State Trading: Its Nature and International Treatment
State Trading : Its Nature and International Treatment
Edmond M. Ianni 0
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Part of the International Law Commons; and the International Trade Commons
At least six considerations compel a review of the international
practice of state trading. First, state trading is practiced widely
throughout the world and embraces at least one quarter of world
trade.' From a domestic perspective, United States trade with state
trading countries continues to grow and, therefore, is directly relevant
to the United States national interest.2 Second, increasing international
economic interdependence has augmented the role of state trading in
international trade by the inducements of economic necessity and
efficiency.3 Third, recent Eastern European trends toward greater private
economic autonomy 4 have facilitated trade relations between free
market countries and state trading countries, thereby fostering a stronger
economic nexus between market economies and nonmarket
economies.' Fourth, to the extent that foreign policy making and
international trade are intertwined, state trading enters the policy making
calculus as a relevant factor.' Fifth, current political unrest and
uncertainty in state trading countries, as in Poland and the U.S.S.R. for
example,7 have actual and potential repercussions on the financial, legal
and political aspects of international trade. Sixth, state trading itself is
changing in form (e.g., joint ventures and cooperation agreements) and
organization (e.g., the foreign trade structure of the Soviet Union)?
These considerations have important implications for the legal,
political and economic frameworks in which state trading is practiced.' 0
This article reviews some important aspects of state trading and
the international context in which it is practiced. It specifically
examines the nature of state trading (with illustrative focus on Eastern
Europe, the Soviet Union and the People's Republic of China), the
4 During the past six years, the foreign trade organizations of some Eastern European
countries and the Soviet Union have been reorganized, thereby giving private enterprises a relatively
larger role in foreign trade. See, e.g., Lasok, Government InterventionandState Trading,44 MOD.
L. REV. 249, 256 (1981); Rabinovich, The Legal Status of Soviet ForeignTrade Organizationsin
View ofNew Soviet Legislation, 15 INT'L LAW. 233 (1981).
5 See U.S. TARIFF COMM'N, IMPACT OF GRANTING MOST FAVORED NATION TREATMENT TO
THE COUNTRIES OF EASTERN EUROPE AND THE PEOPLE'S REPUBLIC OF CHINA 5-9A (1974)
(primary author, John E. Jelacic).
6 See S. PISAR, COEXISTENCE AND COMMERCE 58-74 (1970). For a review of theories relating
United States foreign policy making and international trade, see McGowan & Walker, Radical
and ConventionalModels of U.S. ForeignEconomic Policy Making, 33 WORLD POL. 347 (1981).
7 See Minard & Michaels, Why Workers won't in the Soviet Union, FORBES, Dec. 6, 1982, at
138; Brecher, Snuffing Out Solidarity,NEWSWEEK, Oct. 18, 1982, at 47; Anderson, A System that
Doesn't Work, NEWSWEEK, Apr. 12, 1982, at 36; Deming, Warsaw's 'Operation Calm,'
NEWsWEEK, Mar. 1, 1982, at 36; Strasser, Poland Under the Heel, NEWSWEEK, Dec. 28, 1981, at 10.
8 See generally N.Y. Times, Feb. 14, 1982, § 12 (International Economic Survey).
problems of state trading within the international framework of the
General Agreement on Tariffs and Trade" (hereinafter GATT), and,
as an illustration of state trading relations outside the scope of the
GATT, United States trade relations with the People's Republic of
China. The article also reviews the deficiencies of the GATT's
treatment of state trading, suggests improvements, and examines the
comparative advantages of bilateral trade arrangements.
