Are We Moving in the Right Direction?

Transcription

1 Journal of International Economic Law, 2016, 19, doi: /jiel/jgw054 Advance Access Publication Date: 21 August 2016 Article Disciplines on State-Owned Enterprises in International Economic Law: Are We Moving in the Right Direction? Ines Willemyns* ABSTRACT State-owned enterprises (SOEs) are a specific kind of enterprise with specific characteristics and inherent competitive advantages. However, they continue to play a considerable role in twenty-first century trade. The first section of this article will address the question of why and how SOEs must be regulated in international economic law. It will shortly review the characteristics of SOEs and link these to the question whether there is a need for specific disciplines to remedy the potentially trade and investment distorting behaviour of SOEs. In the second section of the article, the existing provisions on SOEs in international economic law will be elaborated upon. Several issues surround the currently existing disciplines on SOEs, including the lack of a clear definition and scope, limited specific disciplines, and problems of enforcement. The article will try to answer several questions: How well do currently existing rules address the issues surrounding SOEs? Is the specific chapter in the Trans-Pacific Partnership (TPP) new and groundbreaking? Are current gaps being addressed? What about the negotiations in other mega-regional agreements? This article evaluates the existing rules and the new rules found in TPP regarding five elements that should necessarily be included in any chapter on SOEs: (i) a clear definition and broad scope; (ii) general obligations and rights; (iii) specific disciplines on trade-distortive practices by SOEs and specific exceptions; (iv) provisions to improve transparency; and (v) rules regarding enforceability and dispute settlement. INTRODUCTION Contrary to what might be expected, state-owned enterprises (SOEs) still play a role in twenty-first century trade. More importantly, the (possibly) competition distortive behaviour of SOEs is no longer only affecting the domestic markets, but has expanded to international trade. While less economies are relying on SOEs to provide goods and services, those SOEs that still exist increasingly affect international trade. Because of global value chains, globalization, and the opening up of WTO Members * Doctoral Researcher and Junior Member of the Leuven Centre for Global Governance Studies and Institute for International Law, University of Leuven. ines.willemyns@kuleuven.be. I am very grateful to Prof. Gary Horlick for his valuable comments on the research paper that served as the basis for this article. All errors and opinions are the author s own. VC The Author Published by Oxford University Press. All rights reserved. 657

2 658 Disciplines on SOEs in International Economic Law markets, the possible trade and investment distorting effects of SOE participation in international trade have entered the limelight. SOEs are a specific kind of enterprise with specific characteristics and inherent competitive advantages. The first section of this article will address the question of why and how SOEs must be regulated in international economic law. It will shortly review the characteristics of SOEs and link these to the question of whether there is a need for specific disciplines to remedy the potentially trade and investment distorting behaviour of SOEs. In the second section of the article, the existing provisions on SOEs in international economic law will be elaborated upon. Both the provisions at the multilateral level, including the GATT 1994 and the GATS, and those in several more recent free trade agreements (FTAs), will be discussed. Do these provisions lead to a level playing field in which SOEs and privately owned enterprises (POEs) can compete? Do they adequately address existing concerns regarding the participation of SOEs in international trade? Do the rules in the FTAs fill any gaps left at the multilateral level and how do they compare to each other? The second section of the article does not aim at merely critiquing the existing provisions, but also evaluates possibilities for the future. It departs from the premise that any SOE chapter that intends to reduce the inefficiencies that currently characterize the disciplines on SOEs must contain five main elements: (i) a clear definition and broad scope; (ii) general obligations and rights; (iii) specific disciplines on trade-distortive practices by SOEs and specific exceptions; (iv) provisions to improve transparency; and (v) rules regarding enforceability and dispute settlement. This article is structured according to this suggestion and will evaluate the existing provisions in international economic law accordingly. The Trans-Pacific Partnership (TPP) is a FTA concluded between a very diverse group of negotiating countries in several aspects: level of economic development, sectoral strength, and use of SOEs (e.g. Vietnam is still an avid user of SOEs). 1 As a so-called mega-regional agreement, TPP is one of the biggest regional trade agreements between some of the largest economic players in the world. 2 This agreement, like some other FTAs that came before it, contains a chapter on State-Owned Enterprises and Designated Monopolies. As the TPP was anticipated to be a groundbreaking agreement, with the opportunity for countries like Australia and the USA to influence possible new international economic rules on SOEs, special consideration will be given to its provisions on SOEs. 3 Additionally, wherever possible, reference will be made to the negotiations on two other mega-regional trade agreements: the Transatlantic Trade and Investment Partnership (TTIP) and the Trade in Services Agreement (TiSA). 1 William Krist, Negotiations for a Trans-Pacific Partnership Agreement, Wilson Center, ter.org/publication/negotiations-for-trans-pacific-partnership-agreement (visited 26 May 2016), at 6 7. Members to the TPP are: Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, USA, and Vietnam. 2 The economic importance of this Agreement can be illustrated by the fact that the combined economies of these 12 countries amounted to a GDP of USD billion in 2014, which is 36% of the world s GDP. Source of countries GDP: World Bank: (visited 26 May 2016). 3 Ming Du, Explaining China s Tripartite Strategy Towards the Trans-Pacific Partnership Agreement, 18 Journal of International Economic Law 407 (2015), at 413.

