Industrial subsidies, state-owned enterprises and market distortions: Problems, proposals and a path forward

Industrial subsidisation is an area identified for WTO rule-strengthening by the European Union (EU) and the Trilateral Trade Ministerial Cooperation (hereafter Trilateral Cooperation). 

The aim is to curb  certain trade practices spearheaded by China’s state-owned enterprises (SOEs), which allegedly engender over-capacity, distort markets and undermine the effectiveness of the WTO Agreement on Subsidies and Countervailing Measures (ASCM). The obligations of transparency and notification prescribed by the ASCM require strengthening, too.     

A key issue with certain Chinese SOEs centres around their operation model, whereby the boundaries between a private business entity and  public body become obscure such that proving the case for countervailing a subsidy using ASCM will be challenging. As a result, the Chinese government’s involvement in the market continues, and the ASCM would be less effective in identifying prohibited or actionable subsidies for sanctions. This whole undertaking becomes more onerous when the requirements of subsidies notification prescribed by the ASCM are not met by China (and other WTO members). 

To seek redress, the EU and the Trilateral Cooperation (in the name of its individual members) have proposed in July 2019 a number of solutions to the relevant WTO councils, including the US proposal to strengthen the disciplines on notification submitted to the WTO Council for Trade in Goods.  At a national level the US Department of Commerce (USDOC) made attempts to define a “public body” but the analytical framework it established were quashed by the WTO Appellate Body in the cases of United States – Countervailing Duty Measures on Certain Products from China (DS437), and United States — Countervailing Measures on Certain Hot-Rolled Carbon Steel Flat Products from India (DS436). 

After presenting the context of the specific areas for strengthening industrial subsidies disciplines, this policy brief outlines the questions that certain Chinese SOEs have raised and why the present relevant ASCM provisions are no longer effective. The country’s unsatisfactory discharge of its subsidy notification obligations will also be highlighted, together with China’s commitments pledged at the WTO within the remit of the ASCM. Subsequently, the brief recounts the initiatives to rectify the ASCM that are proposed by the EU and the US, and the positions taken by the Trilateral Cooperation. Finally, the brief analyses the drawbacks of these initiatives and suggests a practical way forward to enhance the industrial subsidies disciplines.

DOWNLOAD FULL POLICY BRIEF