The Continued Battle on the Legal Status of State-Owned Enterprises in Two Recent WTO Cases involving the U.S., China and India

By Ru Ding, S.J.D. Candidate at Georgetown University Law Center

As an increasing number Chinese state-owned or invested enterprises make their way up the Global Fortune 500 and expand their shares in the international market, other countries are seeking ways to counter-balance this fast expansion that is destructive to their own industries. One of the ways on the legal side is through trade remedy measures, especially countervailing duties against the imported products that contain the inputs from state-owned enterprises (SOEs). These SOEs and their subsidiaries are called “public entities” or “public bodies” by domestic investigating authorities under national law or international trade law, and are presumably regarded as inherent providers or conveyers of subsidies. Whether this way of condemning SOEs is consistent with the World Trade Organization (WTO) legal regime is generally called the “public body” issue.

In 2011, in a WTO case between the U.S. and China, the Appellate Body of the WTO (the AB) gave its opinion on when an SOE can constitute a “public body” under the Agreement on Subsidies and Countervailing Measures (SCM Agreement).  The general rule is “a public body ... must be an entity that possesses, exercises or is vested with governmental authority.” United States — Definitive Anti-Dumping and Countervailing Duties on Certain Products from China (US – Anti-dumping and CVD (China)), WT/DS379/AB/R, adopted March 11, 2011, para. 317. Based on the AB’s further elaboration, there are three types of evidence to prove such “governmental authority”: 1) when a statute or other legal instrument expressly vests authority in the entity; 2) when in fact an entity is exercising governmental functions; and 3) when there is evidence showing that a government exercises “meaningful control” over an entity in certain circumstances. The AB also clarified that majority ownership per se does not amount to sufficient evidence to prove an SOE constitutes “public body”. However, as to the exact scope of the “governmental functions,” and the meaning of the concept “meaningful control,” questions remain unsolved.

In two WTO panel-level cases (prior to the Appellate Body) decided recently, these “public body” issues were addressed. The Panels in these two cases approached them differently, bringing more room for question and debate. In one case between the U.S. and India, United States — Countervailing Measures on Certain Hot-Rolled Carbon Steel Flat Products from India (US — Carbon Steel (India)), WT/DS436/R, adopted July 14, 2014, appealed August 8, 2014, the Panel decided the U.S. Depart of Commerce (USDOC)’s determination that an Indian state-owned corporation constituted a “public body” was consistent with the U.S.’s WTO obligation. The Panel decision brought home an interpretation of what may constitute “meaningful control” – majority ownership plus government’s appointment of directors of the corporation.  Id., para. 7.85. In another case between the U.S. and China however, the Panel decided the USDOC’s twelve countervailing duties decisions on Chinese SOEs constituting “public bodies” were inconsistent with the U.S.’s WTO obligation.  United States — Countervailing Duty Measures on Certain Products from China (US — Countervailing Measures (China)), WT/DS437/R, adopted July 14, 2014, appealed August 22, 2014. The Panel, based on the previous AB’s decision, held that ownership and control in and of themselves are not sufficient for determining that an entity is a public body. This Panel did not attempt to elaborate on “meaningful control” since the Panel believed it was “unnecessary” in the case. Id., para 7.74. A more painful loss for the U.S. is that the Panel decided the USDOC’s “rebuttable presumption” rule in determining government-owned enterprises as public bodies is inconsistent “as such” with the SCM Agreement. This means that in the future, the burden of proof is on the USDOC instead of the investigated SOEs to prove that an entity is or is not a “public body”. Comparing the two cases, the former one adopted a tougher stance on SOEs and the latter one provides stricter rules against abusive use of trade remedy measures against SOEs.

Both cases were appealed to the AB level and the AB will circulate its decision in December this year. The U.S. in its appeal of the India case, seeks modification by the AB of the AB’s own previous interpretation of “public body” and proposes its new interpretation: that if a government controls an entity such that the government can use the entity’s resources as its own, then the entity is a public body. It is unlikely that the AB would grandly change its settled interpretation, but it is interesting as to where this “public body” debate is ultimately heading.