Beijing Law Review
2013. Vol.4, No.4, 198-218
Published Online December 2013 in SciRes (http://www.scirp.org/journal/blr) http://dx.doi.org/10.4236/blr.2013.44025
Open Access
198
Whether China’s State-Owned Commercial Banks Constitute
“Public Bodies” within the Meaning of Article 1.1 (a) (1) of the
Agreement on Subsidies and Countervailing Measures: Analysis
of US—Definitive Anti-Dumping and Countervailing Duties on
Certain Products from China
Yi Liao
Faculty of Law, University of Toronto, Toronto, Canada
Email: roxyliao1988@gmail.com
Received September 24th, 2013; revised October 26th, 2013; accepted November 23rd, 2013
Copyright © 2013 Yi Liao. This is an open access article distributed under the Creative Commons Attribution
License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original
work is properly cited.
US—Definitive Anti-Dumping and Countervailing Duties on Certain Products from China is the initial
WTO dispute in which China claims that US-countervailing duties on certain products from China are
inconsistent with the obligations of the United States under the Agreement on Subsidies and Countervail-
ing Measures (“SCM Agreeme nt”). In this dispute, the specific meaning of “public bodies” within Article
1.1 (a) (1) of the SCM Agreement and the question of whether China’s state-owned commercial banks
(“SOCB”) constitute “public bodies” are the heart of the matter. This thesis will analyze these issues by
examining the reports of the Panel and the Appellate Body. In particular, the thesis will argue that the
theory of the governmental function advanced by China is much more persuasive than that of govern-
mental control in terms of defining “public bodies”. Although China’s SOCBs have gone through several
stages of reforms, the majority ownership of them has remained in the hands of the Chinese government.
However, SOCBs’ policy-oriented nature has been largely marginalized, and currently they only perform
subsidiary governmental functions. In this regard, the conclusion this thesis will attempt to reach is that
the WTO system needs to give developing countries like China more policy flexibility in order to upgrade
their international trade participation to the level required and followed by developed countries. During
the process, developing countries should also make the best use of their latent comparative advantage and
the effects of globalization.
Keywords: Public Bodies; State-Owned Commercial Banks
Introduction
China put banking reform on its agenda in 1978 with the goal
of modifying the structure of its banking system. Over the past
three decades, China’s banking sector has evolved from a
mono-bank system, in which the People’s Bank of China
(“PBOC”) served the dual roles of central bank and sole com-
mercial bank, into “an increasingly sophisticated and open
system with multiple institutions performing diverse financial
functions” (Chen, 2012). In this system, large state-owned
commercial banks are playing a crucial and dominant role.
In 2001, China’s entry into the World Trade Organization
(“WTO”) was conditioned on its reduction of over 7000 tariffs
quotas and other trade barriers, including opening its market to
foreign banks within five years. Some Chinese commentators
were concerned that foreign competition would overturn ineffi-
cient state-owned enterprises (“SOEs”), as to some it did. But
China, overall, has enjoyed one of the best decades in global
economic history, with a remarkable increase in its GDP and
exports (“China’s Economy”, 2011). Despite its economic suc-
cess, Chinese scholar Yongtu Long, who helped China win
admission to the WTO, is concerned that China’s economic
philosophy has seldom changed, and it is now moving further
away from the WTO’s principles. To modernize its economy,
China has remained wedded to industrial policies, SOEs, and a
“technonationalism” that protects and promotes homegrown
technologies (“China’s Economy”, 2011). Many foreign com-
panies feel they must compete with the Chinese state instead of
Chinese firms.
The United States began applying its countervailing duty
legislation to imports from China in 2007, after the United
States Department of Commerce (“USDOC”) determined that
China’s economy, albeit still not a market economy, had un-
dergone sufficient economic reform as to enable the USDOC to
identify and countervail subsidies granted by the Chinese gov-
ernment.
Under the circumstance, US—Definitive Anti-Dumping and
Countervailing Duties on Certain Products from China is the
initial WTO dispute in which China claims that US-counter-
vailing duties on certain products from China are inconsistent
Y. LIAO
with the obligations of the United States under the Agreement
on Subsidies and Countervailing Measures (“SCM Agreement”).
In this dispute, the specific meaning of “public bodies” within
Article 1.1 (a) (1) of the SCM Agreement and the question of
whether SOEs and SOCBs in China constitute “public bodies”
are the heart of the matter.
Although there are many studies available on SOEs in China
in a trade context, there are quite limited studies on SOCBs by
scholars either within or outside China; this gap provides a
necessity and, in some way, urgency of the proposed study with
regard to increasing trade-related disputes in which conflicting
interpretations of the status of SOCBs play a crucial role. The
hypothesis I will provide at this stage is that the theory of the
governmental function advanced by China is much more per-
suasive than that of governmental control in terms of defining
“public bodies” within the meaning of Article 1.1 (a) (1) of the
SCM Agreement. Indeed, by either criterion, SOCBs in China
could probably be identified as “public bodies”. However, the
policy-oriented nature of SOCBs has been largely marginalized
in the past three decades, and they currently only perform sub-
sidiary governmental functions in line with macro-economic
goals; in essence, they are profit-motivated enterprises.
A thorough analysis of the status of China’s SOCBs is con-
ducive to providing a better understanding of the similarity and
uniqueness of their nature with respect to their counterparts in
western countries, thus giving an insightful understanding of
China’s international trade policies, which are closely related to
its banking system and joint-stock reform. In a broader sense, a
detailed examination of “public body” within Article 1.1 (a) (1)
of the SCM Agreement could help preserve the strength and
effectiveness of the subsidy disciplines in the context of inter-
national trade, and inhibit circumvention by ensuring that gov-
ernment cannot escape those disciplines by utilizing entities to
accomplish tasks that would potentially be subject to those
disciplines.
This paper is divided into six sections. The introduction
sketches the background, the issue, and the significance of this
study. The factual background of the dispute is presented in the
second section. Third, various criteria for defining “public
body” are outlined, along with detailed evaluation of those
criteria. In the fourth section, this paper examines the status of
SOCBs in China by means of policy and legal approaches.
Based on the discussion of “public bodies”, this paper then
addresses whether SOCBs lending loans and land-use rights
satisfy “specificity” within the meaning of Article 2 and con-
stitute “subsidies” as defined by Article 1 of the SCM Agree-
ment. In the last section, this paper concludes by supporting the
theory of governmental function proposed by China, but
SOCBs in China could still possibly constitute “public bodies”
and their lending loans constitute “subsidies” within the SCM
Agreement. In addition, some challenges and recommendations
deserving further research are identified.
The Case of US—Definitive Anti-Dumping
and Countervailing Duties on Certain
Products from China
On 19 September 2008, China requested consultations con-
cerning the definitive anti-dumping and countervailing duties
imposed by the United States as a result of four anti-dumping
and countervailing duty investigations conducted by the US-
DOC, covering four products from China to the United States:
1) Circular Welded Carbon Quality Steel Pipe (“CWP”); 2)
Certain New Pneumatic Off-the-Road Tires (“OTR”); 3)
Light-Walled Rectangular Pipe and Tube (“LWR”); and 4)
Laminated Woven Sacks (“LWS”) (Panel Report, 2011, US—
Anti-Dumping and Countervailing Duties, para.2.1). China
considered that these measures, which included the conduct of
the underlying anti-dumping and countervailing duty investiga-
tions, were inconsistent with the obligations of the United
States under inter alia, Articles I and VI of the General Agree-
ment on Tariffs and Trade 1994 (“GATT 1994”) (Agreement
on Tarrifs and Trade, 1994), Articles 1, 2, 9, 10, 12, 13, 14, 19
and 32 of the SCM Agreement, Articles 1, 2, 6, 9 and 18 of the
Agreement on Implementation of Article VI of the General
Agreement on Tariffs and Trade 1994 (“Anti-Dumping Agree-
ment”) (Agreement on Implementation of Article VI of the
General Agreement on Tariffs and Trade, 1994), and Article 15
of the Protocol on the Accession of the People’s Republic of
China (Protocol on the Accession of the People’s Republic of
China, 2001).
With respect to the countervailing duty investigation, the
USDOC determined that China provided subsidies in the form
of preferential lending by SOCBs to several producers such as
Weifang East Steel Pipe Co., Ltd. (“East Pipe”), Guizhou Tire
Co., Ltd. (“GTC”), and Heibei Starbright Tire Co., Ltd. (“Star-
bright”). Those producers exported subsidized goods to the
United States, and these subsidies, according to the USCOC,
were specific. The USDOC also found that the government
provision of land-use rights was a countervailable subsidy.
On 9 December 2008, China requested the establishment of a
panel. On 22 October 2010, the panel report was circulated to
Members. China appealed certain Panel’s findings regarding
the USDOC’s determinations on “public body”, “specificity”,
“benefit benchmarks”, and “double remedies”. On 11 March
2011, the Appellate Body report was circulated to Members.
In this dispute, one of the major issues in contention between
China and the United States is whether China’s SOCBs consti-
tute the “public bodies” within the meaning of Article 1.1 (a) (1)
of the SCM Agreement. The Panel interpreted the term “public
body” to mean “any entity controlled by a government” (SCM
Agreement, 1994). The Panel considered government owner-
ship to be highly relevant and potentially dispositive evidence
of government control (SCM Agreement, 1994), and, on that
basis, upheld the USDOC’s determinations that the SOEs and
SOCBs constitute public bodies. The Appellate Body first re-
called that while China and the United States advocated differ-
ent definitions of the term, their respective conceptions of the
entities that may properly be considered “public bodies” are not
mutually exclusive, and in fact overlap significantly (Appellate
Body Report, 2011, US—Anti-Dumping and Countervailing
Duties, para.281). The Appellate Body considered that the Pan-
el’s interpretation of “public body” lacked a proper legal basis,
and therefore reversed its finding by adopting the position that a
public body is an entity that “possesses, exercises, or is vested
with, governmental authority” (Appellate Body Report, 2011,
US—Anti-Dumping and Countervailing Duties, para. 317).
However, the Appellate Body affirmed that the USDOC’s pub-
lic body determination in respect of SOCBs was supported by
evidence that these SOCBs exercise governmental functions on
behalf of the Chinese Government. Therefore, it concluded that
SOCBs in China are “controlled by the government and that
they effectively exercise certain governmental functions” (Ap-
pellate Body Report, 2011, US—Anti-Dumping and Counter-
vailing Duties, para.355).
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Regarding the second issue of “specificity”, the Panel agreed
with the United States that lending by SOCBs to the tire indus-
try was de jure specific, but it did not agree that the USDOC’s
determination of regional specificity in respect of the provision
of land-use rights to Aifudi was consistent with the obligations
of the United States under Article 2 of the SCM Agreement
(Panel Report, 2011, US—Anti-Dumping and Countervailing
Duties, para.9.161). With respect to SOCBs lending loans, the
Appellate Body upheld the Panel’s finding that the USDOC
acted consistently with the obligation of the United States under
Article 2.1 (a) of the SCM Agreement by determining that
SOCB lending was specific to the tire industry (Appellate Body
Report, 2011, US—Anti-Dumping and Countervailing Duties,
para.393). In terms of the land-use rights, China agreed with the
Panel’s conclusion that the USDOC’s determination was in-
consistent with Article 2.2 of the SC M A gr e ement; nevertheless,
it appealed this finding because it disagreed with the basis on
which the Panel reached this conclusion (Appellate Body Re-
port, 2011, US—Anti-Dumping and Countervailing Duties,
para.57). However, the Appellate Body upheld the Panel’s de-
cision as well as the premise upon which the Panel’s decision
was founded (Appellate Body Report, 2011, US—Anti-Dump-
ing and Countervailing Duties, para.424).
What Constitute “Public Bodies” within the
Meaning of Article 1.1 (a) (1) of the
SCM Agreement?
In this dispute, China argued that the major criteria for de-
fining “public bodies” are “entities vested with government
authority and that perform governmental functions”. Con-
versely, the United States, relying on a per se rule of majority
government ownership, contended that “public bodies” are
“entities controlled by a government”.
The Ordinary Meaning of the Terms of the Treaty
Dictionary Definitions
To decide the proper definition of “public body”, the Panel
argued that the dictionary definition of “public” includes: “of or
pertaining to the people as a whole; belonging to, affecting, or
concerning the community or nation” (Brown, 1993: Vol. I, p.