3 Disciplines on SOEs in International Economic Law 659 I. WHY AND HOW SHOULD WE REGULATE SOES? A. The characteristics of SOEs There is no universal definition of what the term state-owned enterprise encompasses. This problem does not arise for privately owned enterprises as this term covers all enterprises that are not owned or controlled by the state, in whatever form or size. Closely linked to this lack of universal definition of SOEs is the lack of coherent international disciplines. As will be shown in the second section of this article, international rules do exist, but they are limited in scope, are ineffective, or are toothless. Different multilateral, plurilateral, and bilateral agreements have incorporated different rules, without effective international guidance that could lead to coherency. Three main differences in characteristics between SOEs and POEs can be identified. First, POEs and SOEs often have different guiding objectives. Where private companies are mainly focused on profit maximization, state ownership is seen as a way of correcting market failures. Governments depart from the principle of competitive neutrality with the purpose of remedying market failures. Examples can be found in cases where natural monopolies exist or where SOEs are used as agents for developmental policies. 4 Secondly, SOEs are characterized by their inherent competitive advantages. As will be explained below, the need for specific rules is created by the competitive advantages that are enjoyed by enterprises solely because of their state ownership, financial participation by the state, government control through rules or practices on the functioning of the enterprise, or because they are a government-designated monopoly. As a last element in this comparison, reference can be made to the differences in decision-making and regarding accountability. SOEs, especially those that are uncorporatized, are often burdened with unincentivized top management, with very limited accountability but with decision-making concentrated in a limited amount of hands. 5 However, it should be taken into account that SOEs exist in a wide range of different corporate forms and with different characteristics and that especially this last characteristic can vary immensely between different types of SOE, influencing the potential for trade distortion. These characteristics help explain why SOEs often inhibit a competitively neutral market. Where governments pursue their objectives through SOEs, trade and investment can be significantly impaired. Therefore, the need for specific rules is created, in order for SOEs to exist without distorting international trade. B. The rationales behind maintaining SOEs State ownership of commercial enterprises often exists for several reasons, including a mixture of social, economic, and strategic interests. 6 The Organization for Economic Co-operation and Development (OECD) points out that there are several 4 Antonio Capobianco and Hans Christiansen, Competitive Neutrality and State-owned Enterprises: Challenges and Policy Options, OECD Corporate Governance Working Paper No. 1 (2011), at 7. 5 See for an elaboration: Daniel Sokol, Competition Policy and Comparative Corporate Governance of State-owned Enterprises, Brigham Young University Law Review 2009(6), 1713 (2009) and Capobianco and Christiansen, above n 4. 6 OECD, OECD Guidelines on Corporate Governance of State-owned Enterprises (Paris: OECD Publishing, 2005), at 10.

4 660 Disciplines on SOEs in International Economic Law reasons why a government would consciously want to depart from competitive neutrality in certain sectors. First, to maintain public service obligations, e.g. with regard to postal services, telecommunications services, and providing essential utilities. 7 Public services meaning services which the state is concerned with providing at prices and/or locations that are accessible to all citizens. This preference is frequently motivated by public concerns. SOEs can be a major source of employment, often with very generous social benefits attached to them. 8 State ownership could also allow for cross-subsidization, enabling a state business that is earning excessively in a lucrative sector to pay for public services in another sector. 9 Secondly, the desirability to use SOEs as tools for industrial policy. SOEs are used to develop certain capabilities, technologies, and knowledge in the broader countries interest, without being limited by commercial considerations. However, this objective only maintains its legitimacy where societal value is attached to the maintenance of the SOE in a specific sector. 10 Thirdly, SOEs can generate large profits that can be considered necessary to maintain government expenses. Fourthly, the political economy of SOEs: where a government feels the need to protect SOEs because of pressure from the general public or interest groups. 11 Especially in the earlier stages of economic development, many reasons exist to justify a higher degree of government involvement. 12 International economic law should not intervene where state ownership or control is the most efficient to reach certain policy objectives (e.g. ensure universal service provision). However, where the government has the interest to ensure that its SOE succeeds in a competitive market (thereby no longer solely focusing on the justifiable policy objectives), competition with (foreign) POEs can be severely distorted. 13 It is the creation of an uneven playing field that must be remedied. C. The role of SOEs in twenty-first century trade The OECD 2013 Trade Policy Paper, looking at the business year of , identified 204 out of the world s 2000 biggest companies as majority SOEs, recording a combined sales of USD 3.6 trillion in that business year. 14 Additionally, the OECD compares both Countries SOE shares (CSS) (reflecting the weighted averages of SOE shares of sales, assets, and market values among each country s top 10 companies 15 ) and Sectoral SOE shares (SSS), thereby providing more detailed information on the countries with the biggest state-owned companies and the sectors in 7 Capobianco and Christiansen, above n 4, at 8. 8 Ibid, at 9. 9 Ibid, at Ibid. 11 These four reasons partially overlap with the illustrative list in: WTO Secretariat, Operations of State Trading Enterprises as They Relate to International Trade, Background Paper, G/STR/2 (26 October 1995), at para Przemyslaw Kowalski and Kateryna Perepechay, International Trade and Investment by State Enterprises, OECD Trade Policy Paper No. 184 (2015), at Sokol, above n 5, at Przemyslaw Kowalski et al., State-owned Enterprises: Trade Effects and Policy Implications, OECD Trade Policy Paper No. 147 (2013), at Ibid.

