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NAFTA 2.0: IS THE SOE CHAPTER A RED HERRING?

April 18, 2019

Excerpt: "China’s authoritarian government, size, and anticompetitive intent are more problematic than the ownership structure of the companies in question.  The government can fund them, without having them be profitable, as long as it likes.  And it can control them without owning them."

[Beth Baltzan | March 7, 2019 | American Phoenix]

Much has been made of the TPP and NAFTA chapters on state-owned enterprises (SOEs).  They are supposed to be forward-looking provisions that will put a dent in state capitalism.  But the premise is wrong, and so the response is wrong.

The premise of the argument is that state capitalism is executed through SOEs.  In some cases that’s true, certainly.  But state capitalism does not have to be executed through SOEs.

In fact, when you strip all the distractions away, you realize the real problem isn’t state ownership.  It’s government control, and anticompetitive behavior.

The OECD Spotlight Should Make People Uncomfortable

The OECD is doing some extraordinary research to try to identify subsidy practices around the world.  The impetus for the research is

growing interest in updating the international trade rule-book to better address concerns about fair competition in the global economy.

Fair competition in the global economy.

Their most recent report was on aluminum.  It gives us unprecedented insight into how governments, including but not limited to China, intervene in the marketplace.  The attached paper goes into greater detail (about the OECD report, and the issues in this blog more generally).  The largest aluminum producer in the world in 2016 was Hongqiao – a private Chinese company that nevertheless benefited from gargantuan government subsidies.

Russia similarly shows us the perils of pretending that formal status as an SOE is dispositive.  Rusal, a private firm, held the title of largest aluminum company in the world until it was supplanted by the aforementioned Hongqiao.  Still, Rusal was doing ok – until the U.S. government slapped sanctions on its owner, Oleg Deripaska, for meddling in our democracy.  But there was no need to worry about the fate of Rusal, because Team Putin made it quite clear that if the company went under, it would be backstopped by the Russian government.

Aluminum provides the best examples of this kind of behavior, in part because of the OECD’s research.  But it’s not just aluminum, and it’s not just manufacturing.  Look at the proposed merger between two German banks, which the New York Times described as potentially creating

a new national champion lender that could support the country’s huge export industry and compete for international business with the giant Wall Street banks.

Sounds like a trade problem, doesn’t it?  Germany’s already accused of being mercantilist.  What better than to have a national lender, vested in facilitating those exports.

What about the SOE Chapter?

The actual rules in the SOE chapter aren’t bad. They address unfair competition – but only with respect to SOEs.  So what harm is there in having an SOE chapter, even if it isn’t as useful as people would like to think?

One problem is the implicit assumption that state control of the economy is an acceptable construct in our trading system, and the only issue that has to be addressed is state ownership of companies. But that’s inconsistent with the foundations of the multilateral trading system.  The GATT does not have detailed rules on state trading because after Stalin refused to join the talks, the very premise of GATT was to exclude the Soviet model.  China was allowed to join the WTO because it was supposed to become a market economy.  If we’re going to change course, we must do so consciously, not by cobbling together chapters in trade agreements without adequate debate.

China’s authoritarian government, size, and anticompetitive intent are more problematic than the ownership structure of the companies in question.  The government can fund them, without having them be profitable, as long as it likes.  And it can control them without owning them.  As to intent, China actually invoked predation to try to get its companies out of antitrust liability in the United States (that’s right – by admitting its predatory intent, China persuaded a court to decline jurisdiction).  These factors have informed the current Administration’s desire to frustrate Made in China 2025 — even if they’ve missed opportunities to address it.

So if the premise of the SOE chapter is that it will rein in the likes of China, think again.  It might be useful with a country like India, which is adopting state capitalist strategies without the authoritarianism.  But even without state ownership, China will control its economy – and ours.

Now, some will say “but we can’t let the perfect be the enemy of the good. We have to start somewhere!”  Fair enough.  If you feel that way, you should be thrilled with the new sunset clause.  It provides an impetus for us to reconsider rules that have proven not to be up to snuff, instead of having inadequate rules fossilized in perpetuity.

Holding Up A Mirror

But let’s not pretend we’ve got all the answers either.  The Chinese ramped up state capitalism after the financial crisis. Is it possible they saw the crisis as a reflection of  U.S. “free enterprise,” where the government’s role was to genuflect before bankers, and said no thank you?

If we don’t fundamentally change course, we will end up with a trade policy that continues to prioritize liberalizing capital flows while implicitly endorsing state capitalism. Financiers will continue to run amok in the West, and the Chinese government will continue to run amok in the East.  What happens when they collide?

If steel and aluminum are any indication, state capitalism will prevail.

An SOE chapter won’t change that.

Read the original article here


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