1123 & Vol. II, p. 2404). Both parties submitted definitions of
the term which are similar to this. The Appellate Body widened
the scope of definitions by encompassing: “as carried out or
made by or on behalf of the community as a whole”, or as “au-
thorized by or representing the community” (Stevenson, 2007:
Vol. 2, p. 2394). In addition to the term “public”, the Panel and
the Appellate Body also addressed the definition of “body”.
Accordingly, the word “body” in the sense of an aggregate of
individuals is defined as “an artificial person created by legal
authority, for example, a corporation, an officially constituted
organization, an assembly, an institution, or a society” (Ste-
venson, 2007: Vol. 1, p. 261). Thus, the composite term “public
body” could refer to a number of different concepts, depending
on the combination of the different definitional elements. The
Appellate Body therefore concluded that dictionary definitions
suggest a rather broad range of potential meanings of the term
“public body”, which encompasses a variety of entities, includ-
ing both entities that are vested with or exercise governmental
authority and entities belonging to the community or nation
(Panel Report, 2011, US—Anti-Dumping and Countervailing
Duties, para.8.59).
When facing the problem of clarifying a term in a provision,
the Panel and the Appellate Body usually first rely on diction-
aries to find certain definitions of the contentious term in the
dispute. The most popular dictionaries usually include the
Shorter Oxford English Dictionary, Websters New World En-
cyclopedia, and Blacks Law Dictionary; but, recently, some
less well-recognized dictionaries have been used in disputes. In
the dispute USChina Dispute of Publications and Audiovis-
ual Products, in addition to these three major resources, there
were many other dictionaries involved, including the American
Heritage Dictionary, Oxford English Dictionary Online, New
Century Chinese English Dictionary, Monash Marketing Dic-
tionary, Random House Unabridged Dictionary, and BNET
Business Dictionary (Panel Report, 2010, China—Publications
and Audiovisual Products,261), There is no universally ac-
cepted scope of dictionaries which could be applied in every
WTO dispute. This inevitably gives rise to diverse definitions
of a certain term, because every Member involved will only
consider the dictionaries whose definitions favour its standpoint.
In the present dispute, the Panel even made a reference to some
online dictionaries, such as Free Dictionary Online and Accu-
rate and Reliable Dictionary online while defining the term
“body” (Panel Report, 2011, US—Anti-Dumping and Coun-
tervailing Duties, para.8.59). The selection of unauthoritative
dictionaries gave rise to the unpersuasive definition of the term,
and also weakened the Panel’s argument concerning what is a
public body. Although the Appellate Body emphasized that the
dictionary definition is not the only criterion for ascertaining
the ordinary meaning of “public bodies”, the proper selection of
dictionaries would be conducive to identifying the most con-
vincing textual interpretation of the term. Therefore, the dic-
tionary method in this dispute failed to provide a reasonable
criterion for settling the proper definition of “public body”.
The Definitions of the Corresponding French
and Spanish Terms
China suggested that the definitions of the corresponding
French and Spanish terms “organisme public” and “organismo
público” in Article 1.1 of the SCM Agreement support its ar-
gument concerning the ordinary meaning of the term “public
body”. China argued that all three terms (including the English
one) are presumed to have the same meaning under Article 33
(3) of the Vienna Convention on the Law of Treaties (“Vienna
Convention”). In terms of the OECD Economics Glossary, the
Agreement on Agriculture, and the Appellate Body Report in
Canada-Dairy, the Spanish and French terms are equated to the
English term “government agency” (Panel Report, 2011, US—
Anti-Dumping and Countervailing Duties, para.8.8). The Unit-
ed States contended that the issue in the present dispute is the
interpretation of the term “public body” or “organismo público
or “organisme public”, and there is no discrepancy between
these terms. The definitions and usages put forward by China
indicated that “public body” can have the narrow meaning of
“government agency” or similar entity, but the Panel found
other definitions and usages showing a broader possible scope.
Thus, the Panel decided not to consider this definitional analy-
sis to give a conclusive answer to how the term “public body”
should be understood. The Appellate Body further found that
dictionary definitions of these words in Spanish and French
would accommodate a similarly broad range of potential
meanings of the term “public body”.
Pursuant to Article 33.3 of the Vienna Convention, “the
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terms of the treaty are presumed to have the same meaning in
each authentic text” (United Nations, 1969, Vienna Convention
on the Law of Treaties, art. 33.3). The use of the phrase “be
presumed to” rather than “must” or any other words implies
that this situation is presumptive but not absolute. Additionally,
Article 33.4 of the Vienna Convention states that “except where
a particular text prevails in accordance with paragraph 1,
when a comparison of the authentic texts discloses a difference
of meaning which the application of Articles 31 and 32 does not
remove, the meaning which best reconciles the texts, having
regard to the object and purpose of the treaty, shall be
adopted” (United Nations, 1969, Vienna Convention on the
Law of Treaties, art.33.4). Both provisions suggest that differ-
ent versions of a certain term could possibly carry different
meanings. Furthermore, using the Spanish and French transla-
tions to explain the English version may go against the general
rule of interpretation concerning “context definition” provided
in Article 31 of the Vienna Convention. Therefore, this criterion
may also fail to constitute proper measurements of “public
body”.
Context
1) The Conjunction “or”
China argued that the conjunction “or” in Article 1.1 (a) (1)
between the terms “government” and “public body” does not
suggest that the two terms must have wholly dissimilar and
unrelated meanings, but only that the terms are not identical.
China cited the report of the USExport Restraints panel’s
reference to the word “or” between the phrases “a government
makes payments to a funding mechanism” and “entrusts or
directs a private body” in subparagraph (iv) of Article 1.1 (a) (1)
as meaning that the two phrases captured equivalent govern-
ment actions (Panel Report, 2011, US—Anti-Dumping and
Countervailing Duties, para.8.9). In contrast to China’s argu-
ment, the United States claimed that the SCM Agreement ex-
presses distinct and different meanings for the terms “govern-
ment” and “public body” by using two different terms to refer
to the type of entity that can provide a financial contribution.
This is a weakness in China’s argument. The word “or” used
in subparagraph (iv) indicates that both methods are regarded as
measures of a financial contribution by the government. But,
the use of “or” may not focus on the commonalities of both;
rather, it emphasizes their distinctions—the former demon-
strating the financial contribution accomplished by a funding
mechanism, and the latter by means of private bodies under
entrustment and direction. The Panel admitted that these two
phrases capture equivalent government actions only in terms of
their commonalities as a financial contribution; this rule could
not be reasonably applied to the relation between “a govern-
ment” and “a public body”. The view that, the use of “or” de-
notes the distinctions between both but does not reject their
commonalities, was also endorsed by China.
2) The Adjective “any”
The Panel believed the separation between the terms “gov-
ernment” and “any public body” by the disjunctive “or” sug-
gests that they are two separate concepts rather than a single
concept or nearly synonymous; in addition, the use of the word
“a” before “government” at the beginning of the clause, and the
use of the word “any” before “public body” further suggest that
these two terms have separate meanings. In addition, the word
“any” before “public body” suggests a rather broader than a
narrower meaning of that term, i.e., as referring to “public bod-
ies” of “any” kind. All these contextual elements together sug-
gest a meaning of the term “public body” as something separate
from and broader than “government” or “government agency”.
However, China’s understanding of a “public body” (an entity
that exercises authority vested in it by the government for the
purpose of performing functions of a governmental character)
indeed put some restrictions on the scope of public bodies.
3) The Collective Term “Government”
Article 1.1 (a) (1) of the SCM Agreement in determining
“subsidy” provides that “there is a financial contribution by a
government or any public body within the territory of a Mem-
ber (referred to in this Agreement as ‘government’)” (SCM
Agreement, 1994, art.1.1 (a) (1)). The collective term “govern-
ment” is equated to the entire phrase “a government or any
public body within the territory of a Member”. China, argued
that the terms “a government” and “any public body” are
“functional equivalents” because of the collective expression
“government”. However, the Panel was convinced that the use
of the collective expression is merely a device to simplify the
drafting, to avoid having to repeat the entire phrase “a govern-
ment or any public body” throughout the SCM Agreement. A
similar drafting device is employed in different places, such as
“specificity” of Article 2.1 of the SCM Agreement.
However, the Appellate Body did not agree with the Panel’s
opinion. Accordingly, the juxtaposition of the collective term
“government” on the one side and “private body” on the other
side in Article 1.1, as well as the joining under the collective
term “government” of both a “government” in the narrow sense
and “any public body” in Article 1.1 (a) (1) of the SCM Agree-
ment, suggests certain commonalities in the meaning of the
term “government” in the narrow sense and the term “public
body” and a nexus between these two concepts. When Article
1.1 (a) (1) stipulates that “a government” and “any public
body” are referred to in the SCM Agreement as “government”,
the collective term “government” is used as a superordinate,
including, inter alia, “any public body” as one hyponym.
Therefore, the Appellate Body disagreed with the Panel’s rea-
soning that the use of the collective term “government” has no
meaning besides facilitating the drafting of the Agreement.
4) The Term “Private Body”
In addition to the issues discussed above, the most important
contextual element in Article 1.1 (a) (1) may be the term “pri-
vate body” in Article 1.1 (a) (1) (iv), and its relationship with
the terms “a government” and “any public body”. In particular,
Article 1.1 (a) (1) describes three kinds of potential providers of
subsidies for the purposes of the SCM Agreement, namely
“governments”, “public bodies”, and “private bodies” (SCM
Agreement, 1994, art.1.1 (a) (1)). In the Panel’s words, from
the standpoint of pure logic, this is a complete list of potential
actors: every entity must fall into one of these three categories.
Neither party argued that SOCBs in this dispute could in any
way be termed “government” as such. Therefore, the question
is the basis of distinguishing between “public” and “private”
bodies.
Based on the dictionary definitions of the terms “private en-
terprises” (“a business etc. that is privately owned and not un-
der State control”) (Stevenson, 2007: p. 2359) , and “public
sector” (“that part of an economy, industry etc. controlled by
the State”) (Stevenson, 2007: p. 2359), the Panel suggested that
a “public” body is any entity that is under State control, while a
“private” body is an entity not controlled by the State, and that
ownership is highly relevant to the question of control. Thus,
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the Panel concluded that, if China interpreted the term “public
body” narrowly, as meaning government agencies and other
entities vested with and exercising governmental authority, and
as presumptively excluding government-owned and/or gov-
ernment-controlled enterprises, it would constitute a complete
reversal of the ordinary meaning of the term “private body”.
Object and Purpose of the SCM Agreement
The SCM Agreement does not contain a preamble or an ex-
plicit indication of its object and purpose. In USCarbon Steel,
the Appellate Body stated, “the main object and purpose of the
SCM Agreement is to increase and improve GATT disciplines
relating to the use of both subsidies and countervailing meas-
ures” (Appellate Body Report, US—Carbon Steel, 2002, pa-
ra.73). This statement is of minimal use for reaching a clear
definition of a “public body”, because it is too abstract. In Bra-
zilAircraft, the Panel considered that the object and purpose
of the SCM Agreement is to impose multilateral disciplines on
subsidies that distort international trade (Panel Report, Brazil—
Aircraft, 1999, para.7.26). In CanadaAircraft, the Panel
suggested that the object and purpose of the SCM Agreement
could appropriately be summarized “as the establishment of
multilateral disciplineson the premise that some forms of
government intervention distort international trade, [or] have
the potential to distort [international trade]’” (Panel Report,
Canada—Aircraft, 1999, para.9.119). In USExport Restraints,
the Panel expressed its agreement with the Panel in Brazil
Aircraft and CanadaAircraft with regard to its statements on
the object and purpose of the SCM Agreement (Panel Report,
US—Exports Restraints, 2001, para.8.62). In USSoftwood
Lumber IV, the Appellate Body stated that the object and pur-
pose of the SCM Agreement are “to strengthen and improve
GATT disciplines relating to the use of subsidies and counter-
vailing measures, while, recognizing at the same time, the right
of Members to impose such measures under certain conditions
(Appellate Body Report, US—Softwood Lumber IV, 2004, II
571).