"State trading" evades precise definition because it refers to
governmental conduct and control of foreign trade. 2 The definitional
problem is determining how much governmental participation is
required to qualify the trading activity (or organization) as state, rather
than private, trade. Scholars recognize the undefinable nature of state
trade and, therefore, have formulated several working descriptions. 13
In terms of degree of governmental involvement, at least three general
types of state trading may be described: (
) where the state owns the
trading enterprise; (
) where the state directly controls, but does not
own, a private enterprise to the extent that the enterprises trading
operations or management or both are predominantly controlled by the
state; and (
) where the trading enterprise is granted exclusive or
special privileges by the state.14 These three situations correspond to
decreasing degrees of state control: (
) ownership, (
) direct (operational)
control, and (
) indirect (licensing) control. The former two
descriptions are more popular among scholars than is the latter'5 because the
third category is overinclusive. For example, it embraces a trading
enterprise that is entirely privately owned, managed and operated simply
because it has received the imprimatur of the state in the form of a
license. These different descriptions, nonetheless, illustrate the
amorphous nature of the concept of state trade and, more importantly, imply
that mere sectors' 6 of a national economy or the entire economy itself
may be characterized as state trading, depending on the degree of
I I General Agreement on Tariffs and Trade, openedfor signature Oct. 30, 1947, 61 Stat. A3,
T.I.A.S. No. 1700, 55 U.N.T.S. 187.
12 Baban, State Tradingand the GATT, 11 J. WORLD TRADE L. 334, 334 (1977).
13 See, e.g., Allen, supra note 1, at 257-59; Fensterwald, United States Policies TowardState
Trading, 24 LAw & CONTEMP. PROBS. 369, 369-70 (1959); Baban, supra note 12, at 334.
14 See M. KOSTECKI, EAST-WEST TRADE AND THE GATT SYSTEM 43-44 (1978). Some
scholars simply define state trading functionally. For example, Baban, supra note 12, at 338, defines
state trading as, interalia, "simply an alternative means by which the functional equivalents of the
more familiar commercial policy measures may be implemented."
15 See, e.g., Allen, supra note I, at 257; Baban, supra note 12, at 334, 338.
16 Economic sectors may be defined according to product or geographic area or both.
emmental control over the trading organization or activity.17
As state trading may be practiced (
) exclusively or concurrently
with domestic, private traders, and (
) narrowly (e.g., in a particular
product-line or geographic sector) or extensively, the appellation "state
trading country" is widely applicable and has no specific meaning.
Traditionally, however, the term is used to refer to countries whose
foreign trade is conducted exclusively or predominantly by
governmentally owned or controlled enterprises.' 8 These state trading countries
are often referred to as "nonmarket economy" countries,' 9 signifying
that the state rather than the free market's "invisible hand" determines
domestic prices, quantities of production and distribution of goods and
services.20 According to this customary understanding, the primary
state traders of the world are socialist and communist countries such as
the Soviet Union, Poland, Romania and East Germany. 2' The foreign
trade of socialist and communist countries, however, is not necessarily
conducted exclusively in the form of state trade. For example, under
Hungary's recent "New Economic Mechanism," the state, though
retaining ownership of the means of production, transfers them to a
private trading enterprise that determines their use.22 This arrangement,
therefore, combines central control with private management and
exemplifies a nonexclusive form of state trading. Furthermore, socialist
and communist countries are not the only countries to engage in state
17 The degree of governmental control is determined usually along the dimensions of
organizational structure, objectives and financing. See M. KOSTECKI, supra note 14, at 43.
18 See K. DAM, THE GATT-LAW AND INTERNATIONAL ECONOMIC ORGANIZATION 316
19 There are usually four basic differences between a "nonmarket economy" (particularly a
"centrally planned economy") and a "market economy." Unlike a market economy, a nonmarket
economy usually involves: (
)a national economic plan of the state which determines resource
) the determination of imports and exports by national economic planning; (
state's fixing domestic prices, which, therefore, do not fluctuate freely in response to supply and
demand; and (4) nonconvertible currencies which may neither be transferred outside the country
nor freely converted into any Western currency. See K. DAM, supranote 18, at 318;
COMPTROLLER GENERAL'S REPORT, supra note 2, at 2.
20 This is a rough distinction, as some countries possess features of both "nonmarket" and
"market" economies. Recent economic developments in Hungary, for example, pertaining to its
"New Economic Mechanism" suggest that the Hungarian economy falls between these two
categories. See Reuland, GA7T and State-Trading Countries, 9 J. WORLD TRADE L. 318, 329-38
21 Most of the Eastern bloc state trading countries are members of the Council for Mutual
Economic Aid ("Comecon" or "CMEA"). Comecon presently consists of 10 members: Bulgaria,
Czechoslovakia, East Germany, Hungary, Poland, Romania, the Soviet Union, Mongolia,
Vietnam and Cuba. GENERAL AGREEMENT ON TARIFFS AND TRADE, INTERNATIONAL TRADE 1978/
79, at 159. For a general discussion of Comecon, see Grzybowski, The ForeignTradeRegime in
the Comecon Countries Today, 4 N.Y.UJ. INT'L L. & POL. 183 (1971).
