Chinese Law Prof Blog

Editor: Donald C. Clarke
George Washington University Law School

A Member of the Law Professor Blogs Network

Sunday, May 25, 2014

China's ban on US management consultants and Windows 8: WTO compliant?

According to the Financial Times, "China has ordered state-owned enterprises to cut ties with US consulting companies such as McKinsey and Boston Consulting Group because of fears they are spying on behalf of the US government." This comes on the heels of a report just a few days earlier that "Beijing has banned central government departments from installing Windows 8." (I will assume for the sake of this discussion that "installing" includes "purchasing.")

Questions have been raised as to whether these moves are WTO-compliant. Fortunately, the Windows 8 case is easy, and we don't even have to figure out whether software is a good covered by the GATT or a service covered by the GATS. This is because the ban applies to "central government departments," and so is clearly a case of government procurement. As China has not yet joined the Government Procurement Agreement (GPA), it can do what it likes in that area.

The management consulting case is harder. The first thing to do is to check China's schedule of commitments under the GATS to see if it made any commitments in the area of management consulting. Yup, there it is:

Capture

The next step is to figure out if there's any reason why that commitment should not apply in this case. How about government procurement? After all, the government didn't order everyone to stop using US consulting services; only state-owned enterprises (SOEs).

But making this argument puts China in an awkward position. At this very moment it is negotiating the terms of its accession to the GPA and resisting demands from other members that SOEs be included as subject to GPA commitments, presumably by arguing that SOEs are just regular market-oriented folks who seek the best product at the cheapest price and don’t take orders from government. This is in fact what it stated in the WTO accession negotiations in response to Working Party concerns. Here are the relevant parts of the Working Party Report:

6. State-Owned and State-Invested Enterprises

43. The representative of China stated that the state-owned enterprises of China basically operated in accordance with rules of market economy. The government would no longer directly administer the human, finance and material resources, and operational activities such as production, supply and marketing. The prices of commodities produced by state-owned enterprises were decided by the market and resources in operational areas were fundamentally allocated by the market. The state-owned banks had been commercialized and lending to state-owned enterprises took place exclusively under market conditions. China was furthering its reform of state-owned enterprises and establishing a modern enterprise system.

44. In light of the role that state-owned and state-invested enterprises played in China's economy, some members of the Working Party expressed concerns about the continuing governmental influence and guidance of the decisions and activities of such enterprises relating to the purchase and sale of goods and services. Such purchases and sales should be based solely on commercial considerations, without any governmental influence or application of discriminatory measures. In addition, those members indicated the need for China to clarify its understanding of the types of activities that would not come within the scope of Article III:8(a) of GATT 1994. For example, any measure relating to state-owned and state-invested enterprises importing materials and machinery used in the assembly of goods, which were then exported or otherwise made available for commercial sale or use or for non-governmental purposes, would not be considered to be a measure relating to government procurement.

45. The representative of China emphasized the evolving nature of China's economy and the significant role of FIEs and the private sector in the economy. Given the increasing need and desirability of competing with private enterprises in the market, decisions by state-owned and state-invested enterprises had to be based on commercial considerations as provided in the WTO Agreement.

46. The representative of China further confirmed that China would ensure that all state-owned and state-invested enterprises would make purchases and sales based solely on commercial considerations, e.g., price, quality, marketability and availability, and that the enterprises of other WTO Members would have an adequate opportunity to compete for sales to and purchases from these enterprises on non-discriminatory terms and conditions. In addition, the Government of China would not influence, directly or indirectly, commercial decisions on the part of state-owned or state-invested enterprises, including on the quantity, value or country of origin of any goods purchased or sold, except in a manner consistent with the WTO Agreement. The Working Party took note of these commitments.

47. The representative of China confirmed that, without prejudice to China's rights in future negotiations in the Government Procurement Agreement, all laws, regulations and measures relating to the procurement by state-owned and state-invested enterprises of goods and services for commercial sale, production of goods or supply of services for commercial sale, or for non-governmental purposes would not be considered to be laws, regulations and measures relating to government procurement. Thus, such purchases or sales would be subject to the provisions of Articles II [regarding most favored nation treatment], XVI [regarding market access] and XVII [regarding national treatment] of the GATS and Article III [regarding national treatment] of the GATT 1994. The Working Party took note of this commitment.

The commitments mentioned in Paras. 46 and 47 are more than just idle promises; they are incorporated by reference into China’s WTO Protocol of Accession and therefore form part of its WTO obligations. Thus, it seems that were China to call this a case of government procurement, it would not only be undermining its current position in the GPA negotiations, but would also be violating its specific commitments in its WTO Protocol of Accession.

Well, wait a minute, you might say. Isn't there some kind of broad national security exception countries can always invoke? It turns out that the national security exception, at least as written, is pretty narrow. Here's what the GATS says about it in Article XIV bis:

1. Nothing in this Agreement shall be construed:

(a) to require any Member to furnish any information, the disclosure of which it considers contrary to its essential security interests; or

(b) to prevent any Member from taking any action which it considers necessary for the protection of its essential security interests:

(i) relating to the supply of services as carried out directly or indirectly for the purpose of provisioning a military establishment;

(ii) relating to fissionable and fusionable materials or the materials from which they are derived;

(iii) taken in time of war or other emergency in international relations; or

(c) to prevent any Member from taking any action in pursuance of its obligations under the United Nations Charter for the maintenance of international peace and security.

That's it. Surprisingly enough, it doesn't look like "fear of state secrets leaking into the hands of a foreign power," no matter how legitimate that fear might be, counts. Needless to say, there is absolutely zero chance that any government would put WTO rules above its own conception of its security needs.

My conclusion, then, is that the anti-Windows 8 measure passes muster but the anti-management consulting measure does not. Let me add that I'm not a WTO expert and don't even play one on television, so there may be some aspect of the issue that I've overlooked. Check this space for a red-faced update.

http://lawprofessors.typepad.com/china_law_prof_blog/2014/05/chinas-ban-on-us-management-consultants-and-windows-8-wto-compliant.html

Commentary | Permalink

Comments

This is the perrenial risk of doing business in China. There is always the political angle of looking at the situation from an friend-enemy angle.

Posted by: Frankie Fook-lun Leung | May 30, 2014 8:18:30 AM

One should be prepared to encounter these kinds of shocks totally unpredictable in doing business in China. Many foreign business people do not invest long-term in china because of the unstable buiness environment and politics plays a major part.

Posted by: Frankie Fook-lun Leung | Jul 27, 2014 10:52:31 PM

Post a comment