The United States recalled that “the object and purpose of the
SCM Agreementincludes disciplining the use of subsidies
and countervailing measures, while at the same time, enabling
WTO Members whose domestic industries are harmed by sub-
sidized imports to use such remedies” (Appellate Body Report,
US—Softwood Lumber IV, para.95). It is believed that inter-
preting the term “public body” as referring to entities controlled
by the government preserves the strength and effectiveness of
the subsidy disciplines, and inhibits circumvention by ensuring
that governments cannot escape those disciplines by using enti-
ties under their control to accomplish tasks that would poten-
tially be subject to those disciplines if the governments them-
selves undertake them. In contrast, China’s restrictive interpre-
tation would render some subsidization unreachable, which
would be at odds with the object and purpose of the SCM
Agreement. China took issue with this reasoning and contended,
first, that the Panel wrongly believed that China’s definition of
“public body” was limited to formal arms or organs of govern-
ment and could not encompass government-owned or -con-
trolled entities. Second, even if a government-owned or -con-
trolled corporation was not regarded as a public body, its con-
duct could still be captured by the SCM Agreement under Arti-
cle 1.1 (a) (1) (iv) which includes the situations that “a gov-
ernment makes payments to a funding mechanism, or entrusts
or directs a private body to carry out one or more of the type of
functions illustrated in (i) to (iii)” (SCM Agreement, 1994:
art.1.1 (a) (1)).
The Appellate Body also commented on the object and pur-
pose of the SCM Agreement in many other cases, namely
USSoftwood Lumber IV and USCountervailing Duty In-
vestigation on DRAMS. It assumed that the consideration of the
object and purpose are of limited use in delimiting the scope of
the term “public body” in Article 1.1 (a) (1), mainly because
the question of whether an entity constitutes a public body is
not tantamount to the question of whether measures taken by
that entity fall within the ambit of the SCM Agreement.
The Appellate Body then found that the Panel’s object and
purpose analysis did not take full account of the SCM Agree-
ment’s disciplines. While the Panel was concerned with what it
saw as the implications of too narrow an interpretation, too
broad an interpretation of the term “public body” could equally
risk upsetting the delicate balance embodied in the SCM
Agreement because it could serve as a license for investigating
authorities to dispense with an analysis of entrustment and di-
rection and instead find entities with any connection to a gov-
ernment to be public bodies. For that reason, the Appellate
Body concludes that consideration of the object and purpose of
the SCM Agreement does not favour either a broad or a narrow
interpretation of the term “public body”.
The International Law Commission’s Article
China submitted that the rules of attribution included in the
International Law Commission’s Articles (“ILC Article”) on
Responsibility of States for Internationally Wrongful Acts, in
particular, Article 4, 5, and 8, reflect customary rules of inter-
national law or general principles of law(International Law
Commission, 2001, Responsibility of States for Internationally
Wrongful Acts, arts.4, 5 & 8). They are “rules of international
law applicable in the relations between the parties” in the sense
of Article 31 (3) (c) of the Vienna Convention and relevant to
the interpretation of Article 1.1 (a) (1) of the SCM Agreement.
However, both the United States and the Panel took the view
that the ILC Article need not be taken into account because,
inter alia, they are not “relevant” to the interpretation of Article
1.1 of the SCM Agreement (China’s appellant’s submission,
para.147). The Appellate Body believed that the Panel miscon-
strued the role of the ILC Articles when it set out to analyze
whether [the ILC Articles] would override [the Panels] analy-
sis and conclusion based on the text of the SCM Agreement
itself” (Panel Report, 2011, US—Anti-Dumping and Counter-
vailing Duties, para.8.84). If, as the Panel stated, certain ILC
Articles have been “cited as containing similar provisions to
those in certain areas of the WTO Agreement” or “cited by way
of contrast with the provisions of the WTO Agreement”, this
could suggest that these ILC Articles have been “taken into
account” in the sense of Article 31 (3) (c) by panels and the
Appellate Body in these cases.
The theory of the law of state responsibility was not well de-
veloped until recently. The position has now changed with the
adoption of the International Law Commission’s Draft Articles
on Responsibility of States for Internationally Wrongful Acts
(“Draft Articles”) by the ILC in August 2001 (International
Law Commission, 2001, Draft on the Responsibility of States
for Internationally Wrongful Acts, p.43). The Draft Articles
have already been cited by the International Court of Justice
and have generally been well received. However, they do not
necessarily apply in all cases. Particular treaty regimes, such as
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the GATT and the European Convention on Human Rights,
have established their own special rules of responsibility. The
Articles have remained as a draft rather than a universally ac-
cepted treaty which is more influential and has general applica-
tion. Therefore, the impact of the Articles may not illustrate the
definition of “public bodies” in the context of Article 1.1 of the
SCM Agreement.
The GATS Financial Services Annex
The General Agreement on Trade in Services (“GATS”) was
also referred by China to support its argument. Paragraph 5 (c)
(i) of the Annex on Financial Services to the GATS (“GATS
Financial Services Annex”) defines the term “public entity” as
an “entity owned or controlled by a Member, that is principally
engaged in carrying out governmental functions or activities for
government purpose […]”. China argued that this definition
reflects a similar view of the functional equivalence between
“government” and “public body”. The United States challenged
this point of view by merely arguing that the GATS is a differ-
ent agreement with an entirely different field of application, and
that the term “public entity” used in it is different from the term
“public body” without providing evidence to further its reason-
ing.
According to what have been discussed above, the object and
purpose of the SCM Agreement could be summarized as: “1) to
impose multilateral disciplines on subsidies that distort interna-
tional trade; 2) to strengthen and improve GATT disciplines
relating to the use of both subsidies and countervailing meas-
ures, while, recognizing at the same time, the right of Members
to impose such measures under certain conditions”. In contrast,
the GATS seeks to create a more liberal, transparent, and pre-
dictable policy environment for one of the most dynamic areas
of international trade (Mattoo & Carzaniga, 2003). The essence
of the GATS lies in the liberalization of international trade in
services by imposing certain restrictions and rules on the ser-
vice regulation measures taken by governments, while the SCM
Agreement tries to regulate the use of subsidies and counter-
vailing measures under certain conditions, which is different
from breaking down service trade barriers addressed by the
GATS. In terms of their differences, it is not appropriate to
apply the definition of “public entities” in the GATS to “public
bodies” in the SCM Agreement.
Reference to Municipal Laws
China argued that the Panel erred, first, in relying on mu-
nicipal law usages to interpret the SCM Agreement, and, second,
in concluding that these usages supported its finding that gov-
ernment control, without more, is the single criterion that de-
fines a “public body”, “organismo público”, or “organisme
public” (Panel Report, 2011, US—Anti-Dumping and Coun-
tervailing Duties, para.8.87). The Appellate Body had some
reservations relating to the way in which the Panel had recourse
to usages of the term “public body” or similar terms in the mu-
nicipal law of a number of jurisdictions in this dispute, and did
not address this argument further. Yet, the Appellate Body
raised several questions. First, the Panel did not clearly explain
why it considered that an examination of the understanding of
the concept of a public body in municipal law would assist in
answering the particular interpretative question with which it
was confronted. Second, while the Panel referred to the defini-
tion of “public bodies” or similar terms in four different juris-
dictions, it is not clear whether the Panel assessed the usage of
the relevant terms only in these four jurisdictions or whether the
Panel surveyed other jurisdictions as well.
US—Countervailing Duty Investigation on DRAMs
China recalled that in USCountervailing Duty Investiga-
tion on DRAMS the Appellate Body referred to the Draft Arti-
cles in the section of its report, in particular the Commentary to
Article 8 of the Draft. Accordingly, this passage of the Com-
mentary makes clear that state ownership is not sufficient to
attribute the conduct of a state-owned corporate entity to a state,
and by extension to a Member for the purpose of Article 1.1 of
the SCM Agreement, and that instead it supported China’s view
of the term “public body”.
In contrast, the United States argued that the question in US
Countervailing Duty Investigation on DRAMS, of whether
certain private bodies were entrusted or directed by the gov-
ernment within the meaning of Article 1.1 (a) (1) (iv) of the
SCM Agreement, such that their provision of loans and equity
was attributable to the government, was different from that in
the present dispute, i.e., whether certain entities constitute
“public bodies” within the meaning of Article 1.1 (a) (1) of the
SCM Agreement, a question which the Appellate Body did not
address in USCountervailing Duty Investigation on DRAMS
(United States first written submission, para.118, second writ-
ten submission, para.41). Furthermore, the United States dis-
agreed that the Appellate Body found the Draft Articles to be
relevant rules of international law, and China read provisions of
the Draft Articles into the SCM Agreement as integral parts of
the text, although they are not relevant to interpreting the term
“public body” (United States first written submission, para.
119).
Korea—Commercial Vessels
The Panel in KoreaCommercial Vessels can be read as
endorsing the position that the question of whether an entity is a
public body can be answered by solely referring to government
ownership or control. China argued that its reasoning was not
persuasive and should not be followed.
However, the United States agreed with the conclusion of the
Panel in KoreaCommercial Vessels that “an entity will con-
stitute apublic bodyif it is controlled by the government (or
other public bodies)” (Panel Report, Korea—Commercial Ves-
sels, 2005: p. 2749). The United States stated that majority
government ownership can demonstrate control, in that gov-
ernment ownership gives the government the ability to appoint
managers and directors to overseas operations.
China’s argument was that only if, in a particular case, a
government-owned or -controlled firm were actually exercising
governmental authority to carry out governmental functions
would such an entity, in that particular instance, be a “public
body”. The Panel considered that such an approach would suf-
fer from the same flaw of mixing considerations of benefit (be-
havior in a particular instance) with determining the nature of
the entity (without regard for its behavior in a particular in-
stance). Contrary to China’s argument, under the SCM Agree-
ment, the question of the nature of the entity (i.e., whether it is
“a government or any public body”) is entirely separate from
the behavior of that entity in a given instance (i.e., whether
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204
there is a financial contribution, whether a benefit is thereby
conferred, and whether there is specificity).
Analysis of SOCBs in China
A thorough discussion of whether SOCBs constitute “public
bodies” requires not only an examination of how to properly
define “public bodies” but also an analysis of SOCBs in China.
A detailed study on the nature of China’s SOCBs involves both
policy and legal approaches.
Policy Approach
China is the world’s largest nation and its economy has been
growing at a rate of about 9% per year over the last three dec-
ades (Outlaw, 2012, “Globalization in China”). Two economies
exist in China. One is dominated by foreign-owned and family-
run private companies that have produced striking growth
mainly in Guangdong and the Yangtze River Delta. The two
areas, which operate a free market form of capitalism, attract
70% of China’s foreign investment and contribute more than 70
% of exports (Plender, 2011, “The Weakness beneath China’s
Rise”). Then the other economy is the slower-growth economy
dominated by state-owned enterprises, which still provide some
social security for its workers. This is indeed a bank-based
mode (Plender, 2011, “The Weakness beneath China’s Rise”).
The rapid growth of China’s economy may be linked to the
globalization of trade, but it has yet to “globalize” its banking
sector (Berger, Hasan, & Zhou, 2008: p. 114). China’s banking
system has thousands of entities, including the 12 second-tier
banks, the urban and rural banks, Postal Savings Bank, and
credit cooperatives (Walter & Fraser, 2010: p. 29). The banking
industry is dominated by four very large state-owned commer-
cial banks, Industrial and Commercial Bank of China (“ICBC”),
Agricultural Bank of China (“ABC”), Bank of China
(“BOC”), and Construction Bank of China (“CBC”)— the
“Big Four”—with about half of the total industry assets (See
Table 1). In 2009, state-controlled commercial banks held over
US $ 11 trillion in financial assets, of which the Big Four also
accounted for over 70% (Walter & Fraser, 2010: p. 30). Such a
concentration of financial assets in the banking system is very
common in lower-income economies. However, as Fraser
Howie and Carl Walter address in the book Red Capitalism,
what differs in Ch i na s case is that the central government has
unshakable control of the sector”, and “foreign banks hold, at
best, little more than 2% of total financial assets (and only
1.7% after the lending binge of 2009), as compared to nearly
37% in the international lower-income group” (Walter & Fra-
ser, 2010: p. 30). Yan Li and Yuming Zhuang, in a workshop
on Reform and Development of Banking System in China,
stated that “financial institutions in China are dominated by
banks, and banks are dominated by SOCBs; therefore, financial
reform could be labeled as “reform of SOCBs” (Li & Zhuang,
2005, “The Reform of State-Owned Commercial Banks in
China”) (See Table 1).
Reform of China’s SOCBs
Financial reform in China is actually composed of three ma-
jor phases: 1) the evolution of the framework of the modern
banking system from 1979 to 1993; 2) transition from special-
ized banks to commercial banks from 1994 to 1999; 3) com-
prehensive reform of SOCBs since 2000.
Today’s banking system is the child of the financial crises
that began China’s 30 years of reform and ended each of its
next two decades (Walter & Howie, 2010: p. 31). The Cultural
Revolution in 1976 destroyed the banking system of China,
leaving no banks or any other financial institutions functioning.