22 See Reuland, supra note 20, at 332.
trading; non-communist and non-socialist countries (e.g., the United
States and the United Kingdom2 3 ) also state trade, although to a lesser
State trading takes a variety of forms.24 The most common forms
) state monopoly over exports or state monopsony over imports
or both, (
) private trade monopolies that are conferred and closely
regulated by the state, and (
) central determination of prices or
quantities or both. These forms are not mutually exclusive and may be
combined in practice. Recently, however, some European countries have
developed a fourth instrument of state trade, viz., planning
Planning agreements are usually tailor-made, quasi-contractual
agreements between the government and a domestic corporation
whereby public and private resources and development plans are
coordinated.26 The objective of such an arrangement is to develop a close
relationship between government and private industry with a view
toward national needs and policies. Although the form and parties of a
planning agreement are domestic, its content subsumes issues of
international trade.2 7
State trading may be practiced for various purposes. Six basic
objectives are common to nonmarket economy countries and market
economy countries.2 8 First, state trading may be conducted to protect
domestic production from imports, to promote exports, to stabilize
domestic prices or incomes, or to discriminate in favor of certain trading
partners. State trading usually accomplishes these objectives through
the determination of either the domestic or external prices of trade
goods and the quantities imported or exported.29 Second, state trading
may be used to improve trade terms and thereby improve the state
trader's international trading position. 30 Third, state trading may be an
instrument for improving the country's balance of payments or
generally for maintaining control over the components of the trade
account.3 ' Fourth, for reasons of public health and welfare, state trading
may be used to control domestic consumption of items such as
pharmaceuticals, tobacco and alcoholic beverages.32 Fifth, state
trading may serve fiscal policy, for example, by shifting trade profits to the
government.33 Sixth, state trading may serve national security interests
by retaining state control over trade in military arms and other defense
items. 34 These various objectives clearly illustrate that state trading can
be used to serve a variety of policies. In the words of one commentator,
"state trading is an all-inclusive operation with political, economic, and
military overtones and undercurrents.1 3' This, therefore, gives state
trading a multidimensional nature. It is perhaps the best example in
international trade of a practice and process that is as political as it is
economic. By definition, the principal actor in state trading is a
political rather than private body. Political efficacy is, therefore, as much
within the purview of state trading as economic efficiency. As one
author has noted:
Economic decisions are transmuted into economic-political-military
decisions, in which costs are balanced against benefits in all aspects of
national life before transactions are concluded. This is so because when the
state controls external economic relations, it must take into account the
total interests of the state, not just its economic interests.3 6
This multidimensional nature of state trading is important to any
evaluation of the frameworks (e.g., the legal framework of GATT) in which
State trading is simultaneously advantageous and problematic.
The overall advantage is that "state trading stands alone in its power as
an instrument that utilizes economic means to improve a country's
relaquencesof State Trading,24 LAw & CONTEMP. PROBS. 276, 276-85 (1959); Nove, East-West Trade,
in INTERNXTIONAL ECONOMIC RELATIONS 100 (P. Samuelson ed. 1969); Vajda, The Problems of
East-West Trade, INTERNATIONAL ECONOMIC RELATIONS 121 (P. Samuelson ed. 1969).
30 Allen, supra note 1, at 258.
31 Baban, supra note 12, at 336-37.
32 State control in this area may involve not only the decision to exclude certain imports but
also the determination of quantities imported and standards of import quality.
33 State trading in this respect is the functional equivalent of a tax because it draws revenue
for the state. See Baban, supra note 12, at 334, 337.
34 For example, the United States reservation for itself of trade in nuclear fuels may be viewed
as state trading in an item for defense.
