Monday, February 20, 2012

China, subsidies and State Owned Enterprises - WTO compliant?

The issue of permissible subsidies, domestic policy space and the SCM Agreement is often a grey area. The SCM Agreement prohibits certain subsidies while makes others "actionable" under certain conditions. This was alluded to in the context of China here.

Trade Reform carried a piece about Chinese State Owned Enterprises, their practices and impact on WTO rules. It referred to a testimony by Elizabeth Drake of Law Offices of Stewart and Stewart before the US - China Economic and Security Review Commission which highlighted the strategy the US should undertake in the context of State Owned Enterprises of China.

Providing policy options to address Chinese State owned and controlled enterprises the testimony outlines three areas which the U.S. can take steps to help level the playing field between American industries and Chinese SOEs: 

1)  confronting Chinese government subsidies to SOEs, including subsidized loans, export credits, debt forgiveness, grants, equity infusions, and preferential access to key inputs such as land, utilities, and raw materials;
2)   challenging Chinese SOEs’ use of purchasing and joint venture agreements to favor domestic suppliers, goods, and services over foreign suppliers, goods, and services or to leverage technology transfers and other concessions from U.S. firms; and
3)   addressing anti-competitive and unfair trade practices by SOEs, including in China’s own market as well as in countries that are increasingly targeted for overseas expansion by SOEs.

The testimony deals with the SCM Agreement and GATT principle of national treatment and argues that a more vigorous pursuit of enforcement of WTO rules might be the answer to address some of the measures undertaken by China in the context of the WTO.
"Chinese SOEs pose a major challenge to U.S. firms and workers seeking to compete in China’s market, in the U.S. market, and in third countries.  Fortunately, many rules already exist that could be more energetically enforced to neutralize the unfair advantage Chinese SOEs enjoy.  These include subsidy disciplines and non-discrimination rules at the WTO, as well as specific WTO commitments China has made to ensure its SOEs act consistently with commercial considerations and in a non-discriminatory manner when making purchasing and sales decisions, not to influence the commercial operations of SOEs, and not to require local content or technology transfers as a condition of investment approvals."
This testimony is interesting since it is claiming that many of the practices that are undertaken by China and its State owned enterprises can be challenged within the existing WTO rules itself. This would require a thorough collation of data, objective evidence and also establishing a causal link between the measure and serious prejudice in certain cases.

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