Battle over state-owned enterprises an issue of fair trade versus economic reality

PUBLISHED : Monday, 21 July, 2014, 3:59am
UPDATED : Monday, 21 July, 2014, 9:33am

The status of state-owned enterprises - a long-standing source of trade disputes - has been one of the most contentious issues facing the international trading system. Are they independent companies or extended arms of their governments? A key dispute has been the extent of "subsidies" they should be considered to enjoy given the privileges and special treatments they allegedly receive.

The World Trade Organisation this month struck a blow against countervailing tariffs imposed by the US on steel and solar panels imported from China and India. The ruling, which can be appealed, rejects Washington's claim that the enterprises that produced them were "public bodies" and that they enjoyed state subsidies either overtly or indirectly.

The WTO cited a narrow definition of what could be considered "a government or public body". It rules that it has to perform government functions and enjoy government authority; it is not enough to be considered as such merely because the government holds a majority or controlling stake. The ruling will have consequences for import duties well beyond the steel and solar panels produced by China and India.

SOEs have been integral to the economic rise of developing countries such as China and India. Yet they attract enormous animosity from champions of free enterprise like the United States, which has for years imposed high duties on many of their imports worth tens of billions of dollars.

Washington has waged a tough campaign on multiple fronts against the role of state-owned companies in developing economies. It is more than likely that it will appeal against the WTO ruling. Its fight has as much to do with trade and profit as with economic ideology and fundamental outlooks about what constitute fair trade.

Despite its latest WTO setback, Washington is certain to continue its fight against SOEs. But the reality is that only further domestic liberalisation and opening of markets could lessen the role of SOEs in developing economies.