35 Fensterwald, supra note 13, at 382.
36 Allen, supra note I, at 265 (emphasis added).
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tive economic, political, and military position. ' 37 A state trader enjoys
two fundamental advantages over a private trader: a greater economic
bargaining power and greater "translational" powers.38 A state trading
country enjoys the former as a consequence of its sheer size in the
market, e.g., as a monopsonist of imported goods or as a monopolist of
exported goods.39 A state trader's translational power is the power to
translate acquired economic power into other kinds of
influence-political, for example-serving the state's interests. Thus, state trading
"confers not only greater bargaining power, but also the ability to shift
this power among the different goals of the state."4 These advantages
bespeak the multidimensional nature of state trading and collectively
enhance the state trader's position vis-a-vis the private trader in
State trading, however, has its costs. It imposes two basic
disadvantages on the country itself and its trading partners. First, state
trading necessarily requires a bureaucratic structure. The bureaucracy
inherently presents several actual and potential problems: (
conflicts within the trader's political leadership; (
) policy conflicts and
the potential for lack of coordination between the bureaucratic
leadership and the implementing trading entity; (
) direct or indirect
nullification of trading gains by bureaucratic delay or contradiction; and
(4) practical problems of trade execution resulting from multi-tiered
bureaucratic structure.4 ' One reporter, for example, recently described
the Soviet form of economic management as follows: in theory the
complex system of reporting and command allows central planners to
maximize efficiency by organizing and guiding production and setting
prices for periods of up to five years; in practice the planning often
results in bureaucratic chaos. 42 Unlike a state trading country such as
the Soviet Union, the smaller private trader avoids these severe
bureaucratic burdens in its corporate structure.
The second disadvantage of state trading-particularly from the
perspective of the state's trading partners-is its instability.4 3 Absent a
bilateral agreement with a state trading country, a trading partner, such
as an exporter, cannot rely on firm demand in the importing state
trading country because such demand is controlled by the state for
noneconomic and economic reasons rather than by free market forces.
Even if a bilateral agreement exists, the terms of trade that are
discretionary rather than fixed are susceptible to the vagaries of political and
other noneconomic policies that motivate the decision-making of the
state trader.' In other words, the multidimensional nature of state
trading can impede the stability of international trade irrespective of
the existence of a bilateral trade agreement.
THE INTERNATIONAL REGULATION OF STATE TRADING
From the perspective of the GATT,45 state trading may be
regulated from within two general, international frameworks: the
framework of the GATT which applies to state trading countries that are
contracting parties thereto, and regulatory frameworks outside GATT,
which apply to state traders that are not parties to GATT.
Presently, six communist-socialist countries belong to the GATT:
Cuba, Czechoslovakia, Yugoslavia, Poland, Romania and Hungary.46
Notably, the Soviet Union and the People's Republic of China are not
contracting members of the GATT. All six members, with the
exception of Yugoslavia, are also members of the Council for Mutual
Economic Aid ("Comecon" or "CMEA"), 47 an extra-GATT framework
that regulates state trading among its members. Although this article
focuses on the problems of applying the GATT to these six communist
state trading members, it should be noted that they are not the only
GATT members that practice state trading. Many non-communist
GATT members (e.g., the United States and the United Kingdom, as
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noted earlier 48 ) also engage in state trading, albeit to a lesser extent.
The assumptions underlying the GATT and its orientation
inappropriately address the modem practice of state trading. The GATT's
free trade theory perspective is reflected in its general orientation
towards a free-enterprise or "market" economy.49 This point of view is
consistent with the basic rationale underlying the GATT-the desire to
remove politics at least one significant step away from the realm of
economics (i.e., to "de-politicize" international trade) by eliminating
nontariff trade barriers and regulating tariffs.5 0 This free market
orientation and de-politicization rationale are not surprising, as the GATT
rules were drafted essentially with state trading market economies in
mind.5 ' It simply was assumed by the drafters-as it was assumed by
the conventional, international economic theory of free trade that
preoccupied them 5 2-that free market trade is, and should be, the norm
and that state trading is an aberration. Furthermore, it was assumed
(erroneously, in hindsight) that state trading would be practiced in
insignificant amounts by GATT members.5 3 The effect of these
assumptions and the GATT's orientation for state trading
countriesparticularly those with nonmarket economies-is that some of the
GATT rules are difficult to apply to these countries and that it is very
difficult to use GATT as a framework for the economic integration of
the state trading communist bloc into the world economy (assuming
that such integration is desirable54 ).
