The Covid 19 Exogenous Shock and the Crafting of New Multilateral Trade Rules on Subsidies and State Enterprises in the Post-Pandemic World

Abstract

This Article discusses existing WTO rules on subsidies and state enterprises, relevant caselaw and reform prospects in light of key geopolitical developments and changes in the global economy emerging in the aftermath of the Covid-19 pandemic. Following a general introduction, the Article critically analyzes present WTO rules on industrial subsidies, focusing inter alia on the new problems raised by activist industrial policies pursued by global trading powers, foreign subsidization, the climate change shock and environmental exigencies. It then shifts attention to the application of WTO rules on subsidies to the state sector and the increasing demands for new international trade rules on non-subsidies measures to address the negative spillover effects on trade from government influence on state-owned enterprises (SOEs). With respect to each of these matters, the Article first clarifies the terms of the problem in relation to existing WTO rules and caselaw, and next examines the question of how, and to what extent, “deeper” free trade agreements (FTAs)—those that experts designate as models for WTO reforms on the matter—establish new rules that permit to adequately address the trade concerns raised by SOEs’ commercial and financial activities. Based on this multi-layered analysis, the article concludes by examining prospects of reform of WTO rules on state interventionism.

A. Introduction

Geostrategic rivalry is once again a prominent feature of the international system, “with far-reaching implications for the stability of the existing political, security, and economic order.”¹ Amid such challenges, the WTO has been progressively facing pressures,² with few if any chances to modernize its rulebook without agreement on new substantive and procedural rules between USA, China and the EU,³ the three world’s largest traders. In fact, the relations among these powers are the setting where several tensions rise in the multilateral trading system. As explained in the introductory piece to this Special Issue, direct government intervention in the economy⁴ in the form of subsidization policies and the activity of state enterprises–i.e., business entities over which the state has influence beyond the use of general policy tools like regulation⁵–stand out among the sources of such tensions. Together with trade restrictions and new legislation designed to impact cross-border investment, mergers, and acquisitions, the use of subsidies and countervailing measures by governments⁶ and trade-distorting effects of state-owned enterprise (SOEs)⁷ have lately caused harsh controversies within and outside the WTO among its members. In turn, such antagonisms contributed to the semi-paralysis of WTO Dispute Settlement System (DSS) since 2019, and culminated in the US-China trade war,⁸ only further aggravated by the Covid-19 pandemic.

There is no sign on the horizon suggesting that trade tensions over such matters will decrease in the near future.⁹ Quite to the contrary, discontentment is growing such that some governments are increasingly “providing subsidies to companies outside their jurisdiction, “buying their way” into other countries’ markets” and undermining “competition therein as they do so.”¹⁰ With the internationalization of state enterprises, concerns about unfair advantages they may have over private firms because of government support have spilled across national borders and fueled protectionist measures.¹¹ Besides, the COVID-19 pandemic has accelerated shifts in several countries’ industrial policies, while creating challenges of its own, inter alia, by raising questions regarding the right policy mix in terms of diversification of domestic and external sources of supply and the build-up of strategic production capacities and reserves; and determining a significant increase in government support and involvement in the economy.¹²

Meanwhile, competition between governments “to stimulate domestic economic activity through ‘make it here’ policies” is rising.¹³ Even more basically, new political interferences with trade flows is caused by industrial programs aimed at actively supporting domestic industries, building capabilities in broadly understood strategic sectors, granting to domestic producers preferential access to government procurement, and ensuring domestic ownership of advanced technological companies by screening acquisitions from abroad.¹⁴ The resulting weaponization of international trade by many states¹⁵—a process intensified in response to the Russian invasion of Ukraine–“appears set to reconstruct global economic governance.”¹⁶

In such a dynamic context, absent reforms, the WTO will be poorly equipped “to assist major Members to attenuate economic conflicts”¹⁷and address the growing tensions arising out the increasing politicization of trade flows. The different proposals advanced by WTO members over the last few years confirm that the adoption of new international trade rules to limit the negative spillover effects on trade from government intervention in the economy is a central piece of the modernization puzzle.¹⁸

This article contributes to the debate about what trade rules may be needed to remedy the enduring problems and emerging shortcomings of existing WTO disciplines on subsidies and state enterprises, and, hence, lay the ground to investigate the direction taken by future possible reforms. Following the present introduction, Part B analyses existing WTO rules on industrial subsidies¹⁹ in order to clarify their main shortcomings, understand the criticism made over the past few years, and lay the ground to investigate the direction taken by possible reforms. It situates such analysis in the context of the present geopolitical setting, looking at the challenges States have to address in the post-pandemic world. Specifically, after explaining how the inherent ambivalence of subsidies has been reflected in the GATT/WTO system of control, Part B examines extant WTO disciplines in light of the emerging changes in global economy and environmental concerns, inter alia pointing at new problems raised by foreign subsidization and the need for well-defined rules on subsidies for green transition.

Part C moves from the consideration that tensions that now exist about the appropriate approach to state enterprises in international trade law focus on two main issues, namely, the application of WTO rules on subsidies to the state sector, and increasing demands for new rules on non-subsidies measures to address the negative spillover effects on trade from government influence on SOEs. The latter argument goes on that these rules need to be based on a concept of competitive neutrality that would somehow require states to establish a level playing field between state and private capitalism. Part C critically discusses the two issues separately. With respect to each matter, it first clarifies the terms of the problem in relation to existing WTO rules and case law. Secondly, it addresses the question of how, and to what extent, “deeper” FTAs—those that experts designate as models for WTO reforms on the matter—establish new rules that permit to adequately address the trade concerns raised by SOEs’ commercial and financial activities.

Based on this multi-layered analysis, Part E concludes by reflecting on reforms of WTO rules on state intervention in the economy with regard to each of the main problematic areas examined in the previous parts.

B. International Trade Rules on Industrial Subsidies in the Post-Covid Era

I. The Inherent Ambivalence of Subsidies as Reflected in the Original GATT/WTO System of Control

New WTO rules on industrial subsidies are advocated by Members and experts alike.²⁰ Relatedly, over the past fifteen years, regulation of subsidies has played an increasing role in free trade agreements (FTAs) concluded outside the WTO and often expanding on the multilateral disciplines on the matter.²¹ Obviously, the growing emphasis on the need for new international trade rules on subsidies does not solely reflect a sudden increase in awareness of their importance, including as a source of trade disputes.²² Rather, mounting concerns of their use (and abuse) as a tool for strategic competition between countries and a careful consideration of the role of public aid to address key societal challenges are major determinants for the prospects of reforming existing WTO rules, particularly the Agreement on Subsidies and Countervailing Measures (ASCM).²³

Yet, “no question in international trade law is as contentious, and as complicated, as the question of subsidies.”²⁴ Part of the reasons are exquisitely technical: the definition itself and measurement of subsidies turn out to be extraordinarily complex. Beyond that, the question is intrinsically political: with subsidies, what is ultimately involved is a confrontation between different ideological, political, and social conceptions of the role of the state in the economy.²⁵ The present analysis cannot thus disregard a certain teleology—that is, a discussion of the goals of (both) subsidies and international rules on subsidies control. Besides, a difference in focus regarding the goals can have a practical influence “on how rules actually work.”²⁶ An investigation of the enduring shortcomings and possible reforms of the WTO rules on subsidies points to the very reasons for offering subsidies and, at the same time, to the goals of their regulation: “Why do governments in reality offer subsidies (positive question) and why should governments have an interest in preserving policy space to offer subsidies (normative question)?”²⁷

In response, the literature does not yield a strong consensus.²⁸ For the limited purposes of the present analysis, I only sketch the contours of the issue with general remarks.²⁹ International regimes on subsidy control are inextricably linked to the consideration of their effects, which must be understood from at least two perspectives. First, from a trade perspective, subsidies are frequently seen as undermining the market access prerogatives that result from tariffs and other trade concessions: domestic subsidies may directly offset the effects of a reduced or eliminated tariff, producing the same protective result.³⁰ Secondly, from a competition perspective, the deepest concern that subsidies raise is their possible negative impact on the competitive process.³¹ Economic analysis shows that subsidies can distort market functioning and introduce inefficiencies at various levels.³²