5 Disciplines on SOEs in International Economic Law 661 which SOE presence is highest. 16 Moreover, a recent OECD policy paper stated that the economic effects of preferential treatment by foreign governments extend beyond foreign markets, also affecting the sales and investment in domestic markets. 17 These raw numbers demonstrate the undeniable influence and power of SOEs both in world trade and in several important countries and sectors. The high relevance of these state-owned companies in international trade begs the question whether the existing rules adequately address the (inherent) competitive advantages enjoyed by these companies and whether more needs to be done. D. Competitive advantages allow a departure from competitive neutrality It should be made clear from the outset of this article that the main concern is not the existence of or the international trading by SOEs, but the (potential) absence of competitive neutrality in markets where POEs and SOEs (could) compete. 18 Competitive neutrality requires that government business activities should not enjoy net competitive advantages over their private sector competitors simply by virtue of public sector ownership. 19 Competitive neutrality aims at limiting the advantages that SOEs derive merely from the fact that they are government-owned. Provisions addressing SOEs should therefore aim at providing a level playing field for competition between SOEs and private enterprises, thereby promoting efficient competition. 20 The need for specific rules on SOEs is thus created by their competitive advantages (see supra). Even though various anticompetitive practices can also be undertaken by private actors, the effects of anticompetitive practices are enlarged by the specific characteristics of SOEs. 21 When considering these competitive advantages in more detail, it becomes clear that all of those described amount to a direct or indirect subsidization, through a lowering of fixed or variable costs of production. Three main categories of competitive advantages can be identified. Regulatory favouritism is granted to SOEs when governments use policy instruments to change market results. 22 This can translate into a more favourable treatment of SOEs, which often includes different and/or less strict regulatory disciplines. Examples given by the OECD include: disclosure requirements and exemptions from antitrust enforcement, building permit or zoning regulations and specific bankruptcy rules or even an 16 The top 10 countries with the highest CSS being: China, the United Arab Emirates, Russia, Indonesia, Malaysia, Saudi Arabia, India, Brazil, Norway, and Thailand. The five sectors with the highest SSS share are: mining support activities, civil engineering, land transport and transport via pipelines, mining of coal and lignite, and the extraction of crude petroleum and gas. 17 Kowalski and Perepechay, above n 12, at Capobianco and Christiansen, above n 4, at Commonwealth Competitive Neutrality Policy Statement by the Australian Government (June 1996), at 5, (visited 26 May 2016); A very similar and clear definition can be found in: OECD, Competitive Neutrality: Maintaining a Level Playing Field Between Public and Private Business (Paris: OECD Publishing, 2012), at This was also recommended by the OECD in its Guidelines on Corporate Governance of SOEs, above n E.g. their easy access to finance, their preferential treatment, and strong position in the market. 22 Global Services Summit, 21 st Century Trade Issues: The Challenges to Services Trade and Investment from the State-owned/assisted Enterprises, Restrictions on Data Flows, and Forced Localization, Washington DC, 2011, at 3.

6 662 Disciplines on SOEs in International Economic Law exemption from these rules. 23 Market distortion through financial support occurs when non-market financing or guarantees provided by government policy allow the SOEs to operate without economic considerations. 24 This can take several forms. First, through state subsidization: often SOEs receive direct financial support from the state or indirect support through favourable tax regimes or other benefits like land usage and rights of way. 25 Secondly, SOEs often have easy access to financing, through credit from governments, through state-owned financial institutions, or through implicit/explicit state guarantees. 26 This lowers their costs of borrowing and puts them again at a competitive advantage compared to private enterprises. Apart from the other advantages listed above, competitive non-neutrality can be caused by, first, more favourable treatment by the government that takes the form of preference in public procurement and information asymmetries. 27 Secondly, governments may entrust SOEs with exclusive or monopoly rights with regard to universal or public services. When these rights are given in markets where natural monopolies exist, this may have little consequences for market competition, but this is not the case when SOEs operate in network industries and operate as vertically integrated structures with incipient monopolies in their value chains. 28 In the latter case, relative competition can be distorted and market entry can be prevented. Thirdly, the fact that ownership and control are less easily transferred in SOEs than in private firms. This is caused by the fact that SOEs equity is often locked in and it is very hard to transfer the ownership rights. This benefits SOEs in several ways: (i) it can absolve them from the obligation of paying dividends to shareholders; (ii) as there is no fear of dropping stock prices, such SOEs can pursue anticompetitive, exclusionary pricing strategies; and (iii) there is less incentive to efficiently operate the company, as inefficient management will not translate into the normal disciplinary effects of capital markets. Because of these competitive advantages and their unique position in the market, SOEs often have the possibility to use specific restrictive business practices. These practices can involve preventing other companies from importing/exporting at lower prices; administering import regimes and determining price or quantity of imports; subsidizing trade, domestic production, or distribution; favouring domestic producers for the purchasing of commodities; holding or disposing of stocks; establishing or controlling product standards or minimum prices; and owning and operating production and processing facilities Capobianco and Christiansen, above n 4, at Global Services Summit, above n 22, at Capobianco and Christiansen, above n 4, at Ibid, at Ibid. 28 Ibid. 29 Ernst-Ulrich Petersmann, GATT Law on State Trading Enterprises: Critical Evaluation of Article XVII and Proposals for Reform, in Thomas Cottier and Petros C. Mavroidis (eds), State Trading in the Twenty-First Century (Michigan: University of Michigan Press, 1999), at 72.

