This post was written with China Trade Monitor intern Neil Jiang

One of the most contentious issues in U.S.-China trade relations is the non-commercial behavior of Chinese state-owned enterprises (SOEs) and how to construct WTO rules to address this concern. One aspect is the following: What is the precise scope of these entities? This question arose in a WTO dispute and was a key factor in the U.S. decision to shut down the WTO's Appellate Body.

It turns out that negotiators from the U.S. Trade Representative's Office (USTR) had detailed thoughts on the issue during the end stage of China's negotiation to accede to the WTO. On the basis of a FOIA request that uncovered an email from a lead USTR negotiator to the Clinton White House National Security Council team, this post considers the views expressed by USTR on this issue in the context of the U.S. legislation that would pave the way for China's WTO membership.

The SOE issue in WTO dispute settlement

As part of the definition of "subsidy" in the WTO's Agreement on Subsidies and Countervailing Measures (SCM Agreement), a key element is whether there is "a financial contribution by a government or any public body within the territory of a Member." The term "public body" is of particular importance in relation to SOEs. The more broadly the term is interpreted, the more SOEs will be covered by subsidy rules.

A Congressional Research Service report explains that what constitutes a “public body” in the context of the SCM Agreement is heavily disputed. In 2011, the WTO Appellate Body, in a case involving U.S. countervailing duties on products from China, defined "public body" as "entities that have the power to regulate, control, supervise, or control the conduct of individuals." Pursuant to this interpretation, the Appellate Body ruled that "the mere fact that a government is the majority shareholder of an entity does not demonstrate that the government exercises meaningful control over the conduct of that entity, much less that the government has bestowed it with governmental authority."

USTR disagreed with this interpretation, and argued that such a narrow scope hindered the ability for "governments to effectively combat unfairly subsidized imports." As part of its response, the United States, along with the European Union and Japan, issued a joint statement in 2020 which said that "[t]o determine that an entity is a public body, it is not necessary to find that the entity ‘possesses, exercises or is vested with governmental authority.’" They further stated that the Appellate Body's interpretation "undermines the effectiveness of WTO subsidy rules."

This disagreement remains unresolved today, with the Appellate Body rulings still part of the jurisprudence that has been adopted by the Dispute Settlement Body, but with several key WTO Members registering their objections, and the Appellate Body no longer operating.

The PNTR legislation

The U.S.-China Relations Act of 2000 (P.L. 106-286) was a landmark piece of legislation signed into law by President Bill Clinton that grants China Permanent Normal Trade Relations. This legislation paved the way for China’s accession to the WTO.

Legislators were thinking about the scope of obligations on the Chinese government and related entities as they were drafting the legislation. A provision of that legislation offers guidance on the scope of the Chinese government in this context as follows:

GOVERNMENT OF THE PEOPLE'S REPUBLIC OF CHINA.— The term "Government of the People's Republic of China" means the central Government of the People's Republic of China and any other governmental entity, including any provincial, prefectural, or local entity and any enterprise that is controlled by the central Government or any such governmental entity or as to which the central Government or any such governmental entity is entitled to receive a majority of the profits.

This provision places an emphasis on "control" by government entities, or an entitlement to receive a majority of the profits.

Our research has not uncovered any discussion by legislators as to how they thought about the issue of defining the Chinese government in this context. As a result, all that exists from a drafting history standpoint is the text quoted above.

USTR's reaction to the legislation

As part of the Clinton Administration’s efforts to support passage of the legislation, officials from USTR provided their views on the draft legislative language. In doing so, one of the lead USTR negotiators on the Chinese accession process, Catherine Field, sent an email – uncovered by China Trade Monitor through a FOIA request – to two White House officials, Malcolm Lee and Timothy Punke, in May 2000, as the PNTR legislation was being considered. Lee was the Special Assistant to the President and Senior Director for International Trade and Economic Policy; Punke was a policy advisor to the White House.

In the email, Field set out USTR's recommendation that Congress remove specific language in the definition of the "Government of the People’s Republic of China." In particular, USTR wanted to remove the following: "and any enterprise that is controlled by the central Government or any such governmental entity or as to which the central Government or any such governmental entity is entitled to receive a majority of the profits." The reasoning behind this recommendation was based on a number of concerns, including legal consistency, the impact on privatization of SOEs, and the ability to effectively monitor compliance. 

First, USTR pointed out that "[u]nder U.S. law, companies owned by governments are not viewed as being the government (separate juridical entities)." Imposing such a position on China would thus be inconsistent with U.S. law.

A further concern was that this language was becoming less relevant or, possibly, could slow or even reverse the trend of growing private-sector management of Chinese corporations, with USTR noting that "[m]any state-owned enterprises are presently being transferred away from traditional Government of China management and ownership."

In addition, such a definition would "inadvertently include" private Chinese companies that have a "nominal relationship to some Chinese government entity" and "Chinese foreign joint ventures where the foreign party has a 49% stake or less." Here, USTR was concerned with a broad umbrella term of the "Government of the People’s Republic of China" that may complicate future trade relations and enforcement of the promulgated rules and regulations.

USTR raised additional concerns that "[m]any of the provisions in the bill that this language implicates are not related to actions by a company but only actions of ‘governmental’ bodies, e.g., only the government can promulgate laws and regulations." Under Section 102, for example, the Congressional-Executive Commission on the People’s Republic of China would be monitoring the "acts of the People's Republic of China" which "reflect compliance with or violation of human rights, in particular those contained in the International Covenant on Civil and Political Rights." USTR then noted the requirement for the Commission "to compile and maintain lists of persons believed to be imprisoned, detained, or placed under house arrest, tortured or otherwise persecuted by the Government of the People's Republic of China in pursuit of the enumerated rights," and said "[u]nder the current definition, this would require examination of the practices of companies and a determination of whether they are engaging in these onerous practices"; and it also noted the requirement of "monitoring the development of the rule of law," which "refers, for example, to the processes by which statutes, regulations rules and other acts of the Government of the People's Republic of China are developed and become binding within China," and said "[i]ncluding companies within this definition simply makes no sense in this context."

Finally, USTR noted that the draft legislation's broad definition of the Government of the People’s Republic of China creates significant hurdles related to the monitoring of compliance. USTR's comments highlight that "[n]on-transparent accounting practices make it untenable to determine whether the Chinese government receives the ‘majority of profits’ in any given case." USTR further stated that "this definition might create an incentive to avoid improving transparency, and disincline Chinese firms to avail themselves of newly available US accounting services exported to the Chinese market."

The end result

Ultimately, the language of the statute remained the same, indicating that USTR's comments were not taken on board. Nonetheless, the efforts by USTR to clarify the language help foreshadow the controversies that would come later, as trade law and policy continues to grapple with how to effectively govern the role of SOEs in China.