To fix this situation, banking reform was put on the agenda in
1978. The objective of bank reform was to strengthen banks
financially as well as institutionally so that Chinese bankers
Table 1.
The Assets, Deposits and Loans of Financial Institutions RMB 100 Million yuan, %.
Assets Deposits Loans
Balance shares Balance shares Balance shares
Total 316006.68 1 248988.62 1 189298.46 1
Policy Banks 24122.48 7.63% 1274.87 0.51% 22228.24 11.74%
SOCBs 169320.5 53.58% 144417.48 58.00% 101182.24 53.45%
Joint-stock Commercial Banks 46972.2 14.86% 40598.84 16.31% 28859.41 15.25%
City Commercial Banks 17056.3 5.40% 14145.58 5.68% 9030.97 4.77%
Rural Commercial Banks 565.36 2.34% 500.8 309.7
Urban Credit Cooperatives 1786.76 0.57% 1588.76 0.64% 1014.54 0.54%
Rural Credit Cooperatives 30767.02 9.74% 27340.16 10.98% 19241.56 10.16%
Trust Corporations 2674.09 0.85% 1750.11 0.70% 1331.85 0.70%
Finance Companies 5854.1 1.85% 4954.1 1.99% 3097.8 1.64
Leasing Companies 215.37 0.07% 69.32 0.03% 157.2 0.08%
Postal Savings Institution 10849.6 3.34% 10849.6 4.36% 0 0.00%
Foreign Banks 5822.9 1.84% 1499 0.60% 2844.2 1.50%
Source: the People’s Bank of China database, 2004.
Y. LIAO
could offer sound judgment and advice. This resulted in the
“Big Four”, which served mainly as policy-lending “conduits”
for the government (Walter & Howie, 2010: p. 22). The reform
was continued with the separation of commercial banks from
policy banks in 1994. Since then, three specialized “policy”
banks—Agriculture Development Bank of China (“ADBC”),
China Development Bank (“CDB”), and Export-Import Bank of
China (“the Chexim”)—have undertaken the policy-related
business of the “Big Four”; this divorced the “Big Four” from
“policy loans” dictated by government. In 1995, the Law of the
People’s Republic of China on Commercial Banks (“the Law of
Commercial Banks”) was passed, enabling the “Big Four” to
become genuine commercial banks and segregating business
operations of banks, securities firms and insurance companies.
The reforms then entered a new phase after the Asian financial
crisis of 1997-98. According to Howie and Walter, in an unset-
tling portrait of a fragile economic behemoth, the Communist
Party “treats its banks as basic utilities that provide unlimited
capital to the cherished state-owned enterprises” (Berger, Ha-
san & Zhou, 2008: p. 22). The result is a banking system that is
allowed to carry huge amounts of nonperforming loans and to
delay the day of reckoning (Chanceller, 2011, “China’s Fiscal
Legerdemain”). At that time, China’s big four commercial
banks had nonperforming loan (“NPL”) ratios of 30% - 50%,
and they were believed to be insolvent (Huang, 2009: p. 1).
Thus, the Chinese authorities became serious about disposing
of the NPLs of the “Big Four”.
Various forms of assistance were provided by the govern-
ment with limited impact, given the seriousness of the problems
challenging the “Big Four”. For that reason, in 1999 the gov-
ernment established four asset management companies wholly
owned by the Ministry of Finance: Xinda, Orient, Great Wall,
and Huarong (Huang, 2009: p. 2). By July 2000, these asset
management companies had largely completed purchasing from
the “Big Four” NPLs with a total book value of RMB 1.4 tril-
lion, but the four SOBCs still had NPLs totaling RMB 1.8 tril-
lion. Based on this situation, some commentators claimed that
China’s banks have so far escaped the consequence of their
reckless lending at no apparent cost to society (Chanceller,
2011, “China’s Fiscal Legerdemain”). Since the Chinese gov-
ernment fixed a wide spread between their borrowing costs and
what they charge for lending, the banks even appear highly
profitable. Yet the true cost has been borne by the Chinese peo-
ple, who received artificially low rates on their deposits. This is
named technically “financial repression”, which in China is
estimated at around 4% of gross domestic product (Chanceller,
2011, “China’s Fiscal Legerdemain”).
In December 2001, China joined the WTO, and promised to
completely open its market to foreign banks within five years.
The “Big Four” were uncompetitive with foreign banks on
nearly every measure, exemplified by their high nonperforming
loan ratio, low profitability, profit per employee, capital ade-
quacy and so on (See Tables 2-5).
To deal with this situation, the “Decision on Improvement of
the Socialist Market Economic System”, issued by the Third
Plenary Session of the 16th Central Committee of the Commu-
nist Party of China on 14 October 2003, included proposals to
choose state-owned banks that meet certain conditions to reor-
ganize as joint stock companies, accelerate their disposal of
NPLs, increase their capital, and meet the conditions required
for listing their shares (Li & Zhuang, 2005, “The Reform of
Table 2.
Nonperforming Loan Ratio.
2001 2003
SOCBS 25.40% 20.36%
Japanese banks in average 4.50%
French banks in average 4.20%
British banks in average 2.4%
American banks in average 1.80%
Source: Source: database from People’s Bank of China—A fragile banking sys-
tem.
Table 3.
Profit on Asset (%).
1999 2000 2001 2002
SOCBs 0.11% 0.13% 0.12% 0.24%
ICBC 0.14% 0.13%
ABC 0.24% 0.03%
BOC 0.35% 0.45%
CBC 0.21% 0.50%
Joint-stock banks 0.36% 0.39% 0.30% —
Foreign banks in China2.67% 1.92% 2.26% —
Source: China Financial Yearbook, 1999-2003.
Table 4.
Profit per Employee (thousand dollars).
2003
SOCBs (excludes ABC) 2.5
Top 10 banks in the world 152
Source: Yan Li and Yumin Zhuang, ASEAN + 3 Workshop on Reform and
Development of Banking System in China, May 24-26, 2005, Shanghai, China.
Table 5.
The Capital Adequacy Ratio of SOCBs.
1997 1999 2002
ICBC 2.55% 5.70% 5.54%
ABC 2.14% 5.10% 1.44%
BOC 4.70% 3.00% 8.15%
CBC 2.73% 2.50% 6.91%
Source: Annual Reports of the Big Four (1997, 1999, 2002). Capital adequacy
ratio had been reached 8% after the Ministry of Finance injected $33 billion in
SOCBs in 1998. But the ratio kept declining after that.
State-Owned Commercial Banks in China”) (See Table 6).
On 31 December 2003, the State Council invested a total of
$45 billion of foreign currency reserves equally in BOC and
CBC. The two banks were chosen first because BOC had the
highest capital ratio of the “Big Four”, and CBC had the lowest
NPL ratio. The entities that exercised their rights as major
shareholders in BOC and CBC and received profits and divi-
dends from their investment were the Ministry of Finance and
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Table 6.
Substantial Improvement in the Financial Indicators of State-Owned Banks that Reorganized as Joint-Stock Companies (% and RMB billions).
2005 2006 2007 2008
Capital ratio 9.89 14.05 13.09 13.06
NPL ratio 4.69 3.79 2.74 2.29
Industrial & Commercial Bank of China
Retax profits 59.35 71.52 115.11 145.30
Capital ratio 10.42 13.59 13.34 13.43
NPL ratio 5.41 4.04 3.12 2.65 Bank of China
Retax profits 55.14 67.63 89.96 86.25
Capital ratio 13.57 12.11 12.58 12.16
NPL ratio 3.84 3.29 2.60 2.21 China Construction Bank
Retax profits 55.36 65.72 100.82 119.74
Capital ratio 11.20 10.83 14.44 13.47
NPL ratio 2.37 2.01 2.05 1.92 Bank of Communication
Retax profits 12.84 17.41 31.04 35.82
Source: People’s Bank of China, (China Financial Stability Report), 2009 (in Chinese).
Central Huijin Investment Company Ltd. (“Central Huijin”),
which were jointly capitalized by the PBOC and the State Ad-
ministration of Foreign Exchange (“SAFE”). Central Huijin
used foreign exchange reserves to invest $15 billion in ICBC in
April 2005, $20 billion in the China Development Bank to
convert it from a policy bank to a commercial bank in Decem-
ber 2007, and $19 billion in the ABC in November 2008.
With the goal of NPL dispositions having been met, the “Big
Four” had gradually achieved the conversion of state-owned
banks to joint stock companies, with the Ministry of Finance
and Central Huijin as major shareholders. Before 2006, China
had only four SOCBs. The Bank of Communications (“Bo-
Comm”) as the fifth largest state-controlled joint-stock com-
mercial bank then joined the “SOCBs” group in 2006, and
China now has five SOCBs (Wen, 2010, “Ownership Structure
and Bank Performance in China”). Meanwhile, the China Bohai
Bank was added to the joint-stock commercial banks (“JSCBs”)
group in the same year. The current relation between SOCBs
and JSCBs can be demonstrated by Figure 1 (Wen, 2010,
“Ownership Structure and Bank Performance in China”). After
this period, the focus of reforms aimed at the public listing of
SOCBs has shifted to attracting strategic investors from over-
seas, because it could not only enhance capital but also improve
both managerial and governance capabilities. For those foreign
financial institutions, investment in one of the “Big Four” was a
way to enter the Chinese market.
In August 2004, the Hong Kong and Shanghai Banking Corp.
(“HSBC”) became BOC’s first strategic investor from overseas.
By acquiring 19.9% of its shares, HSBC became the foreign
financial institution with the largest stake in China’s banking
sector. Then in 2005, the Bank of America acquired a 9.0%
stake, and Temasek a 5.1% stake, in CBC, and Royal Bank of
Scotland, UBS, Asian Development Bank, and Temasek took a
combined 16.19% stake in BOC (Li & Zhuang, 2005, “The
Reform of State-Owned Commercial Banks in China”, p. 4). In
2006, Goldman Sachs, Allianz, and American Express together
invested $3.8 billion to purchase an 8.4% stake in ICBC.
Despite bold reforms taking place in the late 1990s and early
2000s, the financial reform process, from about 2005, slowed
and then came to a halt. According to Walter, the author of Red
Capitalism, this is due to the fact that the main political figures
supporting reform, Prime Minister Zhu Rongji and President
Jiang Zhemin, had been replaced, and the key vice premier in
charge of finance came down with cancer in 2005. This seri-
ously weakened those implementing the financial reform meas-
ures that had begun in earnest in 1997 (Barboza, 2013, “A
Conversation with Carl Walter”). At the same time, three of the
“Big Four” had completed unexpectedly successful IPOs by
2006, so it may have seemed to the new government that the
principal reform objectives had been achieved (Barboza, 2013,
“A Conversation with Carl Walter”). Walter and Howie have
established through their analysis that China is unlikely now to
construct an economy or state which mirrors the “classical” or
“normal” style of capitalism in the West (Taaffe, 2011, “Book
Review: Halfway House—‘Red Capitalism’”). Although the
state-owned system has many forms of western financial modes
such as stock exchanges, bond markets, interbank markets and
so forth, they regard this as “camouflage” (Plender, 2011, “The
Weakness beneath China’s Rise”). On the exchanges, initial
public offerings merely redistribute capital among state entities
with occasional leakage to retail investors (Plender, 2011, “The
Weakness beneath China’s Rise”). The government bond mar-
ket mainly shuffles paper between different arms of state enter-
prise at officially administered interest rates no different from
those charged by banks (Plender, 2011, “The Weakness beneath
China’s Rise”). In this regard, Walter and Howie believe that
capital allocation is controlled by the Communist party. As they
state in the preface of their book: “It is a simple fact that Chi-
nas financial system and its stock, bond and loan markets ca-
ter only to the state sector, of which the National Champions
represent the reddest of the Red. These corporations, the heart
of Chinas state-owned economy, are inside the system’. The
private economy, no matter how vibrant, isoutside the system
and, in fact, serves the will of the system” (Taaffe, 2011, “Book
Review: Halfway House—‘Red Capitalism’”). It has been con-
tentious that China has not and may not complete a full transi-
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12 JSCBs
BOCOM Other 11 JSCBs
4SOCBs Bohai
Bank
5 “SOCBs” (2006)12 “JSCBs” (2006)
Figure 1.
The Current Relation between SOCBs and
JSCBs.
tion to capitalism as we know it in other areas of the world
(Taaffe, 2011, “Book Review: Halfway House—‘Red Capital-
ism’”).