7 Disciplines on SOEs in International Economic Law 663 E. Addressing concerns on SOEs Special rules with regard to SOEs are necessary because of the inherent differences between SOEs and POEs. Especially the different guiding objectives of SOEs warrant for specific disciplines. This can be illustrated by the fact that the rules of the GATT 1994 are enacted on the assumption that they apply to enterprises that are driven by economic incentives, arguably not covering several activities of SOEs. 30 The GATT and the WTO have succeeded greatly at reducing tariff barriers in both developed and developing countries. Therefore, the barriers to trade are increasingly situated behind the border, some of them related to state ownership. All of the above elements help to explain the inadequacy of the current rules with regard to SOEs in the GATT Because Article XVII GATT 1994 was enacted in a time where the focus of trade liberalization lay elsewhere (lowering of tariffs), the rules no longer suffice, taking into account the position of SOEs in our globalized world. Trade distortions through SOEs on the international market entail a higher welfare cost than distortions caused by SOEs in a closed domestic market. Evidently, firms that are exposed to international competition are often more efficient, cost-effective, and advanced. 31 Moreover, it is important to ensure competitive neutrality in order for enhanced allocative efficiency in the economy. 32 When different players in the market do not operate under the same competitive terms, goods and services may no longer be produced by those that are most efficient at it, ultimately to the detriment of the consumer. The competitive advantages of SOEs allow for a distortion of trade and investment. It is, therefore, deemed necessary to ensure a level playing field through specific legislation. However, this need for specific disciplines must be nuanced in various ways: SOEs exist in a wide spectrum of government involvement. On the one hand, there are the enterprises fully owned and controlled by the government, and on the other hand, there are enterprises that seem to act completely separately and distinctly from the government. 33 Additionally, the corporate form of SOEs differs widely across countries and sectors. This will significantly impact their characteristics. For example, a listed company that has the state as its majority shareholder will have much less scope to pursue non-commercial objectives than a fully state-owned enterprise that is not listed on the stock exchange. The corporatization of SOEs in some (OECD) countries has already led to more competitive neutrality. 34 Moreover, only where SOEs compete (or potentially compete, if competition is being prevented through regulation or restrictive business practices of the SOE itself) with POEs, does the issue of competitive neutrality come into play. It is not the existence of SOEs in themselves that causes the call for more specific regulation, but rather their distortive practises when engaging in commercial competition. Regarding the performance of 30 William J. Davey, Article XVII GATT: An Overview in Cottier and Mavroidis, ibid, at Ibid, at OECD (2012) above n 19, at WTO Secretariat Background Paper, above n 11, at para 9. See the Background Paper for a more detailed list of the different types of SOEs. 34 Capobianco and Christiansen, above n 4, at 9.

8 664 Disciplines on SOEs in International Economic Law both POEs and SOEs, ownership does not matter as long as the trading happens in competitive environments. 35 This article does not argue a need to diminish the amount of internationally trading SOEs. Trade negotiations are concerned with trade and investment distorting effects of SOEs, not with their motives or guiding objectives. It is, however, the behaviour of the government that enables the competitive advantages of SOEs, mostly through (indirect) subsidization. Therefore, international, intergovernmental, plurilateral regulation of these matters does make sense. In order to regulate SOEs sensibly, five main elements must be reflected in the provisions: (i) a clear definition and well-defined scope; (ii) clear general obligations and rights; (iii) specific disciplines on trade-distortive practices by SOEs and specific exceptions; (iv) provisions to improve transparency; and (v) rules regarding enforceability and dispute settlement. Existing rules on SOEs in international economic law will be examined, taking into account these five elements. II. SOES IN INTERNATIONAL ECONOMIC LAW A. Definition and scope One of the main issues regarding the disciplines on SOEs is the lack of a clear and consistent definition of this category of companies in international law. This section will look at the existing definitions in international economic law, including various FTAs and the recently concluded TPP. 1. At the multilateral and bilateral level The GATT 1994 contains a definition of state trading enterprise in Article XVII, describing it as a state enterprise, wherever located, and any enterprise that has been granted, formally or in effect, exclusive or special privileges, including marketing boards and import monopolies. 36 The working definition found in the Understanding on the Interpretation of Article XVII is, however, more narrow than the legal definition in Article XVII itself, imposing two requirements: (i) granted exclusive or special rights or privileges, including statutory or constitutional powers and (ii) in the exercise of which they influence through their purchases or sales the level or direction of imports or exports. 37 The scope of Article VIII GATS is narrower than the provision in the GATT because it only applies to monopoly suppliers and exclusive service suppliers. Article XXVIII(h) elaborates on the concept of monopoly supplier stating that the service supplier needs to be authorized or established formally or in effect by that Member as the sole supplier of that service, thereby requiring some direct government involvement. The panel in China Electronic Payment Services explained the concept of exclusive services supplier as one of a small number of suppliers in a situation 35 Mohammed Omran, The Performance of State-Owned Enterprises and Newly Privatized Firms: Does Privatization Really Matter?, 32 (6) World Development 1019 (2004), at See Interpretative note to Article XVII, para 1 General Agreement on Tariffs and Trade 1994 [hereinafter GATT]. 37 Petersmann, above n 29, at 72.