Still, subsidies are ambivalent, because they can produce positive effects and pursue legitimate goals too. Public expenditure seems in some way inevitable, and there is a robust economic and political case to maintain it.³³ Subsidies are a key instrument of government policy in virtually all States in the world, an instrument that is by no means necessarily inefficient,³⁴ and is “not viewed by economists as intrinsically trade-distorting or welfare-reducing.”³⁵ As it is known, positive externalities and public goods, which are not internalized in market prices for particular products and services, may justify subsidization.³⁶ Subsidies “may create negative international externalities and distort global resource allocation. But they may also represent sensible policy responses to a range of market failures or play a useful role in addressing income inequality.”³⁷ Schwartz and Harper express this when they remark that subsidies can correct the market process at least as much as they may distort it. ³⁸ Also, in practice, subsidies often constitute a favored tool of industrial policy in several states.³⁹ Their inherent ambivalent nature explains why it is proposed that any system of subsidy control that “pretends to be balanced should take into account (at least some of) the public policy objectives pursued and positive externalities produced by subsidies.”⁴⁰

In essence, the first objective of any international system of subsidy control is discouraging subsidies that can harm foreign competitors either by impairing their market access expectations or by affecting their competitive position.⁴¹ But this is only part of the story. A well-balanced system of subsidy control should go beyond the producers’ interests and also recognize the legitimacy of subsidies targeting market failures and pursuing public/societal goals. The framers of the General Agreement on Tariffs and Trade (GATT)⁴² reflected subtly on the scope/justification structure.⁴³ The resulting discipline on subsidies was ambivalent: “On the one hand, their legitimacy as tools of public policy was affirmed while their capacity to distort trade was also acknowledged. On the other hand, self-help against such subsidies was permitted in the form of countervailing duties, provided that the subsidies caused ‘material injury’ to domestic industry in the importing country.”⁴⁴ In a similar vein, GATT revived in the initial recognition by the ASCM of the three categories of non-actionable subsidies (including certain subsidies for research and development, certain types of assistance to disadvantaged regions, and certain subsidies for compliance with environmental regulations)⁴⁵ alongside with the rules to control industrial subsidies “as a potential non-tariff barrier to trade or a source of distortions in international trade that may undermine underlying comparative advantages or alternatively undermine tariff commitments.”⁴⁶

Importantly, according to the terms of the ASCM, the permissive list of non-actionable subsidies expired in 2000 when the WTO members were unable to agree on extending them. Since then, it was never revised or reestablished. Therefore, “today no subsidy programs are explicitly protected as non-actionable.”⁴⁷ Moreover, the WTO subsidies code does not include a general exception rule such as Article XX GATT that allow explicit trade measures, which would be otherwise inconsistent with the substantive obligations of that agreement, to pursue a range of public policy objectives, including the life and health of humans, animals or plants, the conservation of natural resources, and public morals. As a result, with the expiration of the short list of subsidies that were explicitly carved out from the discipline, current rules drastically confine WTO members’ flexibility to use subsidies as tools of public policy, the only limited concession being the more flexible rules Article 27 ASCM provides for developing country-members in recognition of the important role that subsidies can play in the economic development programs of these members.⁴⁸

II. Enduring Problems and Emerging Deficiencies of the WTO Subsidies Rules

1. The ASCM Agreement and the Long Line of Subsidies Disputes

While well-rehearsed in the scholarly literature, it is useful to briefly review existing WTO subsidies disciplines in order to assess then their enduring problems, understand the criticism made over the past few years and analyzing emerging challenges. Such an analysis eventually provides the right conditions to investigate the direction taken by current proposals for reforming the ASCM. As observed above, before the Uruguay Round, the multilateral trading system “did not contain any enforceable legal disciplines on domestic subsidies.”⁴⁹ Therefore, beside defining the green light category of non-actionable subsidies and placing export subsidies and domestic content requirements in the category of prohibited measures,⁵⁰ the Uruguay Round’s ASCM introduced a third intermediate or yellow light class of domestic subsidies, deemed to be actionable, “where WTO members commit to avoiding the use of any subsidies specific to particular firms or industries that”, in addition, “have the following adverse effects on the interest of any other member country”:⁵¹ an injury to the domestic industry (which may include price undercutting of a like product); a nullification or impairment of benefits accruing directly or indirectly to other members, in particular the benefits of bound tariff concessions (that is improved market access from tariff reductions is undercut by subsidization);⁵² or a serious prejudice to the interests in terms of prices or volumes of its products in domestic or foreign markets (usually as a result of export displacement).⁵³

These actionable domestic subsidies can be challenged in the WTO DSS. For the first time, the ASCM provided an explicit multilateral remedy against subsidization. Where a subsidy meets the criteria for actionability, a WTO member can thus pursue two different avenues: First, it may challenge the subsidy in the WTO DSS, seeking the remedy of removal of the offending measure. Alternatively, a state may countervail the subsidy i.e., it may elect to respond to a subsidy with a countervailing duty (CVD).⁵⁴ Where a WTO member elects the first option, it must also demonstrate the existence of adverse effects (as defined above) on members other than the subsidizing member, including the complaining member.⁵⁵ If a member instead decides to impose a CVD, it must comply with the various procedural and substantive criteria established by the ASCM for such actions, including the requirement of showing “material injury”. The same criteria apply also where a member is countervailing a prohibited subsidy as defined by Art. 3 ASCM.⁵⁶

Since its entry into force the ASCM “has precipitated a number of high-profile subsidies disputes.”⁵⁷ Moreover, in the 26-year period of its application from 1995 to 2021, a whole 385 CVDs have been imposed in total with the US being the most frequent user with 203 countervailing measures applied, followed by the EU and Canada that applied 46 and 40 CVDs respectively. Of the 385 anti-subsidy measures in force in 2021, 145 concerned imports from China, while India was subject to 60 countervailing measures.⁵⁸ Interestingly, in no other year of application of the ASCM the number of countervailing measures in force has been so high as in 2021. The 41 countervailing measures in force at the end of that year almost doubles the number in 2020 (24) and substantially exceeds those in force in 2019 (35).⁵⁹

2. Current Challenges to the Existing WTO Subsidies Code: The Pandemic Exogenous Shock

Contemporary shifts in geopolitics and economy along with environmental exigencies make ever more clear that the conventional understanding of trade rules on subsidies as encapsulated in the ASCM is outdated. That understanding is overly limited to a large-scale agreement that focuses on subsidies as a potential non-tariff barrier to trade and as a source of distortions in international trade. Even more in light of the elapsing of the safe harbor for permitted categories of subsidies. Going forward, there are a number of reasons “for expecting subsidy disputes to escalate rather than diminish in number and significance”⁶⁰ and the ASCM not being able to measure up to challenges WTO members must address in the post-Covid-19 world.

To begin with, the Covid-19 global pandemic has challenged deep-structural aspects of the organization of the world, including established relationships between society and government as it has required unprecedented levels of state action and expenditure. The pandemic caused an exceptional exogenous shock to the global economy.⁶¹ It has been and is currently still affecting organizations of all sizes and in many industries, as well as the life of people around the world. Experts have feared that, unlike previous exogenous shocks, the Covid-19 global pandemic “could affect the supply side of the economy through several channels and thus lead to a permanently lower level of potential output.”⁶² Hence, in the wake of the coronavirus pandemic, support for the use of fiscal measures to diminish the economic damage to workers and business activities—including by bailing out enterprises or sectors facing financial distress as a result of the pandemic—has been extensive in several countries of the world.⁶³ In addition, the Covid 19 pandemic has promptly induced many governments across the globe “to allocate substantial public resources to the development of vaccines and related medical resources.”⁶⁴ While the immediate crisis has since been overcome, the global pandemic is not completely behind us just. One key lesson learnt is that both fiscal and monetary policy measures in response to the crisis were needed to shield the real economy and financial sector from the pandemic fallout. As observed by the Vice-President of the Deutsche Bundesbank, Claudia Buch, the features of future economic developments are already taking shape: “[s]tructural change in the real economy is likely to pick up speed—digital transformation, demographic change, and climate policies pose challenges for the real economy and the financial sector.”⁶⁵ In a newly vulnerable macroeconomic setting, incentives exist for governments to promote selected domestic industries and “redress dependence on global supply chains where bottlenecks may preclude ready access to essential inputs”⁶⁶ (medical equipment, pharmaceuticals, semi-conductors, etc.). Existing WTO rules on industrial subsidies make it more difficult for members to engage in industrial policies that are needed to deal with the economic consequences of the COVID-19 pandemic and support ongoing changes in the real economy.

