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Getting State-Owned Enterprises Right in the Trans-Pacific Partnership

The Obama Administration Must Negotiate a Robust Set of Rules on State-Owned Enterprises

SOURCE: AP/Charles Dharapak

President Barack Obama shakes hands with Japanese Prime Minister Yoshihiko Noda in November 2011 at the APEC summit, where Trans-Pacific Partnership leaders met, in Hawaii.  

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U.S. trade negotiators meeting their Asian counterparts in Australia next month should come prepared to stand firm on the thorny question of how to deal with “state-owned enterprises” that are common in Asia. Discussions about state-owned and state-subsidized companies in economies of countries such as Vietnam, Malaysia, and Singapore are expected to dominate the upcoming 11th round of negotiations on the Trans-Pacific Partnership, a nine-country free trade agreement under development since 2009.

Now that a broad framework over the agreement is in place, it’s time to get into the details. Our trade negotiators should insist that unfair advantages state-owned companies enjoy because of their state backing be remedied to the greatest extent possible. The goal should be an even playing field so that the Trans-Pacific Partnership becomes a vehicle for expanding American exports, jobs, and economic growth for years to come. Our negotiators need to understand the problems posed by state-owned enterprises and deal with them accordingly.

State-owned enterprises

The expanding power of state-owned enterprises poses unprecedented challenges for a market economy such as the one in the United States. That’s something U.S. businesses and organized labor agree on.

A number of Trans-Pacific Partnership participants—among them Vietnam, Malaysia, and Singapore—manage their economies through a state-capitalist model in which the government directly or indirectly controls many of the economy’s productive assets, formal financial systems, and activities. These enterprises participate in commercial markets but enjoy state backing. They benefit from preferred access to bank capital, below-market-rate financing, favorable tax treatment, capital injections, and other advantages that distort the playing field and put American firms and workers at a competitive disadvantage.

U.S. domestic and international trade laws are ill-equipped to deal with this version of state capitalism in which transactions are frequently based on a government’s political objectives rather than commercial considerations. It’s time for the United States to stop treating such countries as if they operate under free market rules. They do not. The Obama administration must articulate a firmer approach to state-owned enterprises in the Trans-Pacific Partnership to ensure a level playing field.

Recommendations

U.S. negotiators should insist that state-owned enterprises be evaluated under the agreement as if they were operating solely according to commercial considerations. The rules governing commercial considerations—as they relate to export finance, for example—should be based on the existing Organization for Economic Cooperation and Development protocol, which governs economic relations between its developed-economy member nations.

The Trans-Pacific Partnership should require member countries to provide a list of their subsidies on a regular and periodic basis to ensure proper adherence to commercial considerations. If a country does not comply, then the United States or other signatories to the agreement should under the agreement be able to request more information in an expedited manner. The requirements in order to file a claim and ensure action on a request for full disclosure of government subsidies should be kept to a minimum.

There must also be an appropriate enforcement mechanism when a particular country does not comply with the requirements of the agreement. One strong approach would be to use a market-based proxy rate to adjust tariffs on exports from state-owned enterprises based on the expected subsidy rate.

Another remedy to consider is including a “snap-back provision” that allows Trans-Pacific Partnership signatories to suspend tariff concessions if a member is found in violation of its obligations under the agreement. As a final recourse the United States or other signatories should have an expedited process that allows for fair adjudication of unfair advantage claims

If the Trans-Pacific Partnership is going to be a template for the rules of trade for the 21st century, then we had better make sure that its rules are strong enough to create a level playing field not only for the current nine negotiating partners but also for other countries that may want to someday join the trading bloc. And the United States should apply these rules to the activities of state-owned enterprises in other areas governed by the Trans-Pacific Partnership as appropriate.

As the Obama administration prepares to enter the 11th round of negotiations in Melbourne, it must ensure that the Trans-Pacific Partnership chapter on state-owned enterprises is robust and protects the interests of American workers and firms wherever state-owned enterprises operate—in their home country, third country, and the U.S. market for years to come.

Sabina Dewan is Director of Globalization and International Employment at the Center for American Progress.

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