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SOE Reform: From experience of developed countries to advice for China

Clinic: UIBE Law School, Fall 2018

Executive Summary

(The full report can be read here).

State-owned enterprises (SOEs) have long been used as a way of government intervention in economic development. To achieve better economic and social results, SOEs may be used to solve employment problems, to cure market failure, to properly allocate resources, etc. Admitting the benefits of SOEs may bring to economy and society, however, SOEs are also accused of disturbing fair competition in market. Specifically, under international trade regime, two issues involve SOEs into debate now and then. The first issue focuses on special privileges SOEs may receive provided by the government, while the second issue focuses on the intermediary status of SOEs as a giver of subsidies from the government. China once used SOEs to operate its planned economy and SOEs proliferated in China. Although the planned economy is at present abandoned by China, the large amount of SOEs still exist and raise some concerns in international trade, such as DS379, DS413. Many literatures have discussed the concerns with China’s SOEs, but few discussed SOEs in developed countries. We initiate this research to figure out whether like concerns with SOEs were raised in developed countries in history.

To find the answer, we looked into cases and literatures about SOEs during the period of 1947 - mid-1990s, when GATT 1947 was in effect and the waves of privatization had not yet started across the world and large amount of SOEs still existed in researched countries. By looking into the Import Injury Investigations Case Statistics released by U.S.’s International Trade Commission, we found that the number of countervailing duty cases field in FY 1982 was 113 in total and most of them were about steel industry. In contrast, the number of countervailing duty cases field in one year from FY 1980 to FY 2008 was 44 at most, except for FY 1982. Additionally, we further discovered that in those years, most journals were talking about subsidies. One economic background of that period is a severe slump in the U.S. steel industry as a result of years of neglect, a recession, and an influx of imports by foreign competitors. The other statutory background is that the Trade Agreements Act of 1979 amended the Tariff Act of 1930 in order to implement into U.S. law the international agreements negotiated and signed by the United States at the Tokyo Round Multilateral Trade Negotiations, by enacting new anti-dumping and countervailing duty laws. Judging from the above, it was obvious that subsidy, a method of state intervention, was one reason causing trade tension among countries around 1982. More importantly, SOEs played an important role in conveying subsidy. Thus, this paper selected four cases where the subsidy granted to SOEs or was granted by SOEs during the period from 1978 to 1985.

Each case shows how one enterprise was determined as an SOE and what was the concern for such SOE. For each case, the solution to the trade tension raised by SOE will be elaborated. At the end of the case studies, a conclusion about the experiences from the case studies will be given. Further, we will discuss SOE-related matters in present days, and give advice for Chinese government and SOEs on how to avoid trade tensions.

In this research, we take the first step to analyze SOE-related concerns in developed countries. This theoretical analysis could build a comprehensive framework for study of SOEs, and the case studies can show how SOEs were operated, whether trade tensions were raised, and how the tension was eased. Theoretically, this research could give some hints on analyzing legitimacy of SOEs’ actions based on the discussed cases. Practically, it can act as a reference for Chinese government and SOEs before they take certain policies and actions.

The present research consists of four parts. Part 1 is the introduction of this paper which shows why and how we will do this research. Part 2 discusses the definition of SOEs. Part 3 are case studies which can help us learn from the past. Part 4 presents advice for Chinese government and SOEs on how to avoid being accused of disturbing fair market competition.

Read the full report here

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