3. Geopolitical Rivalry, Securitization and Industrial Planning

Related is a second and broader problem with the existing WTO subsidies code. This concerns the rivalry between global powers “to establish the credibility of new visions for a planned global economy” through the language of “securitization”,⁶⁷ and its practical implications in terms of geopolitical objectives, industrial planning, and related public spending. Commenting these dynamics, an author has recently posited that the WTO approach to subsidies “is now hampered by shifts in the share of global trade away from geopolitically aligned, wealthy states and the growth of global supply chains” and that “[t]hese pressures were magnified by the accession of China” to the WTO, “with its centrality to global trade and recurrent geopolitical tensions with the United States.”⁶⁸ Whereas I share the opinion that contemporary changes in the global economy and China’s economic rise and present centrality are reasons for the challenges in facing multilateral cooperation over subsidies, my own view is slightly different. Granted, for Western powers the “wake-up call regarding China has been a loud and disturbing one.”⁶⁹ Its use of activist industrial policy tools to limit the kind of market access expected from its WTO commitments, and the resulting tensions with the US and other trade powers are persistent challenges for the multilateral trading system.⁷⁰ But the underlying problem is, at the same time, more profound and general. It is about a newly and variously marked misalignment between strategic industrial policies pursued by a number of WTO members, on the one hand, and the form of economic integration enabled by the WTO agreements, on the other.

The overly pragmatic approach to international trade law lately adopted by US officials is emblematic of such course. As Anne Orford maintains in her contribution to this Special Issue, today US officials and trade experts are offering “new languages and frameworks for envisioning the future international economic regime”, suggesting that a “new paradigm of industry protection”’⁷¹—the strategy that US Treasury Secretary Janet Yellen has called friend-shoring⁷²—should supersede the traditional approach of multilateralism, trade liberalization, and control of government unilateral conduct associated with the WTO.⁷³ In parallel with such developments in rhetoric, both the US Government and the Chinese Government have been committing substantial public resources to attempting to achieve preeminence in emerging high-tech sectors such as renewable energy, robotics, artificial intelligence, quantum computing and semiconductors.⁷⁴ Micron’s $40 bn. investment in semi-conductor production re-shored in the US with help of the US Chips and Science Act (2022),⁷⁵ a federal law that allocates $52 billion to encourage more domestic semiconductor production,⁷⁶ is just a spectacular example. The EU and its members too have been attempting to obtain a competitive advantage in broadly understood strategic sectors leaning towards policies aimed at actively supporting these industries, reshoring production, and ensuring domestic ownership of advanced technological companies by screening acquisitions.⁷⁷ And, as evidenced by Aggarwal and Reddie, the use of economic statecraft across the globe as a tool for strategic competition between countries is by no means an exclusive prerogative or practice of the three world’s largest traders.⁷⁸ Nor is the commitment to developing plans to reshore supply chains.⁷⁹ Policies of these sorts may require significant levels of state action and public spending. For example, in the case of 5G, as Western countries seek to ‘“decouple” from China in part for privacy and national security reasons, they may need “to develop rapidly their own substitute technologies”,⁸⁰ which, depending on the context, may involve targeted industrial policies and sizeable subsidization. At the same time, a growing number of developing countries have gained the capacity to adopt industrial program that involve direct expenditure,⁸¹ a transition that contributes to “reverse the typical constituency for subsidy reform.”⁸²

4. Foreign Subsidies

Thirdly, contrary to the past, foreign subsidies (i.e., financial contributions granted to an entity by a government other than that of the country where the receiving entity is established) are today “a growing source of concern as States increasingly subsidize their firms’ expansion into other markets.”⁸³ The EU has recently adopted a regulation to tackle foreign subsidization in its own market.⁸⁴ In fact, it is controversial whether, and to what extent, the WTO Agreements, and in particular the GATT, GATS and ASCM, provide an adequate avenue to address this concern multilaterally.⁸⁵ Among the very few authors that have explored the problem of foreign subsidization in-depth, Crochet and Gustafsson conclude that multilateral trade agreements fail to do so. Hence, states are “left to their own devices in addressing the issue of foreign subsidies”, with the further complications that the ASCM forbids “WTO members from taking unilateral action against foreign producer subsidies”, and that “leaving them without any remedy whatsoever in these situations seems to go against the negotiated balance”⁸⁶ of the same agreement. Van den Bossche’s line of arguments on the issue is more nuanced. He claims that the ASCM retains a space of application, although a limited one. It does not apply to most industrial subsidies, except when they are prohibited under Article 3, viz. in the case of (foreign) export subsidies and import substitution subsidies (because in this case they are deemed to be specific under ASCM, Article 2.3).⁸⁷ Further, Van den Bossche recalls that there are no rules on subsidies to service suppliers in the GATS. Therefore, foreign subsidies to service suppliers are not prohibited or actionable. He then concludes that, where multilateral forms of control are not available, unilateral reactions are possible insofar as they are consistent with the GATT and GATS non-discrimination rules or can be justified by the General Exceptions provisions of GATT Article XX and GATS Article XIV.⁸⁸ Despite their differences as to the possible applications of multilateral remedies against imported goods receiving a foreign subsidization, both readings maintain that there exist significant gaps to bridge to achieve an appropriate system of international control of foreign subsidies, and, at the same time, reduce the legal uncertainty surrounding possible unilateral reactions.

5. Climate Change and Environmental Exigencies

Finally, the systemic shock of climate change is of central importance when assessing the adequacy of existing WTO rules on subsidies.⁸⁹ Climate change promises in terms of devastation make the recent trade wars look in comparison like a drop in the bucket. In recent years industrial policy aimed at green transition have come to focus, particularly in relation to reduction of GHG emissions and the transition to carbon-neutrality.⁹⁰ Yet, despite the desire of many people throughout the globe for a green recovery from the pandemic, important pieces of legislation like the 2022 US Inflation Reduction Act passed,⁹¹ and initiatives such as the EU Carbon Border Adjustment Mechanism close to finalization,⁹² “[t]o date, government have committed far more Covid-19 funds to fossil fuels than to green energy.”⁹³ Climate change adaptation, let alone mitigation, requires economic tools of state direction to manage the emergency,⁹⁴ including in the form of government aid for the development of new technologies reducing greenhouse gas emissions in different sectors of a country’s economy and, possibly, in other countries.⁹⁵ WTO commitments may however limit the ability of its members to implement domestic policies and measures to address climate change, particularly “regulatory policies such as emission and energy efficiency standards, eco-labelling, voluntary measures (including contracts between governments and industries) and domestic emissions trading programs.”⁹⁶

Interestingly, to date, WTO disputes have addressed trade remedies relating to renewable energy and equipment, and biodiesel,⁹⁷ but, in none respondents directly invoked climate change as justification for trade measures taken.⁹⁸ Regarding public aid in particular, existing WTO rules on subsidies do not include any specific trade disciplines on fossil fuel subsidies. Nor have such subsidies ever been challenged before the DSS. Strikingly, all the challenges to energy subsidies in the WTO DSS have regarded subsidies for renewable energy.⁹⁹ Subsidies for solar and wind energy may indeed run afoul of both GATT Articles VI and XVI and the ASCM, as also recent cases suggest.¹⁰⁰ Subsidies for solar and wind energy have found to be inconsistent with the WTO rules especially where they have included domestic content requirements,¹⁰¹ “which discriminate in favor of domestic over import inputs into green energy products.”¹⁰² Upon close inspection, the caselaw confirms that what was included in the now defunct Article 8 of the ASCM was too narrow in scope.¹⁰³ That provision did not include an explicit and general recognition that certain subsidies “are much less of a concern than others”, and, even more importantly, that “one of the tasks of governments is to address market failures—including problems global in nature”¹⁰⁴ such as the climate change crisis. Instead, international trade rules should be conditioned on what governments are planning to do, implying “asking what the underlying problem or objective is, and differentiating economic from non-economic goals.”¹⁰⁵