The Entry of Strategic Investors
In the process of reforming the “Big Four”, the Chinese gov-
ernment and foreign investors seemed to agree that engaging
the expertise of international strategic partners has the potential
to improve virtually every dimension of Chinese banks’ per-
formance—overall governance; control and management of
operations; introduction and marketing of new products; en-
hancement of asset quality; comprehensive, timely and accurate
compilation of management information; better management of
risk; stronger capital positions and better returns on equity; and
rehabilitation of the banks’ reputations (Hope & Hu, 2006: p.
35). In addition, international strategic investors’ investment
could confirm to the international investor community that the
banks had been successfully restructured and now represented
an attractive investment opportunity (Walter & Howie, 2010: p.
22). In short, the introduction of foreign strategic investment
holds tremendous promise for the reform of the Chinese bank-
ing system, and both international investors and Chinese banks
can potentially forge a mutually beneficial partnership.
However, problems still exist in the partnership, exemplified
by foreign investors’ inability to gain meaningful control and
influence over the Chinese banks. This fact was used by the
United States in the present dispute to support the claim that the
Chinese government virtually has the effective and absolute
control of the “Big Four”. This may be the major reason that
the Panel believed that China’s SOCBs constitute “public bod-
ies” within the meaning of Article 1.1 (a) (1) the SCM Agree-
ment. Despite the entry of strategic investors, majority owner-
ship still lies in the hand of the Chinese government (See Table
7).
Although China’s socialist market economy includes many
private entities and a wide variety of economic sectors, it is
mainly based on public ownership by upholding and improving
various forms of public ownership entities. This mixed-own-
ership structure with public ownership as the mainstay, particu-
larly in the large and medium-sized key state-owned and state
holding enterprises, could exploit its advantages to the full by
guaranteeing the rational distribution and reservation of na-
tional resources as well as orderly market operation. China’s
SOCBs have served as the crucial pillar in the whole financial
system, and their development is closely related to the progress
of the national economy and society. Therefore, some Chinese
scholars argue that domestic majority ownership of the “Big
Four” is necessary in the process of joint-stock transformation
(Song & Liang, 2006: pp. 43-46). Although the reform has rea-
lized the diversity of the ownership, the majority shareholders
of SOCBs still represent the Chinese government. Others add
Table 7.
Banks’ Shareholder Composition after the Entrance of Strategic Inves-
tors.
Commercial Banks Strategic Investors Equity Stake
Ministry of Finance 25.53
HSBC (UK) 19.90
National Council for Social
Security Fund 14.22
Central Huijin Investment 7.68
Bank of
Communications
Others 32.67
Central Huijin Investment 71.13
China Construction Bank 10.65
Bank of America (US) 9.00
Temasek (Singapore) 5.10
Shanghai Baosteel 1.55
State Grid Corp. of China 1.55
China Construction
Bank
China Yangtze Power 1.03
Central Huijin Ivestment 79.90
RBS (UK) 9.61
Temasek (Singapore) 4.80
National Council for Social
Security Fund 3.91
USB (Switzerland) 1.55
Bank of China
Asian Development Bank 0.23
Ministry of Finance 43.28
Central Huijin Investment 43.28
Goldman Sache (US) 5.75
National Council for Social
Security Fund 5.00
Alianz (Germany) 2.25
Industrial &
Commercial Bank of
China
American Express (US) 0.45
Source: Nomura Institute of Capital Markets Research, based on each bank’s
annual report and prospectus.
that the control of the “Big Four” by the government is inevita-
ble, but this control should be properly restricted; the key strat-
egy is to introduce foreign strategic investors to effectively and
reasonably limit the state majority shareholders (Song & Liang,
2006: pp. 43-46). With the entry of those strategic investors, the
ownership and control of SOCBs by the government have been
moderated, which could help prevent inappropriate govern-
mental intervention (Duan, 2003: pp. 59-66). The entry of strate-
gic investors into China’s banking sector, in particular the “Big
Four”, has been slow but steady during the past decade. Less
state ownership and control could not be realized overnight.
The Function of China’s SOCBs
In China’s banking system (See Figure 2), different banks
perform different functions. The PBOC is China’s central bank,
which formulates and implements monetary policy; it also
maintains the banking sector’s payment, clearing and settlement
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208
Figure 2.
The Financial Banking System in China.
systems, and manages official foreign exchange and gold reserves.
The three policy banks in China, ADBC, CDB, and the
Chexim, were established in 1994 to take over the government-
directed spending functions of the four state-owned commercial
banks (Usa, 2008: p. 229). These banks are responsible for
financing economic and trade development and state-invested
projects as well as promoting mechanical and electrical prod-
ucts. ADBC provides funds for agricultural development projects
in rural areas; CDB specializes in infrastructure financing, and
the Chexim specializes in trade financing (Usa, 2009: p. 179).
The establishment and development of policy banks are the
outcomes of state intervention and economic regulation. In the
process of China’s economic growth, some fields have failed to
attract investment from profit-oriented commercial banks; those
fields share the commonalities of being long-term, least-prof-
itable, capital-demanding, and large-scale, with the develop-
ment of the national economy as a top priority. To support these
projects, the governments of different countries have under-
taken a variety of measures, in particular the establishment of
policy banks with the main purpose of financing those projects.
For example, the mission of CDB is to “provide medium-to
long-term financing facilities that assist in the development of a
robust economy and a healthy, prosperous community” (China
Development Bank, “Mission Statement”, n.d.). It aligns its
business focus with national economic strategy and allocates
resources to break down bottlenecks in China’s economic and
social development.
Compared to the three policy banks whose capital is mainly
appropriated from governmental finance, the four SOCBs have
some unique features. They are in fact not organs of the gov-
ernment or charitable institutions but “enterprises with the main
purpose of profit-making (‘To Strength the Public-Service
Functions of SOCBs,’ n.d.)”, while policy banks aim to obtain
social and economic benefits on behalf of the state and people.
For instance, according to the official websites, the businesses
of ICBC include various aspects (See Figure 3), whereas the
homepage of CDB includes several categories: business over-
view, investor service, special loan, and social responsibility.
This makes clear that policy banks are policy-oriented, whereas
SOCBs are profit-motivated. Furthermore, in contrast to state-
oriented policy banks, the four SOCBs are customer-oriented.
For example, ICBC undertakes business re-orientation by better
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Business Review
Corporate Banking
Corporate Deposits and Loans, SME
Banking, International
Banking, Settlement and Cash
Management, International Settlement
and Trade Finance, Investment
Banking, Asset Management
Personal Banking
Saving Deposit, Personal Loan, Personal
Wealth Management, Private
Banking, Bank Card Business
Treasury Business
Money Market Transaction, Bond
Trading, Bond Investment, Brokerage
Services
Distribution Channel
Domestic Branch Network
Electronic Banking
Year of Process Restructuring, Service Improvement
Globalization, Integrated Operation
Implementation of Globalization and Overseas
BranchesIntegratedOperation
Strategy, Global Presence, Risk
Management, Information
Technology, Human Resources
IT and Product Innovation
Systems and Applications
Continuous Innovation on Products and
Services
ContinuousImprovement in IT Management
and Innovation Management
Human Resource Management
Social Responsibility
Figure 3.
The Businesses of ICBC.
aligning itself with the diversified needs of financial services by
its customers (“ICBC Business Review”, n.d.).
Some scholars argue that, in the case of the four SOCBs, be-
ing “profit-oriented” does not conflict with “perform govern-
mental functions”. However, banks or financial institutions in
different countries have to adhere to state financial policies and
cooperate in meeting the macro-economic goals of their coun-
tries; the only difference lies in the form. This suggests that
commercial banks perform some governmental functions in
their countries. In the case of the “Big Four”, they inevitably
perform some governmental functions in accordance with state
policy and purpose, but their policy nature has been largely
marginalized since the establishment of policy banks. Cur-
rently, the governmental function of the “Big Four” is subsidi-
ary and short-term.
Sub-Conclusion
As discussed in the policy approach, the majority ownership
of SOCBs has remained in the hands of the Chinese govern-
ment, although they have gone through several stages of re-
forms and have been joined by various foreign strategic inves-
tors. However, the policy-oriented nature of SOCBs has been
largely marginalized since the establishment of policy banks.
Therefore, the “Big Four”, like commercial banks in other
countries, only perform their subsidiary governmental functions
in line with state policy and macro-economic goals. In essence,
they are currently profit-motivated enterprises.
Legal Approach
As mentioned in the third section of this paper, the USDOC
determined that SOCBs in the investigation constituted “public
bodies” based on several reasons: 1) “near complete state-
ownership of the banking sector in China”; 2) Article 34 of the
Commercial Banking Law, which states that banks are required
to “carry out their loan business upon the needs of [the] na-
tional economy and the social development and under the
guidance of State industrial policies”; 3) record evidence indi-
cating that SOCBs still lack adequate risk management and
analytical skills; and 4) the fact that “during [that] investigation
the [USDOC] did not receive the evidence necessary to docu-
ment in a comprehensive manner the process by which loans
were requested, granted and evaluated to the paper industry
(Panel Exhibit CHI-93, pp. 58-60).
Majority Ownership
In the present dispute, the United States, relying on a per se
rule of majority government ownership, argued that “entities
controlled by a government” constitute “public bodies”. The
USDOC’s determination that SOCBs in the investigation con-
stituted pubic bodies relies on “near complete state-ownership
of the banking sector in China”. Based on the reasoning of the
United States, several questions are raised: 1) what is the proper
definition of “control”; 2) does “majority ownership” coincide
with “state control”; 3) is it appropriate to use “near complete
state-ownership” in the case of China’s SOCBs?
The Panel agreed with the United States’ argument that a
public body is any entity that is under state control, and that
ownership is highly relevant to the question of control. How-
ever, neither gave a specific definition of the term “control” or
any indicia other than state ownership. Does the state or gov-
ernment decide all the aspects of SOCBs, including governance
structure, daily business and management, and shareholder
structure?
In addition to the term “control”, the extent of state owner-
ship is emerging as an important area to define. As V.V. Ra-
manadham states in the book Privatization: A Global Perspec-
tive, majority ownership may not exactly coincide with “pub-
licness” or state control (Ramanadham, 1993: p. 23). He ex-
plains that some minority ownerships may permit tight gov-
ernment control; or even enterprises without state ownership
but with intense dependence on the state for resources—for
example, funds, market rights, sales to the public sector and
other forms of dependence—may be subject to tighter controls
than enterprises with state ownership (Ramanadham, 1993: p.
23). Also, “publicness”, according to Ramanadham, defined as
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state control is a continuum on which most or all of enterprises
of the economy can be placed (Ramanadham, 1993: p. 23).
Most governments used to exercise control through their own-
ership of shares: they have become the most powerful share-
holders across much of the developing world. But increasingly
they prefer to dilute their shareholdings. Some governments
have mastered “the art of controlling companies through minori-
ty stakes”: in Russia, for example, the state has retained golden
shares in 181 firms (“New Masters of the Universe”, 2012: p. 6).
Third, in the report, the USDOC used “near complete state-
ownership of the banking sector in China” to support the posi-
tion that SOCBs are “public bodies”. However, the phrase
“near complete” is ambiguous. The 2012 Annual Report of
ICBC shows that state-owned shareholders, Central Huijin and
Ministry of Finance, together account for 70.8% of the total
shareholding (“2012 Annual Report of Industrial & Commer-
cial Bank of China”, p. 96). This percentage is far from being
“near complete”.
Law of the People’s Republic of China on Commercial Banks
In 1995, the Law of Commercial Banks was promulgated,
legally establishing the status of the “Big Four” as SOCBs,
which indicated that the “Big Four” began to change to com-
mercial banks.
The USDOC argued in the dispute that SOCBs constitute
“public bodies” by referring to Article 34 of the Law of Com-
mercial Banks which states that “commercial banks shall carry
out their loan business upon the needs of national economy and
the social development and under the guidance of the state
industrial policies” (the Law of Commercial Banks, art.34).
The USDOC’s determination depended on a single article,
which may not be adequate and persuasive; indeed, there are
some other prominent articles in the Law of Commercial Banks
which may lead to the opposite conclusion.
Article 2 of the Law refers “commercial banks” to be “those
enterprises legal persons which are established to absorb pub-
lic deposits, make loans, arrange settlement of accounts and
engage in other businesses in accordance with this law and the
Company Law of the People’s Republic of China (‘the Com-
pany Law’)” (the Law of Commercial Banks, art.2). There are
two aspects of this article that should be emphasized: 1) the
term “enterprises legal persons”; 2) commercial banks are re-
gulated under the Law of Commercial Banks along with the
Company Law. Both facts suggest that commercial banks are in
essence independent enterprises or companies rather than “pub-
lic bodies”.
