(DS413

where the United States

challenged the regulatory requirement that dual-currency credit card transactions in Renminbi
Are handled by China UnionPay (CUP) which can be considered an SOE for the purposes of
this paper. The claim that CUP represented an across-the-board monopoly supplier was rejected.
Yet, the claim that CUP held a monopoly for one type of transaction was upheld and it was ruled
that this, together with other regulatory advantages enjoyed by CUP, represented a breach of
Chinas commitments under WTO. Another controversy involving Chinese SOEs was an
allegation that immediately after the establishment of its anti-monopoly law in 2007, some of the
SOEs did not adhere to the notification procedure required by the law, and that responsible
authorities took no action despite several lawsuits brought to the courts by private competitors.
Given that Chinese SOEs together with joint-ventures involving foreign firms are the two major
players in Chinas mergers and acquisitions market such an exemption had non-trivial effects on
competition in the international context (e.g. Taylor, 2011).
We can distinguish four types of economic ideologies or political strategies that, despite their
differences, all result in the creation of SOEs2: communism, nationalism, social, and strategic. A
milder version is socialism, which induces the creation of SOEs alongside the regulation of
private enterprise. Second is the economic nationalist ideology, which argues that the
government needs to create SOEs to speed up the development of the country and address the
inability of private enterprise to achieve this. An alternative political strategy, which can or
cannot be sustained by a nationalist ideology, relies on import substitution models of
development (Bruton, 1998) or the need for the government to control the commanding
heights, that is firms with important backward and forward linkages (Jones and Mason, 1982;
Rodrick, 2007).
According to the import substitution approach, the logic of government intervention is a
mixture of a desire to reduce dependence on imports and foreign companies, and a desire to
reduce the power of the private owners in industry (Cardoso and Faletto, 1979; Prebisch, 1950;
Vernon, 1979). The commanding heights view is based on the idea that local entrepreneurs did
not have the capacity, interest, or foresight to invest in the development of large-scale projects
with important forward and backward linkages and that were, therefore, necessary for the
industrialization of the country. Local firms sold their output in a protected market and both
nationalization and the creation of SOEs filled in the void left by private entrepreneurs. Third is
an economic social ideology that proposes that the government needs to invest in SOEs to
facilitate the achievement of socially desirable objectives, such as education, healthcare, or
poverty reduction. In such cases, the political strategy of the government promoted
redistribution and questioned the ability of private entrepreneurs to achieve social objectives.
Fourth is the economic strategic ideology that justifies the creation of SOEs as being strategic for
the country, such as defense. The definition of which industries have strategic merit and require
SOEs varies across countries based on the particular perspectives and political strategies of
governments and politicians.

A Typology of State-Owned Enterprises

While many of the SOEs across the globe share founding objectives that indeed converge
around the need to alleviate market imperfections, foster investment in social welfare sectors,
or generate employment at home, these organizational forms have witnessed significant
transformations as many have emerged to become multinational corporations in their own
right. The historical perception of SOEs is rooted in the view that these organizational forms
were solely created by state capital, managed by political appointees, and chartered to serve
the collective good of the country at large (Ramaswamy, Renforth, and Ramaswamy, 1995;
Ramaswamy, 2001; Shleifer and Vishny, 1998). SOEs such as the Russian oil and gas firm
Gazprom, the Mexican oil firm Pemex, or the Indian engineering firm BHEL are examples of such
entities that once typified this genre. As a result, many of these SOEs confined their operations
to their home countries and usually internationalized via exports, especially of raw materials or
energy products, to provide foreign exchange to the home governments (Aharoni, 1986;
Anastassopoulos, Blanc, and Dussauge, 1987; Vernon, 1979).

As many capitalist and mixed economies embraced pro-market reforms, and the centrally
directed economic structures of the communist countries fell apart in the last quarter of the
20th century (Yergin & Stanislaw, 1998), many prototypical SOEs were radically redesigned. The
privatization processes of the late 20th century resulted in a reduction in SOE numbers, through
full privatization of many such firms,and in the transformation of others into partially privatized
firms. As SOEs became minority state owned or fully private, their managerial behavior changed
(see Inoue, Lazzarini, and Musacchio, 2013; Ramaswamy, 2001 and Ramaswamy and von
Glinow, 2000 for a discussion of some of these changes in the Indian context). In many instances
governments privatized control and kept minority stakes with so-called golden shares, which
gave them veto rights over major decisions such as mergers and acquisitions. These
privatization processes resulted in a large interest in the literature that tended to justify their
privatization by arguing that SOEs were less efficient than private companies (see reviews in
Megginson and Netter, 2001; Vickers and Yarrow, 1988). However, the privatization processes
did not spell the end of state ownership of companies. Instead they marked the beginning of a
new range of organizations that represent innovative hybrids of state and private capital,
spanning both local and foreign domains, more likely viewed as vehicles for the state to exercise
its foreign policy and diplomacy goals alongside conventional social and financial objectives.