9 Disciplines on SOEs in International Economic Law 665 where a Member authorizes or establishes a small number of service suppliers, either formally or in effect, and that Member substantially prevents competition among those suppliers. 38 It is unclear whether the Agreement on Subsidies and Countervailing Measures (SCM Agreement) applies directly to SOEs. Article 1, containing the definition of a subsidy, states that a subsidy is a financial contribution by a government or any public body within the territory of a Member. 39 Can a SOE be qualified as a public body? After an elaborate analysis, the Appellate Body in US Anti-dumping and Countervailing Duties (China) came to the conclusion that a public body within the meaning of the SCM Agreement must be an entity that possesses, exercises or is vested with governmental authority. Yet, just as no two governments are exactly alike, the precise contours and characteristics of a public body are bound to differ from entity to entity, State to State, and case to case. 40 Therefore, SOEs might fall within the definition of public body, but this will always have to be determined on a case-by-case basis, evaluating the core features of the entity concerned. In its SOE Guidelines, the OECD clarifies that when it uses the term SOE it refers to enterprises where the state has significant control, through full majority, or significant minority ownership. 41 The OECD thus focuses on the concept of control, stating that different degrees of ownership can involve significant control. Therefore, where the GATT is unspecific as to the precise definition of a state trading enterprise, the definition provided by the OECD is clearer. Another definition or clarification by the OECD can be found in its reports regarding competitive neutrality, where it applies the framework to all types of government-owned bodies that are actually or potentially competing with private operators in any given market and that can be considered as a commercial entity, 42 thereby requiring both (i) stateownership and (ii) being a commercial entity. The US Singapore FTA dedicates a separate chapter to SOEs. Chapter 12 entitled Anticompetitive Business Conduct, Designated Monopolies and Government Enterprises contains specific provisions applicable to the conduct of government enterprises. Article 12.8 defines a government enterprise as (i) for the USA: an enterprise owned, or controlled through ownership interest, by the government; and (ii) for Singapore: an enterprise in which the government has decisive influence. Interestingly, the Parties to this FTA could apparently not agree on a definition for government enterprises, with the USA focusing more on ownership while Singapore focuses more on decisive influence. 2. TPP The definition of a state-owned enterprise in Chapter 17 of the TPP contains two elements: (i) the enterprise is principally engaged in commercial activities; and (ii) a 38 Panel Report, China - Electronic Payment Services (DS413), para Article 1.1(a)(1) Agreement on Subsidies and Countervailing Measures. For a more elaborate study of this term, see Ru Ding, Public Body or Not: Chinese State-owned Enterprise, 48 Journal of World Trade 1, 167 (2014). 40 AB Report, US - Anti-dumping and Countervailing Duties (China) (DS379), para OECD (2005), above n 6, at OECD (2012), above n 19, at 17.

10 666 Disciplines on SOEs in International Economic Law Party either directly owns more than 50% of the share capital of the enterprise; or controls through ownership interests, the exercise of more than 50% of the voting rights; or holds the power to appoint a majority of Members of the board of director or an equivalent management body. This definition lacks a consideration of effective influence. 43 An additional criterion of some degree of control as proposed by the OECD would have broadened the scope and would have addressed the problem of de facto SOEs. Even though the criterion on the power to appoint the majority of the board of directors in a way remedies this problem, it does not sufficiently do so. This definition is markedly different from the simpler and broader USA definition in the US Singapore FTA. However, it does provide for one single definition applying to all the Parties, which should be preferred over the two definitions in the FTA. The definition of SOEs and thereby the scope of the specific provisions should not focus on being as broad as possible. It is, however, imperative that all problematic entities (i.e. all entities benefitting from comparative advantages due to state ownership or control) are covered. This also implies those entities that are not stateowned in the classical sense, but where the government exercises a sufficient degree of control, thereby attributing these inherent competitive advantages to such enterprises. The limitation of the definition to those SOEs that are engaged in commercial activities, already indicates that Chapter 17 does not aim at limiting the opportunities for SOEs to exist and operate in international markets, but rather at levelling the playing field. This definition, that is sufficiently broad but for the missing element of control, is however considerably limited by the provisions in Article 17.2 regarding the scope of the Agreement. The Article contains several predictable provisions such as the exemption of government procurement, the right of the Parties to establish or maintain SOEs, and the exemption of services supplied in the exercise of governmental authority (with an explicit reference to the GATS). 44 However, several other exemptions are included that might not have been expected: the exemption of activities for the purpose of the resolution of a failing or failed financial institution (paragraph 4), the exemption for pension funds (paragraph 6) and the non-applicability of the obligation of non-discrimination and commercial considerations to sovereign wealth funds (paragraph 5). Additionally, services supplied by a SOE within its domestic market are exempted from the obligation not to provide non-commercial assistance. 45 Insofar as these exemptions include service sectors or certain goods that are not provided in competition with other services suppliers, such limitations of scope arguably do not hinder reaching the overall objective of this chapter. 43 Contrary to what is concluded in: Julien Sylvestre Fleury and Jean-Michel Marcoux, The US Shaping of State-Owned Enterprise Disciplines in the Trans-Pacific Partnership, 19 Journal of International Economic Law 2 (2016, forthcoming). 44 Respectively Article , Article , and Article of the Trans-Pacific Partnership, 4 February 2016, (visited 26 May 2016) [hereinafter TPP]. 45 Article TPP.