Article 4 provides that “commercial banks shall work under
the principle of safety, fluidity and efficiency, with full auton-
omy and assume sole responsibility for their own risks, profits
and losses, and with self-restraint” (the Law of Commercial
Banks, art.4). This is one of the core articles of the Law of
Commercial Banks, since it sets out the key principles for
SOCBs to follow. Safety, fluidity, and efficiency suggest that
SOCBs are enterprises which prioritize their economic benefits
and efficiency ahead of state policies. Also, the phrase “under
the guidance of” implies that the “state industrial policies” only
play a guiding role rather than have a decisive effect on com-
mercial banks’ loan business. The meaning of Article 34 should
be properly interpreted in the context. Although “commercial
banks shall carry out their loan business… under the guidance
of the state industrial policies”, they shall “still strictly check
the use of loan by the borrower, the repayment ability of the
borrower, and modes of repayment” (the Law of Commercial
Banks, art.35). Furthermore, when granting loans, a commercial
bank shall “separate the checking process with the actual lend-
ing, and make examination and approval level-by-level” (the
Law of Commercial Banks, art.35). In order to be granted loans,
the borrower is required to provide a guarantee; a commercial
bank shall closely check the ability of the guarantor, the own-
ership and value of the guaranty, pledge, and the feasibility for
realizing the right to mortgage or pledge (the Law of Commer-
cial Banks, art.36). SOCBs’ loan business is not policy-oriented;
rather, they take the ability of borrowers and guarantees into
serious consideration before they decide to lend loans. They
have their own evaluation system and criteria, “provisions on
the management of the asset-liability ratio (the Law of Com-
mercial Banks, art.38)”, instead of being bound by “state indus-
trial policies”.
Furthermore, the most persuasive evidence may be Article 41
which states that “no entity or individual may coerce a com-
mercial bank into granting loans or providing a guarantee. A
commercial bank shall have the right to refuse any entity or
individual to force it to do so” (the Law of Commercial Banks,
art.41). Although there is no further explanation of whether
“entity” includes the state or government, it should be inter-
preted to have this meaning included; “entity or individual”
should be an exhaustive classification. This suggests that com-
mercial banks’ loan decisions are actually independent of state
policies, even if they act in accordance with the state’s macro-
economic goals.
Corporate Governance
During 2004 and 2005, BOC, CBC, and ICBC were trans-
formed into shareholding limited liabilities companies. Modern
corporate governance practices were introduced (Tam,
“Emerging Best Governance Practices”). Corporate governance
is “not only a legal discipline which is situated at the heart of
company law but also a very important concept which is re-
lated to the economic life of banks and other financial institu-
tions” (“The Corporate Governance Reform of State-owned
Commercial Bank in China”, p. 34).
Although there is no generally accepted definition of corpo-
rate governance, Stijn Claessens suggests that definitions in this
regard can be divided into two categories. The first set of defi-
nitions concerns a set of behavioural patterns namely the actual
behaviour of corporations comprising performance, efficiency,
growth, financial structure, and treatment of shareholders and
other stakeholders (Claessens, 2002). The second set of defini-
tions focuses on the rule under which companies operate within
the legal system, the judicial system, financial markets and
labour markets (Claessens, 2002). This section will analyze the
corporate governance of SOCBs in terms of the first set of defi-
nitions. From a banking industry perspective, a corporate gov-
ernance system can be defined as “a set of mechanisms in set-
ting the incentives for a banking organization to act prudently
and for control of the risks that a bank takes” (Zhou & Li, 2002:
p. 215).
Indeed, corporate governance refers to the relationship that
exists between the different participants. The main actors in-
cluded in corporate governance are: 1) the CEO, i.e., the man-
agement; 2) the board of directors; 3) the shareholders (Prasad,
2006: p. 1). According to the Company Law, manager, direc-
tors, and shareholders assume different responsibilities and play
different roles in daily business (See Table 8).
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Table 8.
Functions and Powers of Shareholders, Directors, and Managers.
Shareholders Directors Managers
1. decide on the business policy and
investment plans
1. be responsible for convening shareholders’ meeting
and report its work to shareholders’ meeting
1. be in charge of the management of the
production and business operations of the company
and organize the implementation of the resolutions
of the board of directors
2. elect and replace any director or
supervisor
2. implement the resolutions of
the shareholders’ meeting
2. organize the implementation of the company’s
annual business plans and investment plans
3. consider and approve reports of the
board of directors 3.decide on the business plans and investment plans 3.draft the plan for establishment of the company’s
internal management organization
4. consider and approve reports of the
board of supervisors or the supervisors
4. formulate the proposed annual financial budgets
and final accounts 4. draft the company’s basic management system
5. consdier and approve the proposal
annual financial budgets and final account
5. formulate the profit distribution plans and plans for
making up losses
5. formulate the specific rules and regulations of
the company
6. consider and approve the profit
distribution plans and plans
for making up losses
6. formulate plans for the increase or reduction of the
registered capital and for issue of bonds
by the company
6. propose the appointment or dismissal of the
deputy manager (s) and chief financial
officer of the company
7. pass resolutions on the increase or
reduction of the registered capital
7. draft plans for the merger, split, restructuring or
dissolution of the company
7. decide on the appointment or dismissal of
management personnel other than those
appointed or dismissed by the board of directors
8. pass resolutions on the issue of bonds
by the company 8. other functions and powers as granted by the
board of directors
9. pass resolutions on matters such as the
merger, split, restructuring,
dissolution or liquidation
10. amend the articles of association
11. other functions and powers as provided
for in the article of association
of the company
Source: The Company Law of the People’s Republic of China (Article 38, 47, and 50).
Article 4 of the Company Law states that “shareholders of a
company shall enjoy rights and interest according to law, such
as gaining benefits from its assets, making major decisions and
selecting managerial personnel” (the Company Law, 2005,
art.4). This indicates that shareholders do not personally engage
in operating the daily business of SOCBs; rather, the manager
shall be “in charge of the management of the production and
business operations of the company and organize the imple-
mentation of the resolutions of the board of directors” (the
Company Law, 2005, art.50 (1)). Although a manager is ap-
pointed by and shall be accountable to the board of directors
(the Company Law, 2005, art.50) who shall be accountable to
the shareholders (the Company Law, 2005, art.47), the influ-
ence of a shareholder on daily business decisions or on opera-
tions may be indirect and weak. However, the fact is that cur-
rently the majority state shareholders are very influential, be-
cause the current system of appointing and dismissing directors
in SOCBs is not in line with the Company Law.
First, accordingly, directors shall be elected and replaced by
shareholders according to the Company Law (the Company
Law, 2005, arts.38 & 39), while Article 17 of the Supervision
and Administration of State-owned Assets of Enterprises Ten-
tative Regulations (“SASAETR”) (Supervision and Admini-
stration of State-owned Assets of Enterprises Tentative Regula-
tions, 2003, art.17) provides:
State-owned assets supervision and administration authori-
ties shall appoint and dismiss or propose the appointment and
dismissal of the responsible persons of enterprises in accor-
dance with relevant regulations: …
3. Nominate candidates for the positions of director and su-
pervisor of State-controlled companies, recommend candidates
for the positions of chairman of the board of directors, vice
chairman of the board of directors and chairman of the board
of supervisors of State-controlled companies, and propose can-
didates for the positions of general manager, deputy general
manager and chief accountant of such companies in accor-
dance with the articles of association of the companies; and
4. Nominate candidates for the positions of directors and
supervisors of companies in which the State has an equity par-
ticipation in accordance with the articles of association of the
companies
Accordingly to a survey, among all SOCBs, there were 42
directors, 3 appointed by the Ministry of Finance, 16 by Central
Huijin, 11 by big commercial banks, 10 independent directors,
1 from another (Li, 2009: p. 62). About 42.9% of directors were
designated by China’s administrative organs. Since the state
shareholders hold majority ownership of SOCBs, they have an
overwhelming advantage over other shareholders in selecting
specific directors. As a result, other shareholders’ rights to se-
lect directors are implicitly denied.
Second, the Company Law provides that directors are se-
lected by shareholders, and are motivated by various incentive
mechanisms; their personal benefits are closed associated with
the existence and progress of companies. Under the circum-
stance, directors often develop a sense of identity with their
companies. However, Article 22 of the SASAETR states:
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When the shareholdersmeetings or board meetings of State-
controlled companies and companies in which the State has an
equity participation decide on major matters such as division,
merger, bankruptcy, dissolution, increase or decrease in capi-
tal, issue of corporate bonds, appointment or dismissal of re-
sponsible persons of enterprises, etc., the shareholdersrepre-
sentative and director appointed by the State-owned assets
supervision and administration authority shall express opinions
and exercise his voting rights as directed by the State-owned
assets supervision and administration authority.
Furthermore, Article 18 and 19 of the SASAETR state (Su-
pervision and Administration of State-owned Assets of Enter-
prises Tentative Regulations, 2003, arts.18 & 19):
Article 18 State-owned assets supervision and administration
authorities shall establish systems for assessment of the man-
agement performance of responsible persons of enterprises,
sign a performance contract with the responsible persons of
enterprises that they appoint, and conduct annual and office
term assessment of the responsible persons in accordance with
the performance contract.
Article 19 State-owned assets supervision and administration
authorities shall, in accordance with relevant regulations, de-
termine the remuneration of the responsible persons of wholly
State-owned enterprises and companies among the Funded
Enterprises, and shall decide on the rewards and penalties for
the responsible persons that they appointed to the Funded En-
terprises based on the results of the assessments.
Faced with the different requirements of the SASAETR and
Company Law, on one hand, directors have to consider the
benefits of all the shareholders and SOCBs, and on the other
hand, they should assume the “administrative responsibility” of
following the “order” of the majority state shareholders in order
to ensure the appreciation of state-owned assets. Yet, in compe-
tition in the banking sector, the two aspects usually have dif-
ferent orientations and pose a dilemma with which directors
must make an either-or decision.
Sub-Conclusion
Although the United States advocated that entities controlled
by a government are public bodies by relying on the majority
ownership criterion, they failed to demonstrate that a state ma-
jority ownership is the single and most convincing evidence of
“control”. SOCBs, according to the Law of Commercial Banks,
are enterprises which prioritize their economic benefits and
efficiency. From the theory of corporate governance, the influ-
ence of the state majority shareholders is indirect in terms of
business and operation of SOCBs; but, they still have an over-
whelming advantage over other shareholders in selecting direc-
tors. As a result, the selected directors face a dilemma between
pursuing the benefits of all the shareholders and following the
orders of the majority state shareholders.
Existence of Subsidies
The discussion of whether SOCBs constitute “public bodies”
within Article 1.1 (a) (1) could not arrive at a conclusion by
merely analyzing the definition of “public bodies” and the na-
ture of SOCBs. A thorough study should also include the issue
of whether subsidies exist in the present dispute. If China’s
SOCBs constitute private bodies, there will be two situations: 1)
these private bodies themselves directly provide loans to the
tire industry; 2) these private bodies are entrusted or directed by
the government to provide a financial contribution listed in
sub-paragraph (i) to (iii) of Article 1.1 (a) (1). In the first case,
there will be no need for further discussion; because private
bodies lending loans without instructions or entrustment from
the government to the tire industry are not subject to the SCM
Agreement; but, the second case needs detailed analysis. How-
ever, if China’s SOCBs constitute public bodies, as concluded
above, it will be necessary to further discuss whether subsidies
exist. Article 1.2 of the SCM Agreement establishes that subsi-
dies in the sense of Article 1 are subject to the SCM Agreement
only if they are specific in the sense of Article 2 (Panel Report,
US—Anti-Dumping and Countervailing Duties, para.9.29).
Article 1.1 provides that a subsidy exists where “there is a
financial contribution by a government or any public body
within the territory of a Member” or “any form of income or
price support in the sense of Article XVI of GATT 1994” and “a
benefit is thereby conferred” (SCM Agreement, art.1.1). The
Appellate Body has underlined that “financial contribution” and
“benefit” are separate legal elements that are both required to
be satisfied in order to constitute a subsidy within the SCM
Agreement (Appellate Body Report, Brazil—Aircraft, para.157).
