International Contestability of Markets and the Visible Hand. Trade Regulation of State-owned Enterprises between Multilateral Impasse and New Free Trade Agreements

Abstract

Over the past few decades, the global trading community has seen the rising impact of state capitalism as more state-oriented economies have become increasingly enmeshed in the global trading system. State-owned Enterprises (SOEs) have become major players in the global market. This was not the case when the World Trade Organization (WTO) agreement was negotiated. At that time, the WTO presented a somewhat balanced approach to the conflicting needs of providing a stable, regulated global trade environment and maintaining the sovereign right of states to govern their economies and public policy goals in their own manner. The growth of state-involved economies, such as China, and the development of SOEs in traditional economies has led to an increasing concern over the impact of SOEs and the ability to circumvent agreed trade disciplines through the use of such SOEs. Meanwhile, the WTO has proven to be an inadequate source of regulation to address the impact of this rise in state capitalism. As attempts to revise the WTO to address contemporary issues ended without success, countries have increasingly turned to bilateral and regional preferential trade agreements (PTAs) to address their concerns and ensure that the rise of the economic power of SOEs does not harm the established conditions of competition in international markets. In this article, we analyze the implications of the various approaches taken by the PTAs in addressing SOEs and whether they have sufficiently established a regime that will achieve the balance sought. The article places those disciplines in the context of the current trade regimes, while considering that establishing trade rules concerning SOEs raise fundamental questions about the nature and degree of government involvement in commercial affairs and the right of other governments to inquire into such involvement. The key is to recognize that there are two simultaneous goals at work in trade regulation of SOEs: On the one hand, negotiators seek to create the conditions for internationally contestable markets. On the other hand, negotiators also seek to permit domestic constituencies to maintain sufficient policy space for using SOEs to contribute to important public goals. The emerging approaches to trade regulation of SOEs are thus tested against such dual purposes, as well as whether they address the tensions existing at the WTO level. Particularly, the present study is the first to offer a comprehensive horizontal evaluation of the trade regulation of SOEs designed by contemporary PTAs adopted by the US, the EU and other major trading partners. We conclude through this analysis that, contrary to what is maintained by other scholars, the current rules have not achieved balance. There are weaknesses in the trade disciplines established by contemporary PTAs that will lead to continued conflict among the various aims and to continued stresses in the global trading system. The article first discusses the objectives behind trade disciplines to ensure the international contestability of markets, tempered by the need to allow individual countries to use SOEs to achieve important public policy goals. In the following part, we examine the traditional rules governing trade as interpreted by the WTO dispute settlement bodies and how they have addressed SOEs’ commercial and financial activities over time. Next, having established the relevant context, we provide a critical evaluation of the PTA rules on SOEs, considering whether they have achieved the goals the negotiators had in mind. Finally, the article concludes that developing a regulation that balances the competing needs of international contestability with individual countries’ ability to achieve their public policy goals is a work in progress. Overall, we find that while the most advanced PTAs address SOEs’ commercial and financial activities more extensively than the WTO, the result has not achieved a regime that fully balances all the competing goals.