11 Disciplines on SOEs in International Economic Law 667 B. Disciplines on SOEs: general obligations and rights 1. At the multilateral level and bilateral level A chapter on SOEs in any broad FTA should start by setting out the general obligations and rights of the Parties regarding these specific enterprises. Inspiration can be drawn from the obligation in Article XVII GATT 1994, which requires that state trading enterprises (STEs) act in a manner consistent with the general principles of non-discriminatory treatment for governmental measures that affect imports and exports by private traders. However, the application of this Article is flawed as it is quite general and toothless and only disciplines discriminatory behaviour. The panel in Canada Wheat Exports and Grain Imports confirmed that this included the mostfavoured nation (MFN) treatment obligation, but declined to take a position on whether this also included the national treatment obligation. 46 This implies that where companies act in violation of the national treatment obligation or where the action cannot be considered a government measure, Article XVII is unable to sanction this behaviour. In relation to this, the AB has held that compliance with Article XVII must be assessed by means of a market-based analysis, rather than simply by determining whether an STE has used the privileges that it has been granted. 47 Under the GATT 1994, state trading enterprises, like private actors, may exploit the advantages they enjoy due to their economic benefits. 48 Moreover, Article XVII.1(b) clarifies the provision of subparagraph (a), stating that STEs shall make any purchases or sales solely in accordance with commercial considerations. It has been argued that the Ad note to Article XVII (1) leaves state trading enterprises ample room for price discrimination. 49 However, this is only possible insofar as different prices are charged for commercial reasons. 50 The GATS only contains a specific provision applying to monopoly suppliers and exclusive service suppliers. Article VIII GATS stipulates that they cannot act in a manner inconsistent with a Member s obligation under Article II (containing the MFN treatment obligation) and its specific commitments. Because the national treatment obligation under the GATS is limited to those sectors where a Member has undertaken commitments, 51 monopoly suppliers will not be subject to this obligation in sensitive sectors. Like Article XVII GATT 1994, the GATS does not prohibit state monopolies as such, but only prohibits the abuse of a monopoly position. At the bilateral level, several general obligations and rights can be identified. For the purpose of this article, we identified three main examples. First, several FTAs 46 Panel Report, Canada - Wheat Exports and Grain Imports (DS276), paras 6.48 and AB Report, Canada - Wheat Exports and Grain Imports (DS276), para Ibid, para Gary Clyde Hufbauer and Cathleen Cimino-Isaacs, How will TPP and TTIP Change the WTO System?, 18 Journal of International Economic Law 3, 679 (2015), at Ad note to Article XVII(a) GATT 1994: The charging by a state enterprise of different prices for its sales of a product in different markets is not precluded by the provisions of this Article, provided that such different prices are charged for commercial reasons, to meet conditions of supply and demand in export markets. 51 Article XVII General Agreement on Trade in Services [hereinafter GATS].