Article 1.2 of the SCM Agreement indicates that in order for a
subsidy to be actionable, prohibited or subject to countervailing
duties, it must be “specific” (SCM Agreement, art.1.2). The
criteria to determine whether or not a subsidy shall be deemed
“specific” to “an enterprise or industry or group of enterprises
or industries” for the purposes of the SCM Agreement are con-
tained in Article 2 (Trebilcock, Howse, & Eliason, 2012: p.374).
The Panel in the present dispute gave a more explicit descrip-
tion of the relationship among “specificity”, “financial contri-
bution”, and “benefit”—three independent and cumulative ele-
ments, all of which must be present for a measure to be covered
by the SCM Agreement (Panel Report, US—Anti-Dumping and
Countervailing Duties, para.9.29). The Panel also agreed with
the approach taken by the panels in ECCountervailing
Measures on DRAM Chips, USCountervailing Duty Investi-
gation on DRAMS, and KoreaCommercial Vessels, all of
which analyzed the question of specificity separately from fi-
nancial contribution and benefit (Panel Report, US— An-
ti-Dumping and Countervailing Duties, para.9.29).
As mentioned above, the four countervailing duty investiga-
tions conducted by the USDOC covered four products from
China, CWP, OTR, LWR, and LWS. Based on the facts avail-
able, the USDOC determined that China provided subsidies in
the form of preferential lending by SOCBs to several producers
such as East Pipe, “GTC”, and Starbright. These subsidies were
de jure specific. The USDOC also found that the government
provision of land-use rights was a countervailable subsidy, and
used out-of-country benchmarks to determine the existence and
amount of the subsidy benefits (Exhibit CHI-3, pp. 11-21,
49-70 & 82-83).
Provision of Loans
Financial Contribution
As mentioned above, subsidies are subject to the SCM
Agreement only if the three elements—financial contribution,
benefit, and specificity—are satisfied. With regards to a “finan-
cial contribution”, there are three types recognized in Article
1.1. These include situations in which a government practice
involves a direct transfer of funds (e.g. grants, loans, and equity
infusion), or a potential direct transfer of funds or liabilities (e.g.
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loan guarantees), government revenue that is otherwise due is
foregone or not collected (e.g. fiscal incentives such as tax cre-
dits) and a government provides goods or services other than
general infrastructure or purchased goods (Panel Report, US—
Exports Restraints, para.8.69).
Accordingly, the USDOC determined that China’s SOCBs
are providing preferential loans to the tire industry, which con-
stitute a direct transfer of funds. In the JapanDRAMs (Korea)
decision, the term “funds” in the direct transfer of funds or
potential direct transfer of funds or liabilities contemplated in
Article 1.1 (a) (1) (i) was interpreted (Trebilcock, Howse, &
Eliason, 2012: p. 368). The Appellate Body indicated that
“funds” refers not only to money but also to financial resources
and other financial claims (Appellate Body Report, Japan—
DRAMs (Korea), para.250). The items “grants, loans, and eq-
uity infusions” are provided as examples and thus, modifica-
tions of loan repayment terms and debt-to-equity swaps as
transactions fall within the “direct transfer of funds” contem-
plated in the Article (Appellate Body Report, Japan—DRAMs
(Korea), para.251 & 256). In this regard, providing loans by
SOCBs to the tire industry constitute a “financial contribution”
within the meaning of Article 1.1 (a) (1). There is no disagree-
ment between the parties as to the existence of SOCBs lending
to the two tire producers. Instead, the disagreement in the con-
text of the de jure specificity finding centers on whether the
SOCBs made these loans pursuant to the policies set forth in
planning documents.
Benefits
Regarding a “benefit”, the Panel in KoreaCommercial
Vessels articulated that it “acts as a screen to filter out commer-
cial conduct” (Panel Report, Korea—Commercial Vessels,
p.7.28). Article 1.1 (b) simply provides that “a benefit is there-
by conferred (SCM Agreement, art. 1.1 (b))”, and does not
offer any guidance as to how “benefit” should be defined for
the purpose of the SCM Agreement. The Appellate Body in
CanadaCivilian Aircraft upheld the Panel’s interpretation
that in order to confer a “benefit”, a financial contribution must
“[be provided] on terms that are more advantageous than those
that would have been available to the recipient on the market”
(Panel Report, Canada Aircraft, paras.9.112 & 9.113). Also, it
indicated that Article 14 (discussed below) is relevant. The
Appellate Body added that a “benefit” can only exist where
there is a beneficiary or recipient, whether “a person, natural or
legal, or a group of persons”. Therefore, the evaluation of
whether or not a benefit has been conferred is to be made with
consideration of the market and the specific recipient (Appel-
late Body Report, Canada—Aircraft, para.154).
Specificity
In addition to a “financial contribution” and “benefit”, the
third element for subsidies to be subject to countervailing duties
is “specificity”. Article 2 sets out the principles to determine
whether or not a subsidy shall be deemed “specific” to “an
enterprise or industry or group of enterprises or industries” for
the purpose of the SCM Agreement (SCM Agreement, art.2).
Article 2: Specificity
2.1 In order to determine whether a subsidy, as defined in
paragraph 1 of Article 1, is specific to an enterprise or industry
or group of enterprises or industries (referred to in this Agree-
ment as certain enterprise”) within the jurisdiction of the
granting authority, the following prin cipl es shall apply:
(a) Where the granting authority, or the legislation pursuant
to which the granting authority operates, explicitly limits ac-
cess to a subsidy to certain enterprises, such subsidy shall be
specific.
(b) Where the granting authority, or the legislation pursuant
to which the granting authority operates, establishes objective
criteria or conditions governing the eligibility for, and the
amount of, a subsidy, specificity shall not exist, provided that
the eligibility is automatic and that such criteria and conditions
are strictly adhered to. The criteria or conditions must be
clearly spelled out in law, regulation, or other official docu-
ment, so as to be capable of verification.
(c) If, notwithstanding any appearance of non-specificity re-
sulting from the application of the principles laid down in sub-
paragraphs (a) and (b), there are reasons to believe that the
subsidy may in fact be specific, other factors may be consid-
ered
This provision covers specific subsidies which are explicitly
only accessible to certain enterprises. Specificity will not exist,
if the granting authority, or the legislation, establishes objective
criteria or conditions governing the eligibility for and the
amount of a subsidy (SCM Agreement, art.2.1 (b)). The objec-
tive qualification requirements must be in some official docu-
ments for verification purposes (SCM Agreement, art.2.1 (b)).
In the present dispute, the USDOC determined that China
provided subsidies in the form of preferential lending by
SOCBs (referred to by the USDOC as “policy lending”) to the
tire industry, in particular to two companies, GTC and Star-
bright (Exhibit CHI-4, footnote 16). It determined that these
subsidies were de jure specific on the basis that relevant Chi-
nese laws, plans and policies explicitly limited access to such
“policy lending” by SOCBs to a group of industries that in-
cluded the tire industry.
The USDOC’s finding showed that the various documents
identified “certain enterprises”, which included the tire industry,
for development through the provision of loan financing. For
example, at the central government level, the Government of
China’s Five-Year Plans set the overall economic policies for
China; these policies were then implemented in detail through
subsidiary central government-level instruments. The USDOC
further found that the provincial and local governments imple-
mented national plans and policies at their respective levels
(Exhibit CHI-4, p.13 & 98). The Panel, after analyzing both
central and provincial and municipal governments planning
documents (including the GOC 11th Five-Year Plan (2006-
2010), the Implementing Regulation of the 11th Five-Year Plan,
the GOC Catalogue, the GOC 10th Five-Year Plan (2001-2005),
the SETC Circular 716, Guizhou and Guiyang Planning docu-
ments, and Heibei planning documents), concluded that the
Government of China, at the central level, explicitly identified
“certain enterprises” in the sense of Article 2.1 (a) of the SCM
Agreement for encouragement and development (including the
tire industry), and instructed the sub-central governments to
implement this policy. SOCBs (among other financial institu-
tions) were instructed to provide financing to the “encouraged”
projects.
After concluding that government authorities at all levels of
government in China (central, provincial, and municipal) ef-
fectuated policies to ensure the provision of loans to the tire
industry, the question is whether SOCBs acted pursuant to the
government policies set forth in those planning documents
when they provided loans to the tire producers. In the CFS Pa-
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Y. LIAO
per investigation, which formed part of the record in the OTR
investigation, the USDOC had determined that SOCBs fol-
lowed government policies in making decisions (Exhibit CHI-
93: pp. 49-58). The reasons included three aspects: 1) the state
ownership of the Chinese banking sector and the legacies asso-
ciated with the longstanding pursuit of government policy ob-
jectives undermined the SOCBs’ ability to act on a commercial
basis (Exhibit CHI-93, p. 55); 2) the Chinese Commercial
Banking Law required banks to carry out their loan activities
consistently with “the need of national economy and the social
development and under the guidance of State industrial poli-
cies” (Exhibit CHI-93, p. 58); 3) although SOCBs were im-
proving their risk management capacities, they still lacked
adequate risk management and analysis skills. In addition, the
United States also referred to a range of documents including
annual reports and other publications of certain Chinese banks,
verification reports, and others. In particular, the United States
cited the following statements by banks: 1) the People’s Bank
of China “guided financial institutions to grant loans at a proper
pace”; 2) the People’s Bank of China briefs bank officers on
“how credit should be guided”; 3) the Bank of China takes
industrial policies into account “in assessing a company’s total
credit limit”; and 4) “commercial banks are encouraged to
restrict their lending to borrowers in certain industries in ac-
cordance with relevant government policies” (United States
first written submission, para.358). China does not contest the
accuracy of the United States’ representations of these state-
ments. Nor does it point to any evidence contradicting the
USDOC’s conclusion. The Appellate Body believed that the
Panel conducted a proper factual analysis based on the totality
of evidence, at all levels of government, on which the USDOC
supported its specificity determination (Appellate Body Report,
US—Anti-Dumping and Countervailing Duties, para.400). The
Panel accepted that such documents demonstrate a clear lending
policy directed to favour the tire industry. Therefore, the Ap-
pellate Body concluded that “China has failed to establish that
the USDOC’s finding, that lending by SOCBs to the tire indus-
try was de jure specific, was inconsistent with the obligations
of the United States under Article 2.1 (a) of the SCM Agree-
ment” (Panel Report, US—Anti-Dumping and Countervailing
Duties, para.9.107).
Land-Use Rights
China challenged the USDOC’s determination in the LWS
investigation that the provision of land-use rights to one com-
pany (Aifudi) located in the “New Century Industrial Park” was
regionally specific. In this dispute, the USDOC determined that
China’s provision of land-use rights to Aifudi constituted a
financial contribution by a government in the form of provision
of goods or services. According to the USDOC, this financial
contribution was de jure specific because the provision of the
land-use rights within the Industrial Park was limited to an
enterprise or industry located within a designated geographic
region. Furthermore, the USDOC added that the land-use rights
provided for less than adequate remuneration and therefore
conferred a benefit (Exhibit CHI-3, p. 14). The USDOC ap-
peared to focus principally on the process by which the Indus-
trial Park was created, and the irregularities in that process, as
well as on how the land-use prices were set both inside and
outside the Industrial Park, but with no findings as to any clear
basis on which the provision of a financial contribution in the
form of land-use rights differed as between land inside and
outside the Park. There is no indication in the record evidence
that the USDOC examined whether the Park constituted a
land-use regime that was clearly distinguished from the general
provision of land-use rights by the county government. There-
fore, the Panel ruled in favour of China on its claim under Arti-
cle 2.2, and found that: “The USDOC acted inconsistently with
the obligation of the United States under Article 2 of the SCM
Agreement by determining that the government provision of
land-use rights was regionally-specific” (Panel Report, US—
Anti-Dumping and Countervailing Duties, para.17.1 (b) (ii) &
9.161). China appealed this finding not because it did not agree
with the Panel’s conclusion, but because it disagreed with the
basis on which the Panel reached it. China requested the Ap-
pellate Body to: 1) find that the Panel erred in interpreting Arti-
cle 2.2 of the SCM Agreement to permit a finding of specificity
based solely on a finding that the financial contribution—rather
than the subsidy—was geographically limited; and 2) reverse
the Panel’s finding that the existence of a “distinct regime” is
relevant to a determination of specificity under Article 2.2. The
Appellate Body first did not think that the USDOC committed
any legal error in basing “its determination of regional specific-
ity on the element of the financial contribution, i.e., on the pro-
vision of land-use rights by Huantai County” (Appellate Body
Report, US—Anti-Dumping and Countervailing Duties,
para.414). Second, the Appellate Body did not find that China
has established any relevant error in the Panel’s interpretation
of the term “subsidy” in Article 2.2, and rejected China’s alle-
gation of error in respect of the Panel’s statement concerning a
“distinct regime” in the context of the investigation (Appellate
Body Report, US—Anti-Dumping and Countervailing Duties,
para.389).