C. Discipling State-Owned Enterprises in International Trade Law

I. Trade Concerns over SOEs and the Prospect of WTO Reforms

State enterprises have long constituted, and are likely to remain, an important instrument in any government’s toolbox for a variety of economic and societal goals.¹⁰⁶ In addition, as explained in the introductory piece to this Volume, governments around the world have lately instructed their infrastructure state enterprises to deliver public goods and services more widely and equitably among the population, not only to minimize the pandemic’s impact, but also to address the economic downturn. The significant extent of state ownership among the world’s top companies,¹⁰⁷ SOEs’ quantitative and qualitative transformation, their growing presence in international trade and global value chains,¹⁰⁸ and hybrid nature¹⁰⁹ create an assortment of legal issues. In particular, the conflation of SOEs’ economic governance with the political and legal order of the state raises the issue of their impact on international trade flows and the competitive process, giving rise to an extensive debate about the appropriate approach to these entities in international trade law.¹¹⁰ Different proposals on WTO reforms point at two main problems surrounding SOEs’ commercial and financial operations.

As is indicated, for example, in the Trilateral statement of January 14, 2020,¹¹¹ one problem is the application of subsidies rules in the WTO to the state sector; a concern largely caused by a controversial ruling of the then WTO AB that Chinese state-owned banks do not necessarily qualify as public bodies to whom subsidies disciplines apply.¹¹² This decision has been widely criticized and was in part qualified by the AB itself in a later pronouncement.¹¹³ In related scholarship, several authors have explored its flaws in depth, and some have proposed different solutions, essentially in the (alternative) forms of a revision of the caselaw and additional treaty-making.¹¹⁴

Beyond the application of WTO rules on subsidies to SOEs, there is a more fundamental concern (and increasingly demands) that new international trade rules, mainly of prophylactic nature, are needed to address the negative spill-overs from government influence on SOEs and affecting firms from other countries.¹¹⁵ The argument goes on that these rules need to incorporate (or be based on) a concept of competitive neutrality that “would in some way requires states to establish a level playing field between state and private capitalism.”¹¹⁶ The European Commission’s position is emblematic of such an approach. In its 2021 Communication on “An Open, Sustainable and Assertive Trade Policy”, the EU executive body asserts:

The importance of SOEs is not yet matched with sufficient disciplines to capture any market-distorting behavior. New international SOE rules should focus on the behavior of SOEs in their commercial activities, in line with the disciplines already agreed in several free trade and investment agreements. Apart from industrial subsidies and SOE disciplines, there is a need to reflect on what other elements could be part of new WTO rules aiming at ensuring the principle of “competitive neutrality” and promoting a level playing field.¹¹⁷

The following analysis examines these two issues separately. With respect to each matter, I first clarify the terms of the problem in relation to existing WTO rules and caselaw. Secondly, I consider whether, and to what extent, deeper FTAs—those that experts designate as models for WTO reforms on the matter—establish new rules that permit to adequately address the trade concerns raised by SOEs’ commercial and financial activities. Specifically, I critically discuss how these treaties operate in relation to SOEs, paying attention to how their drafters have defined such entities not least to how they establish new and specific rules for SOEs (vis-à-vis private enterprises), and defined exceptions.

II. The Application of the ASCM to the State Sector

The application of the ASCM provisions to SOEs has proved highly problematic. In determining the existence of a subsidy, a central issue is the meaning of the term “public body” in the ASCM agreement. The question of how to determine whether an entity is a public body becomes particularly challenging when the entity involved is a SOE. According to Article 1.1. ASCM, a subsidy could be conferred by a government, a public body, or a private body that has been “entrusted or directed” by the government to make a financial contribution. But the boundary between a government and a public body is not crystal clear. In particular, it is controversial whether the two terms are functionally equivalent, or the term “public body” covers something that is not covered by the term “government”.¹¹⁸ Clearly, such characterization is key for the subsidy assessment under the ASCM: In many situations, the state confers a subsidy not through the government itself but through entities affiliated with, owned/controlled, or influenced by the government. Thus, SOEs may constitute a ready means for providing subsidies in an opaque way. As a matter of fact, the “SOE-as-provider” problem has raised intense conflict under the ASCM and attracted growing academic and policy debate. Within the limited scope of this article, recall that in the US-Countervailing Measures (China) the AB considered that a “public body” determination involves an assessment of the core features of the entity concerned and its relationship with government, particularly, whether the entity exercises authority on behalf of government.¹¹⁹ Despite a certain ambiguity of the legal standard as formulated by the AB, as well as practical reasons for interpreting the rules on subsidies in a more adaptive way, the adjudicatory body of the WTO has subsequently reaffirmed the demarcations made by existing rules, explicitly rejecting the US argument that government-ownership may be a dispositive factor to making an entity a public body.¹²⁰

The cautious approach taken by the AB was arguably a justifiable application of the law: the notion of “public body’” was understood as an entity that, although not institutionally a part of a government, still functions like one. As I argued in a previous work, “[t]his reading had an important corollary: the recognition that SOEs can be run as genuine commercial enterprises and operate on a level playing field with private enterprises.”¹²¹ The upshot of this is that SOEs should not be treated differently simply because of majority-ownership by a government.¹²² The AB’s narrow interpretation seems also to adhere to the original intent of the drafters, which presumably was not to extend the bound of government too widely. Yet, even if one assumes that this interpretation is correct, it leaves unaddressed the issues raised by SOEs as pass-through vehicles for subsidies. At the heart of the matter are the following questions: What is the standard of proof that a commercial entity is part of the state? Having refuted the formal ownership test, could the AB have clarified what else matters?

Case law shows that the AB insisted on drawing a malleable line, providing a multi-factor test to reply to the questions above.¹²³ Still, the additional evidence that may be required is not entirely clear at present. One of the last cases ruled by the AB before its demise in 2020 confirms this conclusion. In US—Countervailing Duty Measures on Certain Products from China,¹²⁴ the AB ruled (by majority) that the absence of an express delegation of governmental authority does not necessarily preclude concluding that an entity is a “public body” under ASCM Article 1.1(a)(1), allowing even private entities, under certain conditions, to be considered public bodies.¹²⁵ The AB further clarified that a public body inquiry under the same provision does no hinge on the conduct of the investigated entity, but rather on the core features of the entity itself and its relations with government, in light of the legal and economic environment in which the entity operates.¹²⁶ Once it is established that an entity is a public body, all conduct of that entity shall be attributable to the Member concerned for purposes of Article 1.1(a)(1).¹²⁷ For such an assessment a holistic approach is required. This should take into due account: (i) evidence that an entity is exercising governmental functions, especially if it is a sustained and systematic practice; (ii) evidence of the scope and content of the relevant government policies; (iii) evidence of the meaningful control over an entity by the government; and (iv) whether the conduct or functions of an entity are ordinarily classified as governmental in the legal order of the relevant Member. Accordingly, a public body determination must be conducted on a case-by-case basis.¹²⁸

A final remark. “SOEs-as-providers” can be captured by ASCM Article 1.1(a)(1)(iv) that include private bodies which have been entrusted or directed to carry out the functions that constitute potential subsidies (such as transfer of funds).¹²⁹ Yet, this application of the ASCM relevant provisions is no decisive solution to the problem. In fact, not all governmental measures vis-à-vis a private intermediary would necessarily amount to “entrustment” or “direction”, as both terms demand a significant degree of command-and-control authority on the side of the government.¹³⁰ Moreover, the use of private vehicles poses more of an evidentiary challenge for Panels, as they have to examine how the seemingly private conduct can be ascribed to a government entity, which will not necessarily be eager to disclose that relationship to the rest of the world.¹³¹

III. How Deeper FTAs Address the Problems of Subsidies Involving SOEs

How, and to what extent, is the problem of the application of international rules on subsidies to the state sector addressed by FTAs concluded outside the WTO?