12 668 Disciplines on SOEs in International Economic Law contain the explicit right to maintain and establish SOEs. 52 For the sake of legal certainty and to set the scene for the rest of the chapter, it is important to stress that it is not the existence of SOEs that is problematic. Secondly, several FTAs include the obligation of non-discrimination, but with a varying scope: the US Chile FTA (and various other FTAs) obliges its Parties to ensure that any state enterprise that it establishes or maintains accords non-discriminatory treatment in the sale of its goods or services to covered investments. 53 The scope of this obligation in CETA is broader, as it requires nondiscriminatory treatment of investment, goods, or services in the purchase or sale of a good or service. 54 Moreover, Article 12.3 of the US Singapore FTA applies a different scope to the obligation for both Parties: USA SOEs, on the one hand, are obliged to accord non-discriminatory treatment in the sale of goods or services to covered investments. Singaporean SOEs, on the other hand, are required to provide nondiscriminatory treatment to covered investments, USA goods, and USA service suppliers, in both its purchases and sales. Thirdly, the obligation to act in accordance with commercial considerations can only be found in two FTAs: CETA and the US Singapore FTA, where it moreover only applies to Singaporean SOEs. 55 This obligation, however, helps prevent restrictive practices that limit SOEs effectiveness. It can, therefore, be observed that before the enactment of the TPP, only the short chapter on SOEs in CETA contained all three identified general obligations and rights, applying equally to all its Parties. 2. TPP The TPP does deserve merit for clearly setting out the basic rights and obligations of the Parties regarding SOEs. Article TPP contains the right of Parties to establish and maintain SOEs. The obligations of non-discriminatory treatment and to act 52 Article North American Free Trade Agreement, 17 December 1992, 32 I.L.M 289 (entered into force on 1 January 1994) [hereinafter NAFTA]; Article (a) United States Singapore Free Trade Agreement, May 2003, 42 I.L.M (entered into force on 1 January 2004) [hereinafter US Singapore FTA]; Article United States Chile Free Trade Agreement, 6 June 2003, 42 I.L.M (entered into force on 1 January 2004) [hereinafter US Chile FTA]; Article United States South Korea Free Trade Agreement, 30 June 2007, 46 I.L.M 642 (entered into force on 15 March 2012) [hereinafter KORUS FTA]; Article European Union South Korea Free Trade Agreement, 16 September 2010, OJ L 127, 14 May 2011 (entered into force on 1 July 2011) [hereinafter EU Korea FTA]; and Article 18.3 Comprehensive Economic and Trade Agreement between Canada and the European Union, trade.ec.europa.eu/doclib/docs/2014/september/tradoc_ pdf (visited 26 May 2016), not yet signed nor entered into force [hereinafter CETA]. 53 See Article US Chile FTA. Similar: Article 1503 NAFTA; Article (b) United States Australia Free Trade Agreement, 18 May 2004, 43 I.L.M (entered into force on 1 January 2005) [hereinafter US Australia FTA]; Article of the United States Peru Trade Promotion Agreement, 12 April 2006, (visited 26 May 2016) (entered into force on 1 February 2009) [hereinafter US Peru FTA]; Article of the United States Colombia Trade Promotion Agreement, 22 November 2016, ments/free-trade-agreements/colombia-fta/final-text (visited 26 May 2016) (entered into force 12 May 2012) [hereinafter US Colombia FTA]; and Article 16.3 KORUS FTA. 54 Article CETA. It can, therefore, be questioned whether a broad scope of non-discrimination obligations re SOEs is solely an integral part of the evolving practice of the USA. As stated in: Sylvestre Fleury and Marcoux, above n Article CETA and Article 12.3 US Singapore FTA.

13 Disciplines on SOEs in International Economic Law 669 pursuant to commercial considerations can be found in Article The obligation to act in accordance with commercial considerations applies to every purchase or sale of a good or service. The requirement of non-discrimination is explicitly extended to both the sale and purchase of a good or service, including when supplied to an investment in Article , subparagraphs (b) and (c). Both subparagraphs describe a national treatment and MFN obligation, avoiding the confusion that exists on Article XVII GATT. Taken together, these subparagraphs of Article 17.4 go significantly further than the equivalent obligations in most previously mentioned FTAs. Additionally, the same obligations apply to both Parties, thereby avoiding the dual approach in the US Singapore FTA. C. Disciplines on SOEs: specific disciplines and exceptions The rules on SOEs at the multilateral level are characterized by their lack of specific disciplines. None of the Articles in GATT, GATS or any other Covered Agreement impose a specific discipline going further than general obligations and weak transparency mechanisms. However, apart from the general obligations, there is a need for specific disciplines that address specific concerns with regard to SOEs. As to the exceptions, a limited number of sector- and company-specific exceptions should be preferred because these allow countries to protect the sectors that are deemed most important to further their economy or meet public needs and avoid exceptions that are too wide. Any sector-specific exceptions would need to be limited in scope and countries have to specify which of the specific obligations do not apply to the specified sectors. In principle, however, all SOEs that do not provide a public service should be subject to all specific obligations. 1. Specific disciplines a. At the bilateral level The US Australia FTA contains specific obligations on anticompetitive practices by SOEs at the sub-federal level for the USA and on competitive neutrality at all government levels for Australia. 56 Additionally, the US Singapore FTA contains several provisions that might be considered as more specific disciplines on SOEs because they go further than setting out the non-discrimination obligation or the obligation to act in accordance with commercial considerations. Singapore has engaged itself to ensure that SOEs do not enter into agreements among competitors that restrain competition on price or output or allocate customers for which there is no plausible efficiency justification. Additionally, it is obliged to ensure that its SOEs do not engage in exclusionary practices that substantially lessen competition to the detriment of consumers. 57 None of these obligations apply explicitly to the USA. The same goes for the obligation on Singapore to take no action or attempt to influence or direct decisions of its SOEs. 58 In this FTA, the specific rules on telecommunications and investment apply to both SOEs and private enterprises. Another specific discipline can be found in the telecommunications chapter that contains provisions on competitive safeguards, preventing major 56 Article 14.4 of the US Australia FTA. 57 Article (d)(ii) of the US Singapore FTA. 58 Ibid, Article (e).

