The legal and policy debate over the proper treatment of state-owned enterprises in trade remedy investigations, particularly with respect to China, continues with an Appellate Body reversal at the World Trade Organization, a recent European Union determination in a countervailing duty investigation, and ongoing negotiations in the context of the Trans-Pacific Partnership.
The WTO Appellate Body issued an April report in a case brought by China that challenged the final determinations of the U.S. Department of Commerce in four different subsidy investigations. China argued that Commerce incorrectly found in its final determinations that Chinese state-owned enterprises provided subsidized inputs to Chinese exporters. Commerce reasoned that the Chinese state-owned enterprises in question constituted "public bodies" under the terms of the WTO law because the enterprises were majority-owned by the Government of China and therefore bestowed subsidies on behalf of the government when providing inputs at less than market prices. Although the original WTO panel adjudicating the case agreed with Commerce, the WTO Appellate Body reversed the decision, reasoning instead that majority ownership alone is insufficient to determine if a state-owned enterprise is a "public body." Rather, Commerce must also determine that the state-owned enterprise acts with government authority and performs government functions in order for it to be considered a "public body." The WTO Appellate Body decision was criticized by, among others, United States Trade Representative Ron Kirk, who deemed it "overreaching."
In contrast to the WTO Appellate Body ruling, the European Union issued a final determination in May in its first ever countervailing duty case against China. In its investigation of coated fine paper imports from China, the European Union concluded that the financing of the papermaking industry by Chinese state-owned commercial banks constituted a countervailable subsidy. Similar to the U.S. case, it is expected that the European Union's determination also will be challenged by China at the WTO.
Meanwhile, the U.S. government continues to prepare a proposal on state-owned enterprises that it expects to table sometime this year in the ongoing negotiations on the Trans-Pacific Partnership – an Asia-Pacific regional trade agreement being negotiated among the United States and eight trading partners. The most recent round of negotiations took place during the week of June 20 in Vietnam and the next session is scheduled for September. The Obama Administration currently is consulting with interested U.S. business and labor groups about the content and language of its expected proposal, which will seek to create a legal framework in which state-owned enterprises do not enjoy advantages, or disadvantages, over their private sector competitors. Although China is not a participant in the trade agreement negotiations, the final outcome on state-owned enterprises in the negotiations will likely provide an important template for any future negotiations with China on this subject.