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State-owned enterprises in TPP negotiation: WTO – plus commitment?

The article with the title: “State-owned enterprises in TPP negotiation: WTO –plus commitment?” written by Ms. Lê Thị Ánh Nguyệt is published on Saigon Economic Times dated 27/02/2014.

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As a member of the WTO since 2007, Vietnam does not made any special commitments on the operation of state-owned enterprises (“SOEs”) because the WTO does not explicitly govern SOEs, although by their very nature, SOEs may be one of state trading enterprises subject to the application of Article XVII of the General Agreement on Tariffs and Trade 1994 (“GATT 1994”). Therefore, Vietnamese SOEs can still receive subsidies in the form of remission of tax, land use fees or input materials to produce goods for either domestic consumption or for research and development. However, in the context of continuing negotiations on the Trans-Pacific Strategic Economics Agreement (“TPP Agreement”), and in the very near future, governmental subsidies from Vietnamese government for its SOEs will become increasingly difficult and may be phased out. Thus to a certain extent, it is implied that this commitment (if any) will establish an entirely new obligation of Vietnam. This article aims to establish the relationship between SOEs and state trading enterprises in the TPP Agreement and the WTO, as well as analyse some of the difficulties that SOEsof Vietnam are burdened with.

1. Overview of the TPP and the WTO

Since 2005 when the Agreement of Trans-Pacific Strategic Economics (referred to as the P4 Agreement) was founded by four countries (Brunei, Chile, New Zealand and Singapore),the TPP Agreement has expanded by a further eight member countries (the United States of America, Australia, Peru, Vietnam, Malaysia, Canada, Mexico and Japan) – these 12 countries of the TPP negotiation account for about 40% of GDP and 30% of global trade. Up to now, TPP members have gone through 19 formal negotiating sessions and several mid-term negotiating sessions to eliminate import tariffs on goods produced in the territories of TPP negotiating member countries and finding equality for import tax on used goods and new merchandise (cars, etc.). The member countries are especially committed to joint legal regulations and reform for granting increasingly more favourable treatment in the field of services and investment (i.e. ratchet clauses). Of greatest importance is with respect to disputes between foreign investor(s) and the host countries shall be settled in a transparent manner through an international arbitration centre, and not limited to the court or other judicial authorities of WTO members.

TPP is called the “TPP Trade Agreement of the 21st Century” and will become the model for other trade agreements in the future because of the following reasons:

First, by its very nature the TPP Agreement has a higher degree of coerciveness amongst its 12 members as distinct from the nature of the P4 Agreement, its forerunner; “the member shall have the right to make the national policies and priorities and to establish, administrate and enforce the laws and rules of that member itself“. The enforcement of the TPP Agreement is similar to that which Multilateral WTO Agreements legally bind member countries.

Second, the TPP has handled many newly arising matters which have never been recorded in Regional Trade PTAs or WTO Agreements. Typically it is the first unified rules applicable to SOEs. Furthermore, the TPP will potentially be opened to all APEC members, including but not limited to China and Russia..

Given that all TPP members are also members of WTO, the TPP as a regional trade agreement between the members and simultaneously be bound by others regional trade Agreement RTAs like ASEAN (including Brunei, Singapore, Malaysia and Vietnam); Agreement North American Free Trade NAFTA (United States, Canada and Mexico), there will have some certain interactions and alternations with the biggest multilateral  agreement WTO. Therefore, in the future, when TPP was officially extended, it may impact to the completion of the Doha round of WTO negotiations, which currently has nearly 12 years of congestion.

2. State-owned enterprises in TPP negotiations: why is this a hot spot?

In essence, SOEs are enterprises in which the State owns all or part of the charter capital of the enterprises. In fact, according to the law of Vietnam, SOEs are divided into three following groups: (1) the State owns 100% of the charter capital; (2) the State owns the majority share of charter capital (less than 100% but more than 50 % of charter capital); and (3) the State owns the minority share of charter capital (less than 50% of charter capital). Despite the difference in determining what an SOE is, SOEs are nevertheless established and maintain their operations in many countries all over the world, not only in Vietnami.e. the United States has Freddie Mac and Fannie Mae; Japan has Postal Corporation of Japan (Japan Post) etc.

Due to the strategic importance of SOEs or the goods produced by SOEs for a State’s economy, in TPP negotiations there was an awareness of the possibility that the State will provide financial support (such as tax remissions, provide free input materials or charge preferential rates that are lower on market prices) for these enterprises when they operate inefficiently.Therefore, the TPP members agreed in principle that they shall establish the first set of rules for the operation of SOEs.These included obliging TPP members to cut subsidies for SOEs to create an equal competitive environment and in turn, SOEs are required to operate according to commercial considerations and market principles (buying and selling goods and inputs shall be determined by the market price), where the quantity and quality of goods are determined in accordance with the supply and demand relationships and not administrative orders.

3. The challenges for Vietnam

According to the writer, these rules established in the TPP (if any) are “WTO-plus” i.e. commitments on SOEs in the TPP are more stringent than the current law of the WTO and other corresponding commitments of Vietnam to the WTO because of the following reasons:

First, the WTO Agreements and Vietnam commitments to the WTO have not established the concept, nature or principles for the organization and operation of SOEs. Although by its nature an SOE may be a state trading enterprise under Article XVII of the GATT 1994;“enterprises entitled by the State the exclusive privileges in certain export and import activities, may be state or privateowned”.  In other words, state trading enterprises according to the WTO may be private owned enterprises and/or state-owned SOEs which are granted the privilege and exclusive rights on the business of import and export. Thus, since the time of WTO, SOEs’ business operations were carried out according to market principles and commercial considerations. Thus, members of the TPP negotiations will still comply only with Articles VI, XVI of GATT 1994 and the Agreement on Subsidies and Countervailing Measures (in brief,the SCM Agreement). This means that SOEs and goods produced by SOEs are still capable of receiving subsidies from the government, rather than being forced to cut subsidies as per current TPP requirements for SOEs.

Second, a number of items of Vietnam, such as coal, minerals, tobacco and electrical power, under the management, trading and import & export of SOEs (according to the law of Vietnam) are now also identified as State trading enterprises according to GATT 1994 Agreement by the Tobacco industry, the Coal and Mining industry; enterprises exporting rice, oil etc. Meanwhile, these items are subjected to the management of private sector in other countries e.g. Japan.

Thus, if Vietnam will not join the TPP Agreement, Vietnam will not be in violation of its subsidy obligations as the WTO Subsidy Agreements may allow local subsidies and subsidies for scientific research.However, in case Vietnam does sign the TPP, it may pose issues in fulfilling their commitment on SOE in the TPP. Besides, if other TPP members (such as Japan) implement the subsidy policy for these items, it will not violate their TPP commitments.Hence if these products compete with each other, the product of Vietnam will lose their competitive advantages.

In general, some members of the TPP Agreement, based on the lax regulations on SOEs in the WTO Agreements, have required the remaining members to negotiate and to accept some regulations that may be detrimental to them.In other words, it is possible that some TPP members are exploiting negotiations in a way to maximize their commercial interests to the detriment of their other trading partners. In this case, it is obvious that the commitment on SOE may create a “reverse discrimination” with respect to Vietnam’s SOEs.