Technically, China's "industrial subsidies" are subsidies granted by State-Owned Enterprises (SOEs) that do not fall under the concept of "public body" as understood by the WTO Appellate Body. Recall that a financial contribution in the sense of Article 1 of the SCM could be granted by a government in the narrow sense or by a “public body.” This is reflected in the expression “there is a financial contribution by a government or any public body … ”.
In its recent paper titled “WTO – EU’s proposals on WTO modernisation” ( Council of the European Union, Document WK 8329/2018 INIT, Brussels, July 5, 2018), the European Commission criticized the AB's jurisprudence about the concept of “public body.” This criticism is based mainly on the allegation that this jurisprudence allows a considerable number of Stated Owned Enterprises (SOEs) to escape an adequate application of the SCM to these enterprises:
Subsidies granted to SOEs are [in principle] already captured by the SCM Agreement, in the same way as any other subsidy granted by the state. With regard to...SOEs..., the SCM Agreement captures them through the concept of a “public body”. However, this has been interpreted in a rather narrow manner, which allows a considerable number of SOEs to escape the application of the SCM Agreement.
Moreover, these " industrial subsidies" loom large in the recent trade negotiations between the United States and China.
In US – Anti-Dumping and Countervailing Duties (China), the panel and the Appellate Body explored whether certain Chinese State-Owned Enterprises (SOEs) and State-Owned Commercial Banks (SOCBs) are “public bodies” in the sense of Article 1 of the SCM. In the context of the CVD case before the the US Department of Commerce, the latter concluded that those SOEs and SOCBs were public bodies within the meaning of Article 1.1(a)(1) of the SCM and established on this basis the existence of a financial contribution which is a necessary component for finding a subsidy. China objected to this conclusion, forcing therefore the panel and the Appellate Body to interpret the expression “public body.”
There are three conceptual approaches when interpreting this expression.(See on this matter the excellent article by Ru Ding, “Public Body or Not: Chinese State-Owned Enterprises,” Journal of World Trade 48(1) (2014) ). The first approach (the governmental control approach) holds that governmental control over an entity is the criterion that determines whether such an entity is a “public body.” The second approach (the governmental function approach) holds that an entity is a “public body” if such entity performs a governmental function. The third approach (the Governmental Authority to Perform Governmental Functions approach) is the one ultimately adopted by the Appellate Body.
Governmental Control Approach
This approach considers governmental control over an entity as the criterion determining whether such entity is a “public body.” However, opinions vary as how to prove such governmental control. In this respect, there are two schools of thought.
The first one holds that government’s ownership, or majority-state-share of an enterprise, is adequate evidence of such control. The majority state-share per se rule advocated by the United States in US – Anti-Dumping and Countervailing Duties (China) is inspired by this approach. The panel (reversed by the Appellate Body) endorsed this approach. Third parties Argentina, Canada, EU, and Mexico explicitly supported the same approach.
Under the second view, the majority-state-share criterion is relevant but not determinative. This means there must be other evidence showing “control” to prove that an entity is a public body. Australia, as a third party, supported this view.
The Governmental Function Approach
This approach holds that an entity is a “public body” if it performs functions of a governmental character. In US – Anti-Dumping and Countervailing Duties (China), China advocated this approach but only as a component of a more exacting definition. According to China, a “public body” is an entity exercising powers vested in it by a government for the purpose of performing functions of a governmental character.Therefore, China’s complete definition of the term “public body,” not only required an entity’s performance of governmental functions but also a government’s delegation of such powers to the entity.
The “Governmental Authority to Perform Governmental Functions” Approach
In US – Anti-Dumping and Countervailing Duties (China), the Appellate Body endorsed an approach similar to China’s complete definition. Under this approach, a “public body” in the sense of Article 1.1(a)(1) of the SCM is an entity “being vested with, and exercising, authority to perform governmental functions.”
Although the Appellate Body clarified in this case certain specific aspects, it felt the need to point out the necessity of a holistic analysis about whether an entity is a “public body.” This means that an investigating authority must give due consideration to all relevant facts regarding the characteristics and functions of an entity as appropriate in the particular circumstances of a case. Therefore, investigating authorities and panels must “avoid focusing exclusively or unduly on any single characteristic without affording due consideration to others that may be relevant” to a public body determination.
Regarding the “vested with governmental authority” component, the most explicit (but still confused and imprecise) passage of the Appellate Body is:
In some cases, such as when a statute or other legal instrument expressly vests authority in the entity concerned, determining that such entity is a public body may be a straightforward exercise. In others, the picture may be more mixed … We do not, for example, consider that the absence of an express statutory delegation of authority necessarily precludes a determination that a particular entity is a public body. What matters is whether an entity is vested with authority to exercise governmental functions, rather than how that is achieved. There are many different ways in which government in the narrow sense could provide entities with authority. Accordingly, different types of evidence may be relevant to showing that such authority has been bestowed on a particular entity. Evidence that an entity is, in fact, exercising governmental functions may serve as evidence that it possesses or has been vested with governmental authority, particularly where such evidence points to a sustained and systematic practice.
The Appellate Body made it clear, however, that apart from an express delegation of authority in a legal instrument, the existence of mere formal links between an entity and government in the narrow sense is unlikely to be sufficient for establishing the necessary possession of governmental authority. Thus, for example:
the mere fact that a government is the majority shareholder of an entity does not demonstrate that the government exercises meaningful control over the conduct of that entity, much less that the government has bestowed it with governmental authority. In some instances, however, where the evidence shows that the formal indicia of government control are manifold, and there is also evidence that such control has been exercised in a meaningful [an adjective not defined by the AB ] way, then such evidence may permit an inference that the entity concerned is exercising governmental authority.
