EU WTO Reform Proposal Seeks To Extend Accession-Based State Enterprise Rules To All Members
In a new WTO reform paper entitled "Further Reflections on Disciplines, Subsidies and Industrial policy," the EU argues for stronger WTO disciplines on the behavior of state enterprises. The objective of the paper, the EU says, is "to examine in more detail gaps, ambiguities and shortcomings of disciplines addressing the commercial activities of State enterprises."
The paper begins by identifying the "current challenges" with the "commercial activities of State enterprises":
2.3. When not properly regulated, State-owned and State-invested enterprises active in commercial markets may distort competition. The weight of State enterprises in the global economy is increasing: in 2023, among the 500 largest firms in the world, over 200 were State-controlled, up from 50 in the year 2000.
2.4. They can unbalance the playing field thanks to State interventions such as regulatory advantages or access to privileged information. Their dominant market positions, often reinforced by legal monopolies or historic incumbency, can also stifle innovation and deter private investment, while cross-subsidisation between commercial and non-commercial activities skews further competition.
2.5. Such distortions not only disadvantage other (privately-managed) competitors but can also lead to inefficiencies, reduced consumer choice, and misallocation of resources in the broader economy. The same is true for private entities entrusted or directed by the State, especially those acting as providers of preferential funding or of raw materials and inputs used in the production process. Raw materials and other inputs provided on non-market terms cause market distortions in the final product, making it cheaper than it would be absent these distortions. They also cause distortions in the markets of the raw materials, whose access to foreign competitors becomes constrained or whose international prices increase as a result.
It then considers the "gaps and shortcomings in WTO rules" on these issues:
2.6. This concern is only partially addressed by the WTO. State Trading Enterprises1 are governed by GATT Article XVII, which subjects this specific set of State enterprises to disciplines on commercial considerations, non-discrimination and transparency. There is no specific WTO agreement addressing the potentially distortive conduct of other State enterprises in the marketplace, beyond the rules on provision of subsidies in the Agreement on Subsidies and Countervailing Measures (ASCM) which apply to public bodies and to private bodies entrusted or directed by the State.
2.7. Several WTO Members have taken specific commitments on State intervention and State enterprises in their WTO Accession Protocols.2 These commitments vary in substance. Some include commitments to privatise certain State enterprises, or to require State enterprises to make purchases and sales solely in line with commercial considerations and refrain from discriminating, for instance, in access to infrastructure, and prohibit non-commercial mandates such as employment guarantees. Others are limited to general commitments to limiting State enterprises' privileges and promoting private sector competition.
2.8. However, these commitments are currently not actively monitored or enforced. This should be corrected.
2.9. Next to WTO accession protocols, many more WTO Members, including the EU, are bound by commitments on State enterprises in around 100 Free Trade Agreements, with a variety of definitions and disciplines. The EU's FTAs typically include obligations to commercial considerations and non-discrimination, establish core principles of competitive neutrality as concerns ownership, and are complemented by transparency obligations. Other regional trade agreements such as CPTTP and USMCA also include disciplines to limit the trade distortive impacts of State enterprises.
2.10. Taking together the WTO accession commitments and the Free Trade Agreements, it can be seen that a large number of WTO Members already share a set of international disciplines regulating the behaviour of State enterprises. While the scope of these disciplines varies, they share the goal of preventing State enterprises from distorting competition through unfair State support, non-commercial behaviour, discrimination, regulatory advantages and lack of transparency.
2.11. In other words, for many WTO Members commercial considerations and non-discrimination are already a widely shared international norm for the behaviour of State enterprises in the marketplace.
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1 Working definition agreed by Members: "Governmental and non-governmental enterprises, including marketing boards, which have been granted exclusive or special rights or privileges, including statutory or constitutional powers, in the exercise of which they influence through their purchases or sales the level or direction of imports or exports."
2 Afghanistan, Cambodia, Cape Verde, China, Comoros, Kazakhstan, Laos, Liberia, Montenegro, Mongolia, Nepal, Russia, Tajikistan, Ukraine, Vietnam.
Thus, according to the EU, it is a problem that there are no general WTO obligations in this area, with the only current rules being those in a few Members' accession commitments and in FTAs.
With regard to a "possible way forward," the EU offers the following suggestions:
2.12. This set of existing commitments should be reviewed and, as appropriate, consolidated at the WTO, so as to ensure a more systematic monitoring (drawing inspiration from the monitoring of STEs carried out by the Working Party on State Trading Enterprises), reporting, and more uniform application. This would be separate from the ASCM, as the issue at stake does not limit itself to subsidies.
2.13. A first step towards consolidation of these rules would be a mapping exercise that could be coordinated by the facilitator for level playing field issues. The resulting overview could then serve as a basis for developing a model schedule of commitments for acceding Members, as well as further targeted and consolidated rules for existing Members. The new set of WTO rules would address the identified gaps as regards the conduct of State enterprises in the marketplace by establishing obligations on commercial considerations, non-discrimination and transparency, in line with the shared international norms already found in Free Trade Agreements and WTO accession protocols.
In my view, the EU proposal here is a good one. I've always thought it was odd that there are general GATT obligations that apply to state-trading enterprises, but nothing similar for state-owned or state-invested enterprises. This gap in the rules should be closed.
As the EU suggests, it would be useful in this context to look at what some governments have already agreed to on state-owned and state-invested enterprises as part of their accession commitments. In footnote 2 above, the EU points to the following governments that have made these commitments: Afghanistan, Cambodia, Cape Verde, China, Comoros, Kazakhstan, Laos, Liberia, Montenegro, Mongolia, Nepal, Russia, Tajikistan, Ukraine, Vietnam. Let's look at China for an example of the commitments.
Paras. 43 through 49 of China's Accession Working Party Report cover "State-Owned and State-Invested Enterprises." Para. 46 says the following:
46. The representative of China further confirmed that China would ensure that all state-owned and state-invested enterprises would make purchases and sales based solely on commercial considerations, e.g., price, quality, marketability and availability, and that the enterprises of other WTO Members would have an adequate opportunity to compete for sales to and purchases from these enterprises on non-discriminatory terms and conditions. In addition, the Government of China would not influence, directly or indirectly, commercial decisions on the part of state-owned or state-invested enterprises, including on the quantity, value or country of origin of any goods purchased or sold, except in a manner consistent with the WTO Agreement. The Working Party took note of these commitments.
The para. 46 commitments (along with those in paras. 47 and 49) are made enforceable through para. 342 of the Working Party Report and para. 1.2 of the Accession Protocol.
On their face, these Chinese commitments seem like a sensible approach to the issue. No doubt the wording could be updated and tweaked a bit, but it's a good start.
However, as the EU paper notes, the accession commitments in this area "are currently not actively monitored or enforced." I'm not sure why the monitoring and enforcement hasn't been done to date, but I agree with the EU that "[t]his should be corrected." It would be useful to have a better sense of how these commitments work in practice, and attempts at enforcement would help with that.
With regard to extending these commitments to other governments by creating a general WTO obligation along these lines, an obvious question is: What are the chances of success for negotiating such an extension? When market-distorting practices are discussed in the WTO context, there is often a concern that China won't agree to additional disciplines on its behavior, which will be an impediment to completing any negotiations. But here, China is already subject to the discipline of its own commitments, so Chinese objections shouldn't be an issue. In fact, China should want to have these "WTO-Plus" obligations extended to others so as to level the playing field. That doesn't mean reaching agreement will be easy, of course, as getting agreement from all the other Members that use some version of state enterprises will be a challenge. But it does remove one big stumbling block.