Article XVII (entitled "State Trading Enterprises") is the central
provision of the GATT dealing with state trading. That article and
several other articles and interpretive notes impose four basic
obligations and restrictions on state trading contracting parties.
Prelimina48 See supra note 23 and accompanying text.
49 K. DAM, supra note 18, at 317-18; J. JACKSON, supra note 23, at 1046; Reuland, supra note
20, at 319.
50 GATT, Preamble, supra note 45 ("directed to the substantial reduction of tariffs and other
barriers to trade and to the elimination of discriminatory treatment in international commerce").
See also Baban, supra note 12, at 335; Reuland, supra note 20, at 319, 320, 324, 326.
51 Baban, supra note 12, at 335 ("the GATT rules were drafted essentially with state trading in
MTEs [market-type economies] in mind"); V. MUHAMMAD, THE LEGAL FRAMEWORK OF WORLD
TRADE 227 (1958).
52 See infra text accompanying and immediately following note 83.
53 V. MUHAMMAD, supra note 51, at 227.
54 It is submitted that economic integration of nonmarket economies (which are primarily
communist countries) into the world economy is a desirable goal. The establishment of amicable,
working trade relations between the communist bloc and noncommunist countries benefits both
groups: the communist bloc is directly benefited by Western imports and the noncommunist trade
partners thereby improve their trade balances. More important, however, is the resulting climate
of amicable relations and cooperation which contributes to dttente and stability in the world.
rily, it should be noted that article XVII does not define "state [trading]
enterprise." The absence of a definition raises the question of what
should be the criteria for a state trading enterprise-state ownership,
direct state control, substantial indirect state control, or some other
standard? The definitional silence of article XVII, therefore, renders its
scope somewhat amorphous.
The first obligation imposed by article XVII is the duty of
nondiscriminatory treatment.55 This duty applies to contracting parties:
) which establish or maintain a state trading enterprise (hereinafter
STE), or (
) which grant to "any enterprise, formally or in effect,
exclusive or special privileges."56 Furthermore, the interpretive note to
article XVII, paragraph 1 explicitly brings within the article's scope two
types of state-established marketing boards: (
) those engaged in
purchasing and selling, and (
) those which simply set regulations for
private traders, but do not themselves engage in trade.57 Though it
seems reasonable to include the former type of marketing board within
the meaning of an STE, inclusion of the latter type seems overinclusive
for the same reason that the third proffered category of state trading, as
noted earlier,58 is often rejected. For this reason, it is submitted that
article XVII's concept of an STE is stated overbroadly.
The same interpretive note to article XVII excludes from the
meaning of "exclusive or special privileges" both governmental quality
standards and efficiency measures, and privileges granted for the
exploitation of national natural resources "which do not empower the
government to exercise control over the trading activities of the
enterprise in question."5 9 This exclusion has the effect of permitting some
internal protection by the government provided it has a nexus with
quality, efficiency or indigenous resources. However, the proviso of no
control by the government raises the question of what type of, and how
much, control is contemplated. For example, would a joint venture
between a government and one or more of its domestic producers in
which the government is a passive partner be excluded? A literal
application of the language suggests that it would be subject to the duty of
nondiscriminatory treatment. This result is conservative because it
would subject all such joint ventures to the duty of nondiscrimination
55 GATT, art. XVII, para. l(a), supra note 45.
56 Id. (emphasis added).
57 Id. Ad art. XVII, para. 1.
58 See supra text accompanying note 15.
59 GATT, Ad art. XVII, para. l(a), supra note 45.
without distinguishing between bona fide governmental participation
and mala fide governmental involvement which uses the cloak of a
joint venture to do indirectly that which it could not do directly (viz.,
discriminate against foreign traders).6" A better result would exclude
the former but include the latter. By excluding the former cooperation
between government and private enterprise for legitimate national
interests would be fostered; including the latter would subject a mala fide
governmental partnership to the constraints of nondiscrimination and
would be consistent with the GATT's underlying rationale of
depoliticizing decisions of trade.