Most FTAs have provisions on subsidies.¹³² Deep(er) FTAs also have adopted approaches to deal with SOEs.¹³³ Comparative treaty analyses suggest that, leaving aside the peculiar disciplines established by EU FTAs that incorporate for both SOEs and private enterprises the EU competition law rules on public aid and the language of Article 106 TFEU, specifying that entities charged with public tasks are subject to competition rules if this does not preclude them from performing their public service obligations, the most advanced formulation of international trade rules on SOEs are contained in two treaties, namely the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)¹³⁴ and the United States-Mexico-Canada Agreement (USMCA).¹³⁵ Their approach on subsidies involving SOEs is based on two central elements, namely, the definition of SOEs and a general prohibition of providing state support on non-commercial terms to the commercial activities of SOEs.

As to the scope ratione personae, both agreements include a broad and, at the same time, precisely demarcated definition of SOEs, which details the relevant notion of ownership/control. Article 17(1)(3) CPTPP defines an SOE as an enterprise that is primarily engaged in commercial activities and has one or more of the following features: the contracting party (i) directly owns more than 50 per cent of the stocks of the enterprise; (ii) controls the enterprise through the ownership of more than 50 per cent of its voting rights; or (iii) has the right to appoint the majority of the members of the executive board or any other decision-making body. More comprehensive is, however, the notion of control as embodied in Article 22(1) USMCA, which expands the definition of the CPTPP “by including also indirect ownership of more than 50 per cent of share capital” and—inserting a sort of “decisive influence” test—“the power to control the enterprise through any other ownership interest, including indirect or minority ownership.”¹³⁶ A footnote to the same provision further clarifies that this power exists if, through an ownership interest, the government can determine or direct important matters affecting the enterprise, excluding minority shareholder protections and that, in determining whether a party has it, all relevant legal and factual elements shall be considered on a case-by-case basis. Another important definitional aspect is that both trade agreements regulate for-profit institutions only, requiring that SOEs “must be” those “principally engaged in commercial activities.”¹³⁷ Thus, the CPTPP and the USMCA adopt clear-cut rules based exclusively on quantifiable proxies, including SOE size and threshold revenues,¹³⁸ and eliminate uncertainties by suggesting a binary means of assessing the commercial nature of SOEs activities for the application of the relevant international obligations upon governments. As a result of the broad definitions of SOEs they establish, these treaties address the two problems affecting the relevance and applicability of the pre-CPTPP rules to the current developments in international trade: the lack of unambiguous tests provided to determine ex-ante government control, and an implicit requirement of state action.

Yet, as I argued previously, clear-cut definitions of this sort “may be counterproductive and in effect weaken SOEs disciplines.”¹³⁹ A problem with quantitative thresholds defining ownership/control in the CPTPP is that they fail to consider the many other, lower levels of ownership or board appointment that can actually be structured so as to retain governmental control, as well as situations of indirect control. Furthermore, there is no provision on interlocking directorates.¹⁴⁰ Also, rigid rules provide actors with incentives to reframe a control/ownership pattern in order to dodge their application—not an implausible hypothesis, given contemporary corporate practices. Additionally, the threshold revenues that SOEs must reach are problematic, given the several inventive accounting techniques that could be used to avoid meeting these minimal requirements. Alongside transfer pricing manipulations, this can result in transfers between intra-group related entities that may not appear as revenue.

There is another element that impacts on the scope ratione personae and ratione materiae of the CPTPP and USMCA rules regarding SOEs, i.e., the exemptions, exceptions and carve-outs included in the relevant texts. Consider the text of the CPTPP. Exemptions regard specific categories of state entities. The extensive number of exceptions and carve-outs included in such treaties confirms that countries have different views on the legitimate role of the state, and which of those purposes should be subject to international discipline. Acceptance of such difference is embedded in the new trade regimes. However, while certain exclusions are quite sensible, (such as, the exemptions of smaller SOEs and government procurement), others are controversial, and may undermine the anticipated benefits of the new regimes. Notable examples are the sweeping exemption for SOEs that a sub-central level government owns or controls; the already mentioned state-owned domestic service providers; and Sovereign Wealth Funds (especially if one considers some Asian countries are actively discussing the potential transformation of their SOEs into SWFs).

The second key element of rules on subsidies involving state enterprises is the inclusion of a general ban on provision of state support on non-commercial terms to the commercial activities of SOEs. Thus, the CPTPP and USMCA are the only treaties that incorporate new rules on non-commercial assistance (NCA), the main aim of which is to prevent adverse effects or injury to the interest of other parties as a result of advantages that SOEs obtain because of their proximity to the government. While rules on NCA are not covered in earlier trade agreements,¹⁴¹ these provisions should be essentially considered as an expansion of the WTO-based approach. This is because the new rules espouse the basic principles of the ASCM and, at the same time, “extend those disciplines to cases not covered by the same treaty, such as NCA provided with respect to trade in services.”¹⁴² Indeed, many overt and covert advantages SOEs may enjoy over private enterprises boil down to a direct or indirect subsidization by the government. Hence, the new rules prohibit a contracting party from causing an adverse effect or injury to other contracting parties through NCA¹⁴³—generally defined as any assistance to an SOE by virtue of its government ownership or control—in purchase, and sale of goods and services and investments.

The CPTPP and USMCA lay out very specific instances where NCA is deemed to adversely affect the interests of another party or cause injury to its domestic industry, making investigations of the violation easier. Indeed, the two treaties define these conditions more narrowly than the ASCM.¹⁴⁴ Despite the fairly lengthy character of these provisions, the bottom line is that the substantive discipline does not generally inhibit NCA as such. Instead, the new rules aim at controlling certain negative effects that may arise from such assistance.¹⁴⁵ If a given form of NCA is causing adverse effect or injury to another party, the providing country needs to take appropriate action to remove those effects or withdraw the assistance concerned. Otherwise, it will be confronted with the countermeasures permitted under the two treaties’ dispute settlement procedures.¹⁴⁶ Central in the new regime, is the use of the word “indirectly” to qualify the provision of NCA to SOEs.¹⁴⁷ As is explained in a footnote to Article 22(6) USMCA, which echoes Article 1.1(a)(1)(iv) of the ASCM, “indirect provision includes the situation when a Party entrusts or directs an enterprise that is not a state-owned enterprise to provide non-commercial assistance.”

Even more meaningfully, both treaties clarify that SOEs, just like states themselves, are prohibited from providing NCA to other SOEs when it causes adverse effect or injury to another party.¹⁴⁸ Therefore, SOEs cannot serve as pass-through vehicles for direct and indirect subsidization to other SOEs, even when they would not match the definition of “public body”under the current interpretation of ASCM by the AB. Thus, the prime benefit of the new NCA rules is their application to cases where governmental assistance slips through the net of ASCM. Another such case is when SOEs engage in trade of services: in the absence of WTO comprehensive subsidy disciplines connected to trade in services, the impact of the CPTPP and USMCA rules in this area is, for the respective parties, potentially vast. However, the NCA rules do not apply to a service supplied by a SOE within the territory of the subsidizing party.¹⁴⁹ A result of intense negotiations, this compromise muddles all domestic services, irrespective of whether they have public goals or not, and seems to flatly contradict free market principles and the objective of the international contestability of markets.

