I have finally finished reading the Panel report in DS379. What an amazing decision! The Panel has effectively declared the second largest economy in the world as a completely distorted one for the purpose of the SCM. The following are some key points of the decision, and their possible implications:
- All SOEs (in which the state owns more than 50% equity) are “public bodies”, i.e., government agencies. Consequently, all buyers of products made by SOEs are potentially being subsidized. That includes all utilities, energy, and telecommunications services, and many other sectors in which the state dominates.
- All prices for land-use rights in China are distorted because there is no private land ownership in China. Hence, every economic actor in China is potentially being subsidized since it has to exist on some land.
- All interest rates in China are distorted because the state controls the banking sector. Hence, any company may be subsidized if it buys input from another firm that borrowed money in China, whether from Bank of China or HSBC.
In short, the entire Chinese economy is built upon distortion. Consequently, WTO members are entitled to use (higher) prices in a third country as the basis for calculating countervailing duties on Chinese exports.
The above summary may lack nuance, but I think captures the big picture.
But is there something strange about this picture? The second largest economy, and one of the most important economic engines in today’s world, does not have any legitimate market in the eye of the WTO.
It is particularly important to note: All the above findings of the Panel are based, not on China’s status as a nonmarket economy under its accession protocol, but on the AB’s decision in US-Softwood Lumber IV. In that case, the AB famously held that in-country private prices may be rejected if the government has a predominant position in the industry, despite that SCM Article 14(d) explicitly provides that in-country prices are to be used for calculating benefits arising from the provision of goods and services (so much for AB’s textualism).
Therefore, the legal reasoning in this case is applicable to all WTO members that have SOEs (including GM between July 2009 and October 2010, when the US government held more than 60% of its equity), or invest in China or other countries where the state has a dominant position in some economic sectors. Insofar as China is concerned, the tens of thousands of FIEs (foreign-invested enterprises) will all be implicated, since they live and thrive (most of them) in that distorted yet booming economy. And remember that FIEs are responsible for nearly 60% of China’s exports.
To me, the case raises a profound question: Can the WTO, as an institution, handle “state capitalism”, which has been on the rise in the post-financial crisis era? If it cannot, the WTO may risk further losing its relevance. Decisions such as this can only drive China to form more bilateral and regional arrangements, away from the WTO regime. But maybe that is inevitable and the world may be better off with more fragmentation (or diversity) in governance.