Regarding the performance of “governmental functions” component, the panel clarified in the recent US – Countervailing Measures (China) (Article 21.5) case that what is a “government function” may vary among Members. The panel seemed to agree with China and the US that for identifying an entity as a public body, “it is permissible under Article 1.1(a)(1) for an investigating authority to identify a broader government function than the specific action that is alleged to constitute a financial contribution.” Thus, the panel noted without objection that the USDOC identified “maintaining and upholding the socialist market economy” as the relevant government function in China for its public body analysis. This function was broader than selling specific inputs to particular downstream purchasers. The panel concluded:
We do not consider there to be any a priori limitation on what may be the relevant government function for the purposes of a public body analysis. Rather, where an investigating authority identifies a broader government function as part of a public body analysis, it must provide a reasoned and adequate explanation, based on relevant evidence, to support that identification.
While China clarified that it did not assert that “maintaining and upholding the socialist market economy” is not a government function, or that it is invalid per se to identify an entity as a public body, China did not agree with the UDSOC identification of the government function in this case (recall that the Article 21.5 panel did not object to this identification). China claimed this function is “so broad that it is essentially meaningless” in terms of its connection to the financial contribution at issue in this case. Therefore, China was contesting the degree and nature of the connection between the government function identified by the USDOC and the financial contribution at issue (i.e., the selling of specific inputs to particular downstream purchasers).
The Article 21.5 panel rejected this not- so- subtle attempt by China to insist on a requirement to identify the precise governmental function fulfilled through a given financial contribution:
In our view, the text of Article 1.1(a)(1) does not prescribe a “connection” of a particular degree or nature that must necessarily be established between an identified government function and a financial contribution.
This seems to imply that the identification of a governmental function in a “public body” analysis must be assessed at the level of the nature and the core functions of the entity and not at the level of the precise financial contribution at issue.
Since the previous developments can leave a feeling of imprecision or even confusion, it is useful to see how the recent US – Pipe and Tube Products (Turkey) panel applied them in practice.
Here, the panel faced the USDOC finding that Erdemir and its subsidiary Isdemir are public bodies which provided respondent companies with hot rolled steel for less than adequate remuneration. To justify this finding, the USDOC relied upon record evidence that the Government of Turkey (GOT) exercises “meaningful control” over Erdemir and Isdemir, through its control of OYAK (which holds a controlling ownership stake in Erdemir), and the USDOC found Erdemir and Isdemir to be public bodies.
First, in order to validate the USDOC’s finding that Erdemir and its subsidiary Isdemir are public bodies, the panel expressed clearly that it would have to verify that the USDOC applied the standard applicable to the public body enquiry under Article 1.1(a)(1) of the SCM, as required by the Appellate Body’s interpretation of this Article. In the panel’s view, this meant establishing that Erdemir and Isdemir “possess, exercise, or are vested with governmental authority to perform a government function.” Note that the panel (rightly confused) did not hesitate to equate establishing governmental “meaningful control” of an entity with establishing that this entity “possess, exercise, or are vested with governmental authority to perform a government function.” This aspect appears in the following passage:
We found that the USDOC failed to apply the standard applicable to the public body enquiry under Article 1.1(a)(1) of the SCM Agreement in its assessment of “meaningful control”, by failing to establish that Erdemir and Isdemir possess, exercise, or are vested with governmental authority to perform a government function.
Second, in assessing the first entity (i.e., OYAK) in the “chain” of meaningful governmental control, the panel found that the USDOC failed to establish based on evidence on the record that OYAK is under the meaningful control of the GOT, or that OYAK is part of the GOT. To justify this finding, the panel was impressed by the fact that much of the evidence that the USDOC considered in relation to OYAK constitutes mere “formal indicia” of government control, and the USDOC did not establish that OYAK has taken decisions in pursuit of government economic policies. Recall here that the Appellate Body has cautioned that it is only “where evidence shows that the formal indicia of government control are manifold, and there is also evidence that such control has been exercised in a meaningful way, then such evidence may permit an inference that the entity concerned is exercising governmental authority.” Note once again that the adjective "meaningful" is never defined.
Third, from that point on, it was a simple exercise in logic for the panel to conclude that “Based on our review above, we therefore find that the USDOC failed to establish based on evidence on the record that OYAK is under the meaningful control of the GOT, or that OYAK is part of the GOT in either the broad sense or the narrow sense. We are therefore not persuaded that OYAK’s [alleged] control over Erdemir and Isdemir justifies attributing the actions of those entities to the GOT.”
In sum, does the imprecision (and even confusion) stemming from this jurisprudence amount to the worst kind of judicial activism? Was it necessary for the Appellate Body to adopt such a complex and unworkable definition of a "public body"? Moreover, the Appellate Body gives the impression of "legislating" in a vacuum since the expression "public body" is not defined in the SCM. A practical "ordinary meaning" analysis of this expression (in its context and in the light of its object and purpose) would have been much more convincing and less hazardous. In any case, it seems that WTO Members will have to define themselves what is a "public body". By leaving such a contentious issue to the Appellate Body, they only succeeded to force the Appellate Body to legislate in a vacuum in a confusing and unworkable way.