Importantly, as in the GATS, the NCA rule does not apply to services supplied in the exercise of governmental authority.¹⁵⁰ Clearly, the very definition of services supplied in the exercise of governmental authority, which supposedly safeguards the sovereign power of states to carry out public functions, reveals the neo-liberal vision of a laissez-faire economy, (minimalist) state, and society. Moreover, the prohibition of NCA to SOEs does not apply to services that are supplied neither on a commercial basis, nor in competition with one or more services suppliers. Similar exemptions have attracted intense criticism for its limited scope in that many predominantly government-provided services, for example health care, education, and water distribution, are provided in actual or potential competition with private providers, and so may fall outside its scope. Not surprisingly, the proposed text for the Trade in Services Agreement (TiSA),¹⁵¹ which incorporates the same exemption in Article I-1:3, has been criticized as a tool to further reduce the area of public services. For these reasons, Uruguay eventually withdrew from the TiSA negotiations.¹⁵²

As for the procedural provisions, the CPTPP and USMCA rules do not contain a mechanism of countervailing duties. Also, they do not clearly indicate an alternative approach. For example, they do not incorporate a mechanism somewhat akin to the undertakings system envisaged under ASCM Article 18. In essence, the complaining party is given wide discretion and control over all the counteracting processes.¹⁵³

To conclude, NCA rules are not without problems. Even leaving aside the issue of the nature and relevance of exceptions and carve-outs, which has been widely explored in the literature,¹⁵⁴ some significant lacunae remain under the NCA rules. While the CPTPP rules seek to cover NCA that may remain uncaptured by the ASCM (e.g., assistance provided by a state enterprise not vested with governmental authority), they do not contemplate the situation where the assisted exports adversely affect the industry of another party operating within that party’s domestic market, i.e., the case that would be subject to countervailing duties under the ASCM.¹⁵⁵ Thus, if assistance is provided in a form that does not fulfil the definition of subsidy under WTO law, the importing party may have no means to address the adverse effects upon its domestic industry caused by assisted exports.¹⁵⁶ Moreover, the CPTPP and USMCA rules do not cover situations where assistance is provided by SOEs to private enterprises. Hence, the “SOE-as-provider” problem is only partially addressed. Under the two agreements, these entities could still represent means for providing subsidies in an opaque way where the final recipients are private enterprises and the ASCM does not apply. Finally, some of the NCA provisions in the two FTAs are quite complex and introduce for the first-time central concepts such as the “adverse effect” requirement and the “cause injury” standard. Besides, there are further provisions that provide exceptions to those injury standards.¹⁵⁷ This reduces the utility of reference to past WTO practice. As history of the ASCM demonstrates many central terms and methodologies were clarified and developed through the interpretation of the Panels and the AB. The same is likely to be true for the CPTTP and USMCA. For this reason, the new NCA rules require the concurrent development of a functioning dispute settlement mechanism. If this is not achieved the SOE regulation under such treaties will result in a lex imperfecta,¹⁵⁸ “with individual parties interpreting more obscure terms in accordance with their preferences and interests.”¹⁵⁹

IV. Incorporating "Competitive Neutrality” in the Legal Order of International Trade

To ensure that the decision-making of state trading enterprises (STEs)—state enterprises or private enterprises operating under state-conferred monopolies or privileges—would be subject to non-discrimination norms, the drafters of the GATT included a provision, Article XVII, that frames non-discrimination in terms of such enterprises basing their purchase and sales decisions on “commercial considerations.”¹⁶⁰ In addition to Article XVII, as one GATT panel stated, “the note to Articles XI, XII, XIII, XIV and XVIII provided that throughout these Articles the terms “import restrictions” and “export restrictions” include restrictions made effective through state-trading operations.”¹⁶¹

The GATT acquis is arguably of limited use in regulating the magnitude of today’s state capitalism.¹⁶² First, STEs are only a subset of SOEs.¹⁶³ Secondly, not only is its application restricted to the above-referred commercial transactions of subset of SOEs, but it seems also marked by some uncertainty with respect to the principle of national treatment.¹⁶⁴ Thirdly, case law has been weakened by the finding that it suffices for STEs to act in a non-discriminatory manner to comply with the provision.¹⁶⁵ Thus, whatever the precise meaning of “commercial” here, Article XVII “has been interpreted by the WTO Appellate Body as establishing non-discrimination as an obligation of result in respect of “state trading enterprises.”¹⁶⁶ While it is questionable whether in so doing, ipso facto, STEs act also in accordance with commercial considerations and afford competitors adequate opportunity to compete for participation—and economic logic would not support this view of the AB¹⁶⁷—this interpretation is by now water over the dam, as “there is not one single deviation from this case law”.¹⁶⁸ Finally, according to the then WTO AB, GATT Article XVII does not apply to an STE’s transactions when no foreign enterprise is directly involved.¹⁶⁹

GATT Art. XVII marked the beginning of international trade regulation on state enterprises which has lately evolved into complexed free trade agreements that contain far-reaching obligations on non-discrimination and non-commercial considerations. The latter kind of obligations incorporate the “competitive neutrality principle” advocated, among others, by the European Commission. I discussed this concept as a normative foundation of new international trade rules on SOEs in an earlier work. In that context, I argued that competitive neutrality, is “a highly condensed form of rhetorical material” that “has come to seem real and part of legal routine in current trade negotiations.”¹⁷⁰ Moving from a critical approach to the debate surrounding this notion, I eventually concluded that in order to fully capture the approaches of contemporary FTAs to the regulation of SOEs “[p]articularly clarifying is the recognition that there are two goals at work […] simultaneously. On the one hand, negotiators seek the creation of the conditions for internationally contestable markets, while simultaneously permitting domestic constituencies to maintain sufficient policy space for using SOEs to contribute to important public goals.”¹⁷¹ Here, it is important to add that, as evidenced by Howse’s systematic engagement with relevant GATT/WTO caselaw, “under existing GATT rules on non-subsidies measures claimants have often been successful in obtaining rulings against protectionist discrimination in the policies or practices of state enterprises or government treatment of them.”¹⁷²

Moving from these different orders of considerations, I now turn to assessing how and to what extent the introduction of “competitive neutrality” into the legal order of international trade in the form of new rules on non-subsidies measures would be an adequate alternative to existing multilateral rules in addressing ways in which government measures concerning SOEs create barriers to international trade of a protectionist nature that are not justified by legitimate non-protectionist public policy objectives.

The obligations of non-discrimination and commercial considerations are present in the CPTPP and USMCA. In subjecting SOEs to such requirements, the new rules are plainly rooted in the GATT rule on STEs. However, they significantly expand on such discipline. First, in both the CPTPP and USCMA, obligations extend to trade in services and investments from other parties.¹⁷³ Second, with a view to favoring the international contestability of markets, they also cover SOEs’ activities within domestic territory. Third, the new rules dissolve any uncertainty with respect to the principle of national treatment, which is now explicitly incorporated, avoiding the confusion that exists concerning GATT Article XVII. Fourth, the same provisions, as they read, reverse the AB’s interpretation of the same rule. As observed supra, the AB had long interpreted the duty of non-discrimination treatment and the commercial considerations rules as illustrative of each other. In contrast, like other deep FTAs, the CPTPP and USCMA put such obligations in two distinct provisions with no logical link between them.¹⁷⁴ A literal and contextual reading of these provisions would command that an SOE cumulatively satisfy both requirements in order for the party to comply. However, here one may notice a first ideological bias against SOEs: “Why should trade law be concerned with whether state enterprises act commercially as a general matter, apart from situations where the non-commercial behavior reflects an alteration in the conditions of competition that disadvantages imports?”¹⁷⁵

Moreover, in defining “commercial considerations” as equivalent to those factors that a privately-owned enterprise in the same business or industry would also consider,¹⁷⁶ the CPTPP and USMCA incorporate a standard, absent in WTO law, that pretends to determine in abstracto whether a firm’s buying or selling behavior is commercially sound. Here again, a seemingly ideological bias against SOEs shines through. “Why would the decision-making considerations of private firms be the baseline against which state enterprises should conform themselves?”¹⁷⁷ As Joseph Stiglitz argues, “the distinction between competitive and non-competitive (including bureaucratic) forms of economic organization may be more important than the distinction between private and public ownership…”.¹⁷⁸ Accordingly, both public and private enterprises depend on managers/agents to achieve the goals of their principals, the owners. Different types of public and private enterprises exhibit different incentive structures for managers, some of these addressing agency costs better than others,¹⁷⁹ but, ‘”in any case, there is no systematic evidence of distortion of global competition from the way in which agency costs are managed in the incentive and monitoring structures of public firms as opposed to private ones.”¹⁸⁰

There are however elements of the new disciplines that appear to relax the standards of non-discrimination expected of SOEs. For example, insofar as the obligation to act in accordance with commercial considerations is concerned, the CPTPP seems to allow SOEs the right to sell at different prices and even allows them to refuse to sell, which at first glance seems to authorize violation of the MFN and national treatment principles. However, contrary to what has been claimed elsewhere,¹⁸¹ my take is that these provisions do not introduce a systemic loophole in SOE rules. Instead, they seem to reduce the bias against SOEs: privately-owned enterprises, by definition, are not subject to a duty of non-discrimination. In fact, as for ownership-neutrality in the GATT/WTO, it is only the motivation and behavior in the market that matters. If a state-owned firm behaves in a commercial manner, the argument might go, its ownership structure would be irrelevant. Hence, like its privately-owned competitors, it should enjoy contractual freedom.