Assuming, however, that the enterprise in question falls within the
scope of article XVII, paragraph l(a) imposes a general duty on the
enterprise to "act in a manner consistent with the general principles of
non-discriminatory treatment" in its import and export trade. 6'
Paragraph l(b) explicitly translates this general obligation into two specific
) to make its purchases and sales involving imports and
exports "solely in accordance with commercial considerations,
including price, quality, availability, marketability, transportation and other
conditions of purchase or sale," and (
) to "afford the enterprises of the
other contracting parties adequate opportunity, in accordance with
customary business practice, to compete for participation in such
purchases or sales."62 The first obligation, requiring attention to solely
commercial considerations to the exclusion of non-commercial
considerations (such as political ones), is expressive of the GATT's
underlying purpose of de-politicizing trade decisions. The second obligation
defines the obligation further by prescribing that the enterprise afford
the STE competitive opportunity (i.e., the opportunity to compete on a
commercial rather than a noncommercial basis).
The general obligation of nondiscriminatory treatment is qualified
in three ways. First, it does not apply to imports that are for
governmental use and not for resale or use in the production of goods for
sale.63 This exclusion implicitly recognizes a governmental versus
commercial distinction as to purpose of use, and by excluding only the
former, retains goods for commercial use within the reach of the
nondiscrimination obligation in keeping with the GATT's philosophy.
Second, a state trading country receiving a "tied loan" is permitted to
60 Given the increased use of mixed joint ventures in international trade, this is an undesirable
61 GATT,art. XVII, para. 1(a), supra note 45.
62 Id. art. XVII, para. l(b).
63 Id. Ad art. XVII, para. 2. "The term goods is limited to products as understood in
commercial practice, and is not intended to include the purchase or sale of services." Id.
take this loan into account as a "commercial consideration" when
purchasing requirements abroad.64 The effect of this qualification,
therefore, is to permit a state trading country to discriminate in its
selection of exporting countries on the basis of the terms of tied loans.
This is consistent with the spirit of GATT because competition in the
international lending industry is macroscopically economic (rather
than political) in nature and, therefore, should be a relevant
"commercial" consideration in a country's procurement decisions. Third, export
price discrimination among foreign markets by a state trading country
is not deemed a violation of the obligation of nondiscriminatory
treatment, provided that the different prices for the same export in the
different foreign markets are charged for commercial reasons in order to
meet conditions of supply and demand in those markets. 65 One might
view this exculpatory provision as a meeting-foreign-market-conditions
excuse for price discrimination. As such, it is a broad standard by
which an exporting state trader can color its discrimination.