Conclusions and Recommendations
The discussion above suggests that there is no simple answer
to the question whether China’s SOCBs constitute “public bod-
ies”.
General
In the process of the dispute, both parties expressed their
opinions on the proper definition of “public bodies” in terms of
dictionary definitions, the meaning of the corresponding French
and Spanish terms, context, and the object and purpose of the
Agreement. China and the United States also referred to some
external resources such as the ILC Article, the GATS Financial
Services Annex, as well as municipal laws; some relevant WTO
cases were also cited to support their arguments. As a result, the
Panel agreed with the United States, holding that public bodies
are entities controlled by a government. Although the Appellate
Body did not accept that majority ownership is sufficient to
prove state control, it still found that SOCBs in China are con-
trolled by the government and that they effectively exercise
certain governmental functions (Appellate Body Report, US—
Anti-Dumping and Countervailing Duties, para.355). To ex-
plore this issue further, this paper turned to a close examination
of the nature of SOCBs in both policy and legal contexts.
Regarding the policy aspect, although SOCBs in China have
gone through several stages of transformation from being pol-
icy-oriented to benefit-oriented, the Chinese government, rep-
resented by the Ministry of Finance and Central Huijin, has
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remained the majority shareholder of SOCBs. However, the
influence of the majority state shareholders has been restricted
due to the entry of foreign strategic investors in recent years,
which could curb undue governmental intervention in business
operations of SOCBs. Additionally, SOCBs’ social and policy
responsibilities have been shifted to the three policy banks
since 1995, with a result that SOCBs have become enterprises
with profit-making as their top priority.
With respect to the legal aspect, the United States and the
Panel advocated that entities controlled by a government are
public bodies, but they did not sufficiently demonstrate that
state majority ownership could be the single and decisive de-
terminant of “control”. Furthermore, the Law of Commercial
Banks makes clear that SOCBs are enterprises which prioritize
their economic benefits and efficiency ahead of state policies.
From the perspective of corporate governance, the Chinese
government, as the majority ownership shareholder, could not
directly influence the business and operation of SOCBs ac-
cording to the Company Law, but they have an overwhelming
advantage over other shareholders in selecting directors. The
selected directors face a dilemma between the benefits of all the
shareholders and the appreciation of state assets.
China’s SOCBs, according to the theory of governmental
control, may constitute “public bodies” within Article 1.1 (a) (1)
of the SCM Agreement because of majority state ownership.
However, the United States failed to further explain “control”
and provide any indicia other than majority ownership. This
may weaken the reasoning of the “control” theory. There have
been huge changes in China’s SOCBs in the past three decades,
and it is not easy for them to eliminate their subsidiary gov-
ernmental function overnight. With the enactment of the Com-
pany Law and the Law of Commercial Banks as well as more
participation of foreign strategic investors, China’s SOCBs are
gradually shedding their governmental function and the policy
influence of the central government.
The conclusion that SOCBs constitute “public bodies” within
the SCM Agreement does not mean that subsidies exist in this
present dispute. Subsidies are subject to Article 1 of the SCM
Agreement only if the three elements—financial contribution,
benefit, and specificity—are satisfied. Various forms of evi-
dence demonstrate that all the three elements are satisfied in
terms of SOCBs lending loans to the tire industry; therefore,
those loans constitute “subsidies” within the meaning of Article
1.1 (a) (1). However, a financial contribution in the form of
land-use rights was not proved in the dispute.
Recommendations
Policy Flexibility in the WTO System
There are always trade frictions between different members
under the WTO framework, which is partially attributable to
their uneven stages of economic development. “The central
economic paradox of our time is that ‘development economics’
is working while ‘development policy’ is not”. To explore this
paradox, Dani Rodrik, in his book One Economics, Many Rec-
ipes, lays out a broad critique of prevailing approaches to de-
velopment policy, offers fresh idea for countries seeking to
improve their economic performance, and argues for important
reforms in the WTO to make room for those ideas (Rodríguez-
Clare, 2007, Review of One Economics).
More time and effort are required by developing countries
like China to catch up with their developed counterparts. Indeed,
according to Rodrik, developing countries may sometimes want
to pursue import protection or seek integration with the rest of
the world through more heterodox policies such as export sub-
sidies and export-processing zones. The deepening economic
integration that has been implemented over the last decade may
be detrimental to some poor countries by shrinking the “policy
space” they need to follow such policies (Rodríguez-Clare,
2007, Review of One Economics). Instead of sticking to this
path, a development friendly WTO should strive for a “better
mix of enhanced market access and maneuvering room to pur-
sue appropriate development strategies” (Rodrik, 2008: p. 215).
In this regard, a much narrower definition of the term “public
bodies” may better promote the participation of developing
countries in international trade as well as advance integration
with their developed trade partners, since it will give develop-
ing countries more time to upgrade their banking sectors and
international trade partners to the level required by the WTO
sys te m.
Latent Comparative Advantages
In addition to requesting more flexibility in the WTO system,
developing countries should also try to make the best use of
their comparative advantages in international trade relations.
According to “the new structural economics” proposed by Lifu
Lin in his book The Quest for Prosperity, no economy can de-
velop if its firms are not viable in an open, free and competitive
market. Therefore, long-term economic development can only
be attained if countries rely on market prices and their latent
comparative advantages (Lin, 2012: p. 94). For instance, some
developing countries have failed in their development goals,
because they neglected the fact that they are generally la-
bor-abundant, and their development strategy needs to be based
on labor-abundant industries for their firms to be competitive
on the world market. Their governments have tried to establish
capital-intensive industries that did not match the comparative
advantages of the countries, resulting in the fact that these in-
dustries were not viable without state invention. Therefore, they
required subsidies and other protectionist measures such as
tariffs or non-convertible currencies, which lead to the estab-
lishment of “a rent-seeking elite and to public expenditure that
were not sustainable in the long run” (Lin, 2012: p. 94). Lin
argued that the rapid growth of China and other fast-growing
East Asian economies were due to the effective exploitation of
their latent comparative advantages (Lin, 2012: p. 162). Ac-
cording to Lin, development based on comparative advantage
creates job opportunities, ample fiscal revenues, and does not
require subsidies for firms; thus, governments have enough
policy flexibility to deliver the necessary improvements in both
“hard” (power, telecommunications, roads, etc.) and “soft”
(education, financial, and legal) infrastructures necessary to
support the structural transformation that has to take place con-
tinuously for an economy to grow (Lin, 2012: p. 163).
Globalization and State Capitalism
In order to upgrade their participation in international trade,
developing countries need not only more flexibility in the WTO
system and more attention to their comparative advantages but
also heavy emphasis on the effects of globalization. Rodrik in
his later book The Globalization Paradox notes the irony that
the countries that experienced the greatest growth during the
heyday of the “Washington Consensus” were Japan, China,
Open Access 215
Y. LIAO
South Korea, and India, which never embraced it. For years,
they had nurtured, protected and subsidized key industries be-
fore subjecting them to foreign competition. Furthermore, they
had closely controlled the allocation of capital and the flow of
capital across their borders; they manipulated their currency
and maintained formal and informal barriers to imports (“Dani
Rodrik’s ‘The Globalization Paradox’”, 2011). It is not easy to
reach a compromise between globalization and state capitalism
which tries to “meld the powers of the state with the powers of
capitalism”, and “depends on government to pick winners and
promote economic growth” (“The Visible Hands”, 2012: p. 3).
Peter Mandlson, a former EU trade commissioner, thinks that
“the huge and very real benefits of globalization are being un-
dermined by the distorting interventions of state capitalism
from one direction and by the anxious politics of an increas-
ingly defensive and fearful developed world from the other”.
State Capitalism achieved success in tackling infrastructure
problems such as building the information superhighway and
mandating higher environmental standards. Additionally, it has
also been successful at producing national champions that can
compete globally. Furthermore, some argue that state capital-
ism makes it easier for emerging countries to learn from the rest
of the world. However, state capitalism has always faced vari-
ous challenges. There is striking evidence that state-owned
companies are not only less innovative but also less productive
than their private competitors (“Mixed Bag”, 2012: p. 14). In
addition, state-capitalist countries harm mainly their consumers
when they subsidize exports, and they depress their overall
competitiveness when they pour money into state champions at
the expense of the rest of the economy (“And the Winner is…”,
2012: p. 17). State capitalism’s biggest failure is to do with
liberty: by turning companies into organs of the government,
state capitalism simultaneously concentrates power and cor-
rupts it (“And the Winner is…”, 2012: p. 18).
The conflict between state capitalism and globalization will
not remain constant and unsolved. State-capitalist countries are
also using tools such as listing state-owned companies on the
stock market and embracing globalization. Some are keenly
working on independent innovation, exemplified by China
which revealed its highest priority for the future at the 17th Na-
tional Congress of the Communist Party: improving the coun-
try’s “capacity for independent innovation”. Rodrik addresses
that globalization will work for everyone only if “all countries
abide by the same set of rules, hammered out and enforced by
some form of technocratic global government” (“And the Win-
ner is…”, 2012: p. 18). Yet, some countries like China and
India are currently reluctant to give up their sovereignty, dis-
tinctive institutions and freedom to manage their economies in
their own best interests. To some degree, state-capitalism in-
deed can help those countries wanting to make their mark on
the world effectively concentrate their financial resources on
developing certain fields like infrastructure. However, it is im-
portant to bear in mind that state capitalism can work well in
some areas (e.g., infrastructure) and badly in others (e.g., con-
sumer goods); and also, it is possible for it to boost growth at
one stage of development and impede it at another (“Mixed
Bag”, 2012: p. 9). It is not a panacea for all problems plaguing
those emerging countries, and it may take many years for the
model’s weaknesses to become obvious. Indeed, it is not a
long-term policy, since no one can escape the challenges of
globalization as well as refuse the opportunities offered by it.
As Joseph Stiglitz states in his book Making Globalization
Work, globalization has every potential to serve as a force for
good (Stiglitz, 2007). In order for globalization to yield eco-
nomic benefits that are broadly distributed throughout society,
national democracies need to be strengthened and international
rules need to be in place that protect all players, while still al-
lowing for “maneuverability and flexibility” (Saffin, 2011,
“Why Global Markets, States, and Democracy Can’t Coexist”).
At the same time, the practitioners of state capitalism need to
unwind their huge holdings in favor companies and handling
them over to private investors (“The Rise of State Capitalism”,
2012); this needs to be done slowly but surely.
Conclusion
It is not easy to strike a balance between global market and
state democracy as mentioned above; this is why developing
countries should be given more policy room in the WTO sys-
tem and state capitalism, and also they should pay more atten-
tion to their latent comparative advantages. These approaches
could help developing countries upgrade their infrastructures,
and transform their structure to advance both economic growth
and policy development to catch up with their developed coun-
terparts in the future. As a result, they will be able and willing
to be guided and bound by international rules. Just as Stiglitz
says, “global society has the will and the ability to address
global problems, and international economic integration will
ultimately prove a force for good”. However, this could only be
achieved with good will, enlightened public opinion, and moral
imperatives to overcome selfish but deeply entrenched private
or national interests that do not share the author’s goal of mak-
ing globalization work for as many people as possible (Frien-
den, 2006, “To Have and Have Not”). Under this circumstance,
the whole world will benefit from a concerted effort to address
problems of the environment, poverty, and diseases. Globaliza-
tion, according to some critics, may not be working perfectly
today; that is why some structural changes are certainly neces-
sary, especially when it comes to trade—the best way to pro-
mote development in poor countries (Wennström, 2006, “Mak-
ing Globalization Work”). Ensuring that trade is fair is hard
when some companies enjoy the support, overt or covert, of a
national government. That is why state-capitalist countries
should learn how to gradually give up their controllings in
state-backed companies, and expose them to competitions or
hand them over to private investor. At the same time, interna-
tional trade institutions should agree to the ending of tariffs and
protectionism in the West, and push Third World countries to
open up their markets and face external competitions. In this
regard, globalization and international trade will be sustainable
and prosperous with the consensus from both developing and
developed participants on following the agreed international
rules and principles.
Acknowledgements
Grateful thanks to my supervisor Michael Trebilcock from
the University of Toronto and Lei Hou from China.
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