In my view, the main technical problem with the obligations of commercial considerations remains that there is no clear-cut economic test to determine whether a firm’s behavior is commercially rational, despite any effort to provide clarifications. Actions such as selling at very low prices to hook customers can be practiced by commercially motivated firms and those with further motives alike.¹⁸² As I have pointed out elsewhere, “[i]t would be easier to test between conduct and motivations if there were a clear alternative hypothesis: what, precisely, is it that SOEs would do if they did not act commercially?”¹⁸³ The answer is likely to vary with the relevant market and business. Given the silence of the legal texts and the likely complexity of relevant cases, the examination of single instances of conduct would greatly benefit from the progressive stratification of interpretative practices (read: case law) at either the international or domestic level. However, at this time, neither agreement is endowed with a functioning dispute settlement mechanism, and to divine whether they could ever effectively work is impossible. Further, there is another obstacle for new rules on state enterprises to go further than the WTO acquis. Commercial rationality in a state-centered economy that needs to shoulder various transitions and crises cannot arguably exist in a uniform way. It is almost by necessity a matter of perspective.

D. By Way of Conclusion: Reflecting on Reforms

I. Tensions Regarding the Future Design of Subsidies and SOEs Treaty Regulation

The tensions that now exist regarding the future design of subsidies and SOE treaty regulation are usually portrayed as part of a political and ideological contest. And, indeed, deciding on the international trade rules that should govern these prominent forms of state intervention in the economy raise “fundamental questions concerning the nature and degree of government involvement in commercial affairs and the right of other governments to inquire into that involvement.”¹⁸⁴ Central tenets of a state economic system and basic beliefs concerning its governance are radically involved under the cover of technical notions like allocative efficiency, contestable markets, market failures, or regulatory neutrality. Against this backdrop, it is hardly surprising that decades of negotiation to reform the GATT/WTO system to address subsidies¹⁸⁵—with the recent supplement of growing demands to deal with trade-distorting effects of SOEs—“have never produced the sort of uniform, scheduled rules that apply to tariffs or even services.”¹⁸⁶ Instead, WTO members developed rules to demarcate between tolerable and intolerable subsidization, and regulate self-help against such subsidies that are presumed or proved to be impermissible.

In this paper, I argue that existing WTO rules on subsidies and state enterprises—which represent a necessary piece of the interface mechanism designed to allow different economic systems to trade together without excessive tensions—are not suitable to ease, to say nothing of solving, recent controversies caused by the resilience of the state as an economic actor and the related increasing politicization of trade relations. Moreover, I submit (and demonstrate) that this system of rules is poorly equipped to assist states in addressing the substantial challenges they face in the post-pandemic world. In fact, extant rules on state intervention in the economy may make it more difficult for WTO members to engage in industrial policies that are needed to deal with the economic consequences of the COVID-19 pandemic, support desired changes in the real economy, and address the climate change shock. My approach is openly analytical: I explain and discuss existing multilateral rules and relevant caselaw on subsidies and state enterprises in light of the present geopolitical shifts, emerging changes in global economy, and environmental concerns. The ultimate goal is to dissect the enduring problems and emerging deficiencies of this system of rules, and, hence, lay the ground to investigate the direction taken by future possible reforms. However, if we now venture beyond the analytical account to the normative, some concluding considerations can be drawn from the foregoing work in relation to the main problematic issues explored and related prospects of reform.

II. Expanding, Reinforcing and Refining Extant WTO Rules on Industrial Subsidies

The first order of considerations is about the expansion, strengthening and refinement of existing multilateral trade rules on industrial subsidies. Some scholars view disciplines beyond rules preventing the nullification and impairment of tariff commitments as both needed and feasible. Exemplars of this assessment of the future position of subsidies disciplines are two works by distinguished international trade experts: Chad Bown and Jennifer Hillman,¹⁸⁷ on the one hand, and Gary Horlick and Peggy Clarke,¹⁸⁸ on the other. At the risk of obscuring different gradations of their analysis, key “common themes emerge in their proposed reconfiguration”¹⁸⁹ of extant WTO rules on subsidies, ranging from expanding the category of prohibited subsidies by including, inter alia, subsidies to the fossil fuel industry that aggravate risks of climate change; extending the scope of public bodies in the ASCM so as to include SOEs; reinstalling a green light category of non-actionable benign subsidies; and finding new institutional arrangements for enforcing subsidies rules.¹⁹⁰ These studies offer very sensible suggestions, some of which are clearly mirrored in the recent EU proposal.¹⁹¹ To be fair, one cannot disregard that, although recent, the two articles at issue were published in a period where the crisis of the WTO did not appear as severe as it is today. As widely discussed in different contributions to this Volume, the situation has dramatically changed over the last few years. At present, in few other areas, divergence between the major trade powers as to the priorities accorded to the subject of reform is as profound as in the area of subsidies.¹⁹² Moreover, in the aftermath of the financial crisis and the Covid-19 pandemic shock, the struggle for what counts as normal relations between state and market has taken new colors and intensity—with the United States “steadily moving from a commitment to economic and political liberalization in its foreign policy”,¹⁹³ and new paradigm of industrial protection spreading among other WTO members.¹⁹⁴ Therefore, in the current geopolitical setting one cannot be but skeptical about the prospects of any consensus within the WTO on new multilateral rules on subsidies in the foreseeable future. As I observe above, any modification of the current rules necessarily entails the re-definition of the confines between illegitimate state intervention in the market and legitimate, hence “normal”/normalized, level of state actions.

This is why authors like Hoekman and Nelson view(ed) the launch of a broader international work program on subsidies in the 12^th WTO Ministerial Conference as a necessary preliminary step to—at least this is the second step I can safely infer from/add to their analysis—subsequent plurilateral negotiations, which, in turn, could respond to the consensus problem. In that perspective, the WTO would provide a platform “to members willing to invest resources into a work program to compile information and analyze existing subsidy programs in systemically important economies,”¹⁹⁵ including in sectors where multilateral rules do not exist (e.g., services). This program would build a more solid evidence base on the magnitude, purpose and effects of subsidy policies and remedy to a significant (and widely acknowledged) information gap about the use of these tools by WTO members. With that evidence at their disposal, members would be able to identify shared objectives and mutual gains in relation to possible reforms,¹⁹⁶ which, most likely, could take place through plurilateral agreements. Regrettably, such an approach was not considered during the last Ministerial Conference, the result being the remaining focus on piecemeal efforts like unilateral action (e.g., the EU regulation on foreign subsidies) and FTAs subsidies rules (some elements of which are portable at the multilateral level, while the overall disciplines are too narrow in scope and focus).

Still, I argue that an international form of cooperation promoted by and within the WTO to gather and analyze information on subsidies in systemically important (and cooperative) economies could effectively assist also other responses to the consensus problem on multilateral reforms. This is the case, for instance, of the proposal advanced by Michael Trebilcock who posits that, within the multilateral system, “there is a strong case for abandoning one-size-fits-all subsidy disciplines for all member countries across all economic sectors.”¹⁹⁷ Rather, he favors a more flexible system, viz. an approach “that draws on the negotiating modalities adopted in the General Agreement on Trade in Services (GATS).”¹⁹⁸ Such a system, transposed to international trade in goods, would entail member countries of the GATT/WTO having the latitude of opting-in to different subsidies disciplines on an à la carte basis. Commitments on the use of subsidies “(akin to opening offers in tariff negotiations) would form the basis for future international negotiations on subsidies disciplines, along with appropriate tariff adjustments.”¹⁹⁹ In case “of agreement (which, like tariffs, may not necessarily be symmetric), countries would be committed to not subsequently adopting or expanding their subsidy policies at variance with negotiated commitments, causing or threatening injury to producers in another country in domestic or foreign country.”’²⁰⁰ Clearly, an approach of this kind would more closely align subsidies rules with tariff commitments, and complement rather than undermine them. Further, it would ultimately determine a graduation of WTO members’ rights and obligations regarding subsidies through progressive regulation.