14 670 Disciplines on SOEs in International Economic Law suppliers from engaging in anticompetitive conduct. 59 Additionally, the chapter requires an independent regulator that cannot be partly owned or influenced by the Parties government, to monitor the public telecommunication service supplier. 60 Where a government has an ownership interest in a supplier of public telecommunications services, it shall notify the other Party and privatize this supplier as soon as feasible. 61 Whereas most FTAs do not contain SOE-specific disciplines, specific obligations can sometimes be found where rules in other parts of the FTA, such as a chapter on telecommunications, are applicable to both POEs and SOEs. Another source of specific disciplines could be the applicability of competition law. Several FTAs refer to rules of competition law in provisions on SOEs, using existing competition law to remedy the trade distortive effects that can be associated with SOEs. 62 This is very obvious at the bilateral level, where the rules on state enterprises are almost invariably found in the chapter containing the competition law provisions. Similarly, the OECD 2012 Report on Competitive Neutrality and some national laws refer to competition law as the way to deal with SOEs. 63 However, applying competition law to the behaviour of SOEs has significant drawbacks. Traditionally, competition law is focused on preventing restrictions on competition, thereby assuming profit maximization as the driving force behind the enterprises at issue. However, the main anticompetitive conduct of SOEs will be considered nonrecoupment predation, 64 which is often not captured by competition law. 65 Competition law provides for a way to deal with anticompetitive practices only after they have taken place (ex post remedy) and will only apply to those SOEs that are sufficiently big, have sufficient power on the market, and that do not fall within a specific exclusion. 66 Moreover, the activities of SOEs often find their basis in law or are justified by public policies. Therefore, even though applied less and less, the state defence doctrine allows for the exclusion of liability where the conduct of the enterprise is dictated by laws or regulations. 67 These observations give rise to the question of whether turning to competition law is the appropriate method of dealing with the trade and investment distorting behaviour of SOEs. It should also be taken into account that competition law is still very much a national issue. Applying national competition laws will lead to fragmented rules on SOEs, instead of the required consistency and predictability. 59 Ibid, Article Ibid, Article Ibid, Article E.g. Article 1502 NAFTA (1994); Article 179, section 2 of the European Union - Chile Association Agreement (2002); Article 14.8 of the Korea - Chile Free Trade Agreement (2004); Articles 11.1, 11.2, and 11.4 of the European Union - Korea Free Trade Agreement (2011). 63 OECD (2012), above n 19, at 26; e.g. Consolidated Version of the Treaty on the Functioning of the European Union Article 106, 2008 OJ C 115/47 [hereinafter TFEU]. 64 Non-recoupment predation exists when the company, after it deterred or eliminated competition through predatory practices, will not collect enough profit to recover the losses it sustained during the predatory attack. 65 Kowalski et al., above n 14, at Capobianco and Christiansen, above n 4, at Ibid, at

15 Disciplines on SOEs in International Economic Law 671 b. TPP, TTIP, and TiSA In Chapter 17, the closest the Parties come to any kind of specific disciplines can be found in the Articles related to non-commercial assistance. These are aimed at preventing governments from providing non-commercial assistance (read: subsidies, the text of these provisions is extremely reminiscent of the language in the SCM Agreement) to their SOEs with respect to the production and sale of goods or the provision of services through the first or third mode of supply. 68 Article 17.7 TPP elaborates on the concept of adverse effects, including price undercutting and displacement or impedance of imports, production, or supply of services. Furthermore, Parties did commit to engage in technical cooperation on the issue of SOEs, which includes the exchange of information and the sharing of best practices on policy approaches combined with the establishment of a Committee on State- Owned Enterprises and Designated Monopolies. 69 It can only be hoped that, through this cooperation, the excellent example of Australia in addressing competitive neutrality can seep through to the national policies of other Parties, including the USA. Moreover, article 1.3 TPP, containing the general definitions, defines enterprises as any entity constituted or organized under applicable law, whether or not for profit, and whether privately or governmentally owned or controlled, including any corporation, trust, partnership, sole proprietorship, joint venture, association, or similar organization. Therefore, all specific provisions in the rest of the TPP that apply to enterprises, apply equally to SOEs, unless provided otherwise. For the reasons set out above, the lack of any reference to national competition law in Chapter 17 of the TPP should be considered an improvement compared to earlier FTAs. It should, however, be taken into account that the chapter on competition policy states that: Each Party shall endeavour to apply its national competition laws to all commercial activities in its territory. 70 Therefore, where an SOE is engaged in a commercial activity, national competition law can be applied under TPP. This does, however, not detract from the fact that more specific disciplines on SOEs can be found in this Agreement. As described above, many of the inherent advantages of SOEs boil down to an (indirect) subsidization by the government. The fact that the TPP includes the specific disciplines on non-commercial assistance, will, arguably, effectively contribute to levelling the playing field for SOEs and POEs in competition with each other. By including the subsidization of trade in services into its scope, Article 17.6 TPP goes beyond anything stipulated under the Covered Agreements. Looking at future mega-regional trade agreements, in the negotiations on TTIP and TiSA, some proposals were made with regard to specific disciplines on the trade-distorting effects of SOEs. First, the European Union (EU), in an initial position paper on TTIP, proposed a prohibition on cross-subsidization of a nonmonopolized market for both goods and services. 71 A similar prohibition on crosssubsidization was proposed in the draft text on the Annex on Competitive Delivery 68 Relevant Articles being 17.6, 17.7, and 17.8 of the TPP. 69 Articles and of the TPP. 70 Article of the TPP. 71 European Commission, DG Trade, TTIP-Rules Group, Anti-trust & Mergers, Government Influence and Subsidies, Initial Position Paper, 19 June 2013, (visited 26 May 2016).