Chinese Law Prof Blog

Editor: Donald C. Clarke
George Washington University Law School

Saturday, July 16, 2005

Does CNOOC’s bid for Unocal implicate WTO issues?

On July 11, the Washington Post carried a Reuters report of a letter sent to the Secretary of Commerce and to the United States Trade Representative by Senators Kent Conrad and Jim Bunning. According to the report, the letter asked the SOC and the USTR to review whether China's financial backing for CNOOC Ltd.'s bid for Unocal violated China's commitments to the World Trade Organization:

Since a chunk of the funding for CNOOC's bid will come from Chinese government entities and in the form of no-interest or low-interest loans, China has violated a promise that its banks would lend to state-owned enterprises only on market terms, the senators wrote.

Assuming for the sake of argument that the Chinese government is indeed backing CNOOC’s bid with below-market financing, does such backing implicate or violate any of China’s WTO obligations or promises in its Protocol of Accession? I think it is a hard case to make.

[Note: Major credit for the following analysis should go to Prof. Julia Qin of Wayne State University Law School, who has kindly given permission for me to quote her directly and indirectly from postings she made to another listserv on this issue.]

First of all, what exactly is the case? According to a report in the BNA’s WTO Reporter ("Senators Charge That CNOOC's Bid for UNOCAL Could Constitute WTO Violation"), the senators’ letter and unidentified sources speaking for Chevron have identified two paragraphs in the Working Party Report as the basis for the argument that WTO obligations have been violated:

China said in its WTO accession agreement that "its state-owned banks had been commercialized and would only lend to state-owned enterprises on market terms," the senators' letter said. "The CNOOC transaction illustrates that China has failed to abide by this commitment."

A source close to Chevron said China made several commitments in the WTO's Working Party Report on China's Accession that are contravened by CNOOC's bid.

For example, the source cited language from paragraph 43 of the report, which says: "The representative of China stated that the state-owned enterprises of China basically operated in accordance with rules of market economy .... The state-owned banks had been commercialized and lending to state-owned enterprises took place exclusively under market conditions."

In addition, paragraph 173 states that China would "reduce the availability of certain types of subsidies, in particular by ... making government-owned banks operate on a commercial basis."

These commitments are violated by the loans at below-market interest rates CNOOC has received, the source said.

Para. 43 recounts that the representative of China stated that "The state-owned banks had been commercialized and lending to state-owned enterprises took place exclusively under market conditions." But this is just a statement, not a promise. One can find promises that SOEs will procure goods and services on a commercial basis (for example, "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"). But one cannot find such a promise respecting investments by SOEs or lending by banks. And this is not surprising, since the WTO is not an investment agreement.

Prof. Qin agrees that "paragraph 43 is a statement, not a commitment. Paragraph 43 is not incorporated into the Protocol (see paragraph 342) since it does not contain any commitment." This is not some lawyers' word game. China's trading partners knew how to turn a statement in the Working Party Report into a commitment in the Protocol of Accession, and they did not do so in this case.

She adds:

a) Under Section 9 of the Protocol, China did promise to "allow prices for traded goods and services in every sector to be determined by market forces" except for a few specified categories. (This is, in my view, one of the most important commitments China made in its WTO deal, although it has attracted little attention.) The exempted sectors include six categories of services that may be subject to "government guidance pricing", among which are banking services, health services, professional services, and transport services. To the extent that prices for banking services cover interest rates on loans, such loans would be exempted from Section 9.

b) Government subsidies, including loans with below-market rates, are subject to WTO subsidy disciplines when they affect trade in goods. In general, export subsidies are prohibited; domestic subsidies are countervailable if they cause injuries to trade interests of others. And China did take on additional obligations regarding SOE subsidies -- essentially allowing other WTO members sue China more easily at the WTO or to launch countervailing actions unilaterally against Chinese subsidies. (I believe we will see WTO disputes involving Chinese SOE subsidies in the not-too-distant future.) But the existing subsidy rules apply to trade in goods only. How subsidies should be regulated in service sectors remains to be negotiated by WTO members. Since the Unocal deal is about capital investment, not trade in goods, it is beyond the coverage of the existing WTO rules.

With respect to para. 173 in particular, Prof. Qin writes:

Paragraph 173 contains one commitment which is incorporated into the Protocol. The [Chevron-affiliated] source, however, cited only a portion of one sentence that is not even part of that commitment. Here is the relevant part of the paragraph:

"The representative of China explained that, in common with many other Members, China had experienced difficulty in obtaining accurate data about all types of subsidies. He also indicated that China was attempting to reduce the availability of certain types of subsidies, in particular by reforming its tax system and making government-owned banks operate on a commercial basis. The representative of China stated that China would progressively work towards a full notification of subsidies, as contemplated by Article 25 of the SCM Agreement. The Working Party took note of this commitment." (The portion cited by the source is in italics.)

It is clear that the commitment in this paragraph is to work towards a full notification of subsidies, and that the preceding sentence from which the source quoted a "commitment" is a statement on what China was attempting to do.

I am making this post open to comments. Since this issue is creating a lot of heat in Washington, let me ask commenters to be temperate in their language and to stick to the intellectual issue of whether WTO commitments are implicated.

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