III. Reforming the ASCM to Address the Climate Change Shock and Green Industrial Transition

The second concluding remark concerns the climate change shock and the role of public spending to favor industrial green transition. Extant WTO rules that divide all subsidies into either prohibited or actionable categories are no longer fit for purpose. Particularly for the purpose of supporting WTO members in levelling the competition between fossil fuels and renewable fuels and make the needed transition to a decarbonized economy. Unless a close connection between climate change policy and the public aids employed is established, climate change subsidies may conflict with both GATT Articles VI and XVI, and the ASCM. Technically, modernization of rules in this area are not hard to conceive. There is wide agreement among experts that WTO rules need to be re-examined because of their inadequate flexibility for public policy.²⁰¹ In this article, I maintain that international trade rules on subsidies should be conditioned on what governments are planning to do, implying determining what goal they pursue, and differentiating economic from non-economic objectives. Theoretically, a sensible way to allow this sort of assessment would be the introduction in the ASCM of a general exceptions provision, akin to GATT Article XX, which relates to a range of legitimate public policy goals, including human, animal, and plant life and health, and the conservation of natural resources.²⁰² As observed above, an alternative option is the reinstallation of the category of benign permitted subsidies, including subsidies to renewable energies. Similar considerations about the technical feasibility of reforms in this area can be readily extended to fossil fuel subsidies with negative climate change externalities. But, again, the core problem is to reach consensus at the multilateral level.²⁰³ This is accentuated by the refusal of some WTO members to separate reforms on subsidies to ease green transition and other changes in multilateral trade rules that may be equally or even more difficult to achieve.²⁰⁴

Late developments regarding fossil fuel subsidies are telling of existing challenges. At the 11th WTO Ministerial Conference in Buenos Aires in December 2017, twelve of the 164 members of the WTO launched an important initiative that could help commitment to fossil fuel subsidy reform under the Sustainable Development Goal 12 (c) of the 2030 Agenda. On this occasion, they issued a declaration expressing their desire to add specific disciplines to the existing WTO subsidies rules to rationalize and phase out inefficient fossil fuel subsidies. Their initiative is “aimed at achieving ambitious and effective disciplines on inefficient fossil fuel subsidies that encourage wasteful consumption.”²⁰⁵ These dozen members have since embarked on a diplomatic campaign to enlist the remaining 152 WTO members in new negotiations on how the trade rules should be amended to address the climate change shock. In December 2021, 19 WTO members issued a similar statement that reiterated the urgency of accelerating fossil fuels subsidies reform and promised to “elaborate concrete options” in the Ministerial Conference ahead.²⁰⁶ Yet, no real step forward emerges from the official reports of the 12^th Ministerial Conference.²⁰⁷ And the whole membership of the WTO has yet to place this issue on the negotiating agenda. Adding it to the agenda is indeed highly problematic.²⁰⁸

IV. New Treaty Rules on Subsidies to the State Sector?

The third order of considerations is about appropriate reforms to address subsidies to the state sector. As I explain above, some recent FTAs contain more detailed rules relating to SOEs as either originator or recipient of government subsidies (rules on NCA). The CPTPP and USMCA, often regarded by international trade scholars as models for WTO reforms on the matter, exemplify such rules. I only recall here that these rules are not without problems, starting with the very definitions of SOEs they establish and the way exclusions and exceptions are made. Moreover, I doubt that transposing the CPTPP or USMCA rules on NCAs—and the related definitions of SOEs—at the multilateral level would adequately address the problem of state enterprises as providers of government subsidies. In the CPTPP these rules were inserted with China in mind. But, for one thing, as Mark Wu and Ming Du show, while China resorts to SOEs as tools of policy, its economic system is vastly more complex. There, the state has the capacity to model market behavior, even that of firms that are entirely private, through complex governmental and Communist Party networks hard to detect from outside.²⁰⁹ For another, the exceptionalism of China “should not drive a general (…) tainting of state ownership or control of business activity”²¹⁰ in an organization whose membership count more than 160 States, especially when, in the aftermath of the last financial crisis, and in the wake of the Covid-19 global pandemic, the state has taken an even greater role as an investor in several countries.

Rather, I subscribe the view that a more adequate approach to the concept of “public body” in the ASCM is possible and opportune.²¹¹ Importantly, in US—Countervailing Duty Measures on Certain Products from China, the then AB eventually qualified its previous caselaw and demonstrated openness in this respect.²¹² In my view, the concept of public body is able to capture public enterprises where government preserves means of control or influence (for example, through appointment of board members), but the company is a private enterprise in other respects. In all such cases, “a presumption of governmental involvement or influence is warranted where the enterprise is acting in a manner that deviates from the normal market conduct of a competing private firm.”²¹³ Whereas Mavrodis and Sapir argues that such a presumption should be included in new version of the ASCM, I fall in with Howse that, in leaving the concept open (also to evolutionary interpretations) and, hence, broad, the drafters of the original GATT and later those of the ASCM display wisdom. They prevented excessive rigidity in a concept the meaning of which can vary over time, and eluded the arguably futile search for a new formula that would more appropriately capture the use of state enterprises as a tool of government policy.²¹⁴ It is sensible for the WTO to “defer to the decision of domestic agencies” that may presume, in economic systems like that of China, or where the peculiar context surrounding the activities of a given state enterprise suggests so, “that certain conduct has been influenced or guided by the state, even in the case of enterprises that are not formally charged with exercising governmental authority.”²¹⁵

V. Ensuring the Equality of Competitive Conditions

Finally, as to the additional obligations of commercial considerations included in the CPTPP and USMCA to ensure competitive neutrality between domestic and foreign firms—advocated as broader reforms for the multilateral trade system too—I only add a couple of remarks to my previous analysis. First, and noted here only briefly, the institutional designs of transparency rules in the SOEs chapter of the CPTPP and USMCA do not offer a useful corrective to the scarce information we have about the extent to which state action—the only thing subject to international trade rules—alters the terms of competition in relation to the operation of SOEs.²¹⁶ In the absence of reliable data, concerns with the potential for negative spill-overs on trade as a result of SOEs’ commercial operations may appear to be ideological rather than empirical.²¹⁷ Secondly, the directives incorporated in the obligations of commercial considerations are designed to ensure that SOEs do not alter the terms of competition in domestic markets at the expense of foreign firms.²¹⁸ In the absence of compulsory rules regarding property ownership for parties to comply with, rules on commercial considerations reduce the incentives for state intervention in the economy by imposing on SOEs obligations to which private enterprises are not subject. Hence, as I explain above, they reveal a clear ideological bias against SOEs. In fact, the resulting difference in treatment is not substantiated by systematic evidence of distortion of global competition from the way in which agency costs are managed in the incentive and monitoring structures of state enterprises as opposed to private ones. Even leaving this issue aside, if it is the terms of competition the main concern, it remains controversial whether rules of this sort are the best option for future reforms. As Mitsuo Matshusita argues in his article for this Special Issue, this kind of problems should be addressed by competition law (rectius: by an interaction between international trade law and competition rules still to be shaped at the multilateral level).²¹⁹ However, in the enduring absence of a WTO antitrust code, the question remains why “competitive neutrality” should be introduced into the trade order through new prophylactic rules focused on state enterprises as opposed to private enterprises instead of relying on a sound application of existing disciplines (particularly, WTO rules on non-discrimination) in cases where government policies toward state enterprises or their conducts effectively distort international trade.²²⁰