An Analysis of the New Trade Regime for State-Owned Enterprises under the Trans-Pacific Partnership Agreement

Abstract

I. INTRODUCTIONThe negotiation for the Trans-Pacific Partnership (TPP) Agreement, a mega regional trade agreement among 12 countries, was concluded on 5 October 2015.1 One of the new features of this regional trade agreement is that it contains a standalone chapter on state-owned enterprises (SOEs). Some of the rules contained therein are not completely new, as it draws upon related disciplines that already exist. However, there had never been a separate, integrated discipline specifically covering SOEs before. In particular, the restriction on what is called non-commercial assistance is a significant new addition to what the current trade agreements provide. The TPP SOE discipline therefore sets a new standard, a minimum floor, which will affect other negotiations such as TISA, TTIP and RCEP that are still on-going. Since many prominent SOEs are engaged in the services sector, its ramifications for services trade rules are potentially great. So far, there are no comprehensive discipline governing subsidies in services. Given such significance, it is worthwhile to analyze the substantive rules of the TPP SOE discipline and understand the background from which they were born.Three distinct sources of influence on the TPP SOE discipline can be traced. First of all, the TPP SOE discipline integrates and further strengthens relevant rules in the existing trade regimes such as the WTO and bilateral FTAs. The TPP therefore has a consolidating role. The main multilateral instrument on SOEs in the WTO is the GATT Article XVII on state trading enterprises (STEs), which was inspired by the fear that some government-sanctioned monopolies might play fast and loose by manipulating markets (Hafbauer and Cimino-Isaacs, 2015: 686). However, the article applies only to STEs that are monopolies or those that have special rights and privileges, and are limited to trade in goods. The article is rarely invoked these days.2Since NAFTA, many bilateral trade agreements the US has pursued typically contain provisions regarding SOEs under competition chapters. Here again, main concern is about those state controlled entities that have special privileges and designated monopolies rather than SOEs in general. In the NAFTA, the SOE provision has been specifically included to address state dominated energy and telecommunication sectors in Mexico. Mexico had not liberalized these sectors under the NAFTA, and the US sought to discipline possible anti-competitive actions of state enterprises through the competition chapter (Yun, 2007). In the KORUS FTA, the concern with state enterprises were minimal and only non-discrimination obligation was introduced with respect to state enterprises. The pinnacle of SOE discipline is embodied in the very one-sided US-Singapore FTA, where Singapore's state enterprises are subject to extensive transparency rules.3 The TPP SOE discipline draws upon all these existing regimes, building on them by extending the scope of coverage and sometimes re-organizing existing obligations to overcome what is seen to be shortcomings of the current regime in dealing with past trade disputes.Second, as described above, it has broken the tradition of placing SOE rules under the competition chapter, and set up a stand-alone chapter on SOEs and designated monopolies. In this, it is firmly based on the principle of what is known as neutrality. The competitive neutrality concept provides an explanation as to why SOEs may behave differently from private firms, and offers a justification for setting up a separate regulatory mechanism apart from competition law.No doubt, frustration with increasingly aggressive use of SOEs for industrial policy by China, allegedly propped up with subsidies, has probably played a big role in this attempt to create an international regime on SOEs. Whether or not China is a member of the TPP, the TPP SOE regime will significantly pressure China, as the new SOE regime is set to become the model for developing international trade regime regulating commercial activities of SOEs. …