While some firms became fully independent private companies or were sold to private
investors, in many other cases governments kept a portion of the equity in the privatized firms
or kept control of such firms, sharing ownership with a variety of institutional and individual
investors via joint ventures or via partial sales in the stock market.
Additionally, some governments maintained majority and minority equity positions in firms
through holding companies, state-owned pension funds, development banks, or sovereign
wealth funds (SWFs) (Musacchio and Lazzarini, 2014). Other SOEs simply went out of business
and their assets were sold.

At the same time, reductions in trade and investment barriers coupled with advances in
transportation and communication technologies facilitated the transformation of many
remaining SOEs into SOMNCs, with SOEs redirecting their attention to the global economy and
investing outside their countries. Notwithstanding the earlier expansions across borders by
SOEs in the oil industry, SOMNCs emerged as an important and little understood force in the
global economy, leading to a renewed interest in these firms, both in the popular press
(Economist, 2012) and in academic analyses (Buckley et al., 2007; Cui and Jiang, 2012; Gerard,
2007; Knutsen, Rygh, and Hveem, 2011; Musacchio and Lazzarini, 2014; Shapiro and
Globerman, 2012).
There is a broader paradigm conflict that has long infused . The model of state-supported
cpailalism is different from that operating in china. In particular those promoting the OECD
guidelines on SOEs as the best practice framework for SOE disciplines describe them as a set of
policy recommendations to address the trade investment and competitions issue
The USs SOE text is directly targeting three of the TPPA countries in ways that will have serious
eonsequences for them. This is not a partnership. The impact will clearly also extend to japan

In the Doha round the US proposed tougher subsidy rules, with specific rules for SOEs that
would prohibit certain government financing on non-commercial terms. That sunk with the
Doha round. US had been working with other countries in the OECD and G20 to develop
disciplines on SOEs, again making specific reference to China. The principle of competitive
neutrality between SOEs and private firms, which is central to the US text was drawn from the
OECD, building on its work on corporate governance. It is clear from the US commentaries that
the OECD guideline on SOEs will be touted as best practice, if they are not explicitly referred to
in the text.

At its heart are the WTO agreements, negotiated and signed by the bulk of the worlds trading
nations. These documents provide the legal ground-rules for international commerce. They are
essentially contracts, binding governments to keep their trade policies within agreed limits.
Although negotiated and signed by governments, the goal is to help producers of goods and
services, exporters, and importers conduct their business, while allowing governments to meet
social and environmental objectives.

There are a number of ways of looking at the WTO. Its an organization for liberalizing trade. Its
a forum for governments to negotiate trade agreements. Its a place for them to settle trade
disputes. It operates a system of trade rules.

Above all, its a negotiating forum Essentially, the WTO is a place where member
governments go, to try to sort out the trade problems they face with each other. The first step is to
talk. The WTO was born out of negotiations, and everything the WTO does is the result of
negotiations. The bulk of the WTO's current work comes from the 1986-94 negotiations called
the Uruguay Round and earlier negotiations under the General Agreement on Tariffs and Trade
(GATT).

This is a third important side to the WTOs work. Trade relations often involve conflicting
interests. Agreements, including those painstakingly negotiated in the WTO system, often need
interpreting. The most harmonious way to settle these differences is through some neutral
procedure based on an agreed legal foundation. That is the purpose behind the dispute
settlement process written into the WTO agreements.

Where countries have faced trade barriers and wanted them lowered, the negotiations have
helped to liberalize trade

The systems overriding purpose is to help trade flow as freely as possible so long as there are
no undesirable side-effects because this is important for economic development and well-
being. That partly means removing obstacles.

It also means ensuring that individuals, companies and governments know what the trade rules
are around the world, and giving them the confidence that there will be no sudden changes of
policy. In other words, the rules have to be transparent and predictable.