Furthermore, this exculpatory provision presents, by implication, an
asymmetrical result: the absence of a similar provision for import price
discrimination suggests that such discrimination isperse a violation of
the obligation of nondiscrimination.66
Related to article XVII's general obligation of nondiscriminatory
treatment is article III's national treatment standard. 67 Whereas the
meeting-foreign-market-conditions qualification of the
nondiscrimination obligation addresses discrimination among foreign markets, the
national treatment standard addresses a state trader's treatment of
foreign sources as comparedto its treatment of domestic sources. Article
III, paragraph 4 requires that imports be accorded "treatment no less
favourable than that accorded to like products of national origin in
respect of all laws, regulations and requirements affecting their internal
sale, offering for sale, purchase, transportation, distribution or use." 68
As applied to STEs, this provision in effect prohibits them from
practicing favoritism toward local suppliers.69
2. The Duty to Notify
The second general obligation imposed by article XVII on a state
trading country is the duty to notify all the contracting parties of the
64 Id. Ad art. XVII, para. 1(b).
65 Id. Ad art. XVII, para. 1.
66 See Baban, supra note 12, at 340; K. DAM, suyra note 18, at 322-23.
67 GAIT, art. III, para. 2, supra note 45.
69 See K. DAM, supra note 18, at 322.
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products imported and exported by its STEs.7° This obligation,
however, is substantially emasculated by the provision of paragraph 4(d)
that a contracting party shall not be required "to disclose confidential
information which would  impede law enforcement or  otherwise
be contrary to the public interest or  would prejudice the legitimate
commercial interests of particular enterprises."'" Each of the three
categories allows a subjective determination by the reporting country of
the applicability of this disclosure requirement. As a result of this
subjectivity, it is not surprising that in practice very little information has
been disclosed by state trading members of GATT on their disclosure
questionnaires.72 For example, in its 1972 notification, Poland listed its
foreign trading agencies and described briefly its trading procedures
and goals, accompanied by a cover note asserting that state trading "in
the sense of Article XVII" did not exist in Poland.73
Paragraph 4(b) adds to the scope of the duty to notify. It requires
disclosure, upon request of another contracting party having a
substantial trade in the product concerned, of the "import mark-up" on the
imported product over which a contracting party has a state trading
monopsony. 74 The import mark-up is defined in the interpretive note
to this paragraph as the difference between the domestic resale price
(charged by the importing state trader) and the landed cost of the
imported product.75 One of the problems with this calculation is the
determination of the resale price in a nonmarket economy-the type of
economy that is characteristic of most state trading countries. As prices
are not determined by free market condition but rather by the state
itself, resale price does not reflect fair market value-the concept
underlying "import mark-up"-but rather a governmental decision based
on factors other than market conditions. Moreover, the duty to disclose
import mark-ups is also emasculated by the broad "confidential
information" exception of paragraph 4(d), which explicitly applies to this
duty. Thus, in effect and in practice, the broad exception undermines
the entire purpose of the general duty of notification.
3. QuantitativeRestrictionsand Domestic Protection
The third and fourth general obligations imposed on state trading
70 GATT, art. XVII, para. 4, supra note 45. In 1957, a standardized reporting system was
established for GATT members. See Baban, supra note 12, at 341.
71 GATT, art. XVII, para. 4(d), supra note 45.
72 Baban, supra note 12, at 342.
73 Id. at 343-44.
74 GATT, art. XVII, para. 4(b), supra note 45.
75 Id. Ad art. XVII, para. 4(b).
members of GATT pertain to quantitative restrictions and domestic
protection. An interpretive note applying to articles XI through XIV
and article XVIII laconically states that the provisions contained within
those articles pertaining to import and export restrictions apply equally
to such restrictions "made effective through state-trading operations. 76
One of the problems created by the note is that it provides "no
indication as to how these provisions would be applied to state trading
enterprises."" Specifically, such application is not self-evident, particularly
in consideration of the fact that state trading involves state "plans" that
fix prices and quantities for the long-term, as well as the short-term.
Article II, paragraph 4 contains the fourth general obligation for
state trading members of GATT. With two narrow exceptions,
paragraph 4 prohibits a contracting party that operates a state monopsony
over imports from using its monopsony "to afford protection on the
average in excess of the amount of protection provided for" in the
appropriate GATT Schedule of Concessions.7" The aim of the provision
is to prevent the use of monopsonistic power over domestic resale
prices from impairing or nullifying the tariff concessions in the GATT
Schedules.79 The qualification "on the average," however, is not
defined and, therefore, leaves the issue of "average protection" to be
disputed between the parties.8" Because of the temporal nature of the
word "average," the amount of protection (assuming it is calculable)
averaged out over one year, for example, may be considerably different
from the amount averaged over several years. The failure of paragraph
4 to clarify this issue opens the door to disagreement over the relevant
temporal period for which this average should be calculated.
Thus, application of the obligations and restrictions imposed by
the GATT on state trading members poses severe difficulties. The duty
of nondiscriminatory treatment has four shortcomings: (
) it fails to
define "state trading enterprise;" (
) it incorporates the overinclusive
"exclusive or special privileges" criterion of state trading; (
application, it fails to distinguish between bona fide and mala fide
governments participating in joint ventures; and (4) it asymmetrically allows
export price discrimination for the purpose of meeting market
condi76 Id. Ad arts. XI-XIV, XviII.
77 Baban, supra note 12, at 341.
78 GATT, art. II, para. 4, supra note 55.
79 Baban, supra note 12, at 342.
80 In 1955, an amendment was proposed that would have limited such protection by means of
"(a) maximum import duty.. . or (b) any other mutually satisfactory arrangement consistent
with the provisions of this Agreement." K. DAM, supra note 18, at 324-25. However, the proposed
amendment did not take effect because Uruguay did not ratify it. See Baban, supra note 12, at
tions without permitting import price discrimination for similar
purposes. The duty of notification is effectively undermined by the broad,
subjective criteria of excepted "confidential information" and fails to
provide an adequate formula for determining import mark-ups in
nonmarket economies. Similarly, the obligation pertaining to
quantitative restrictions does not address the problem of applying those
restrictions to the "plans" of state trading countries, and the prohibition
against above-average domestic protection is silent on the key issue of
determining the "average."
Although the GATT is the largest international legal framework
within which state trading is explicitly regulated, regulation of the state
trading activities of countries that are not GATT members (most
notably the Soviet Union and the People's Republic of China) necessarily
must be effected through other frameworks such as economic unions,
economic communities and bilateral arrangements. 8 ' This part of the
article examines some important aspects of United States bilateral
arrangements and trade relations with the People's Republic of China
(hereinafter the PRC) as an illustration of the bilateral treatment of
The history of United States trade relations with the PRC is
representative of the larger history of United States trade policies and
practices toward state trading countries in general, and toward communist
state traders in particular.8 2 At least until 1969, the United States
articulated a policy that condemned state trading while extolling free
trade. 83 The underlying reason for the condemnation was the
traditional association of communism with state trading-an association
that was based on the fact that nearly all of the communist countries
were (and still are) state trading countries. This antagonistic view of
state trading was bolstered by conventional international economic
theory that views the free market as the economic norm and treats
nonmarket economies as aberrations. Thus, economic theory's bias
against state trading and the United States ideological opposition to
communism converged in a foreign trade policy that rejected state
Within this context, in 1950 the United States instituted an
embargo on trade with Communist China in response to China's
involvement in the Korean War.8 4 That embargo continued until the early
1970s when the Nixon Administration renewed trade relations with the
PRC. In 1979, the Carter Administration established diplomatic
relations with the PRC and entered into, inter alia, a bilateral trade
agreement with China, which took effect in 1980.85
Among the key provisions86 of the U.S.-PRC Trade Agreement
) reciprocal extension of nondiscriminatory (i.e., Most Favored
Nation) tariff treatment for imports from each country;87 (
of patents, copyrights and trademarks; 88 (
) procedures for the
settlement of commercial disputes, including third party arbitration;89 and
(4) safeguards against market disruption.9" The 1980 Trade Agreement
and the other U.S.-PRC bilateral agreements that have been made
since 1979 signify a normalization of trade relations between the two
countries and a closer nexus between their respective market and
nonmarket economies. The 1980 Trade Agreement establishes a
bilateral duty of nondiscriminatory treatment, which is similar to the
84 See M. HARVEY, supra note 82, at 102-04; George, Gulo & Stein, supra note 9, at 22.
85 Agreement on Trade Relations, July 7, 1979, United States-China, 31 U.S.T. 4651, T.I.A.S.
No. 9630, 18 I.L.M. 1041. Many other bilateral agreements with the PRC have been signed since
1979 pertaining to a variety of matters: Agreement relating to Relief from Double Income Tax on
Shipping Profits, Nov. 18, 1981, United States-China, - U.S.T. -, T.I.A.S. No. -- ; Protocol on
Cooperation in Nuclear Safety Matters, Oct. 17, 1981, United States-China, - U.S.T. -, T.I.A.S.
No. --; Agreement concerning the Enlargement of Existing Consular Districts, June 16, 1981,
United States-China, - U.S.T. -, T.I.A.S. No. -- ; Agreement concerning the Establishment of
Additional Consulates General, June 16, 1981, United States-China, -U.S.T. -, T.I.A.S. No. -;
Agreement relating to the Reciprocal Issuance of Visas to Crew Members of Aircraft and Vessels,
Jan. 7, 1981, United States-China, - U.S.T. -, T.I.A.S. No. 9965; Agreement relating to
Investment Guarantees, Oct. 30, 1980, United States-China, - U.S.T. -, T.I.A.S. No. 9924; Agreement
on Marine Transport, Sept. 17, 1980, United States-China, - U.S.T. -, T.I.A.S. No. -;
Agreement relating to Civil Air Transport, Sept. 17, 1980, United States-China, - U.S.T. -, T.I.A.S.
No. -- ; Consular Convention, Sept. 17, 1980, United States-China, - U.S.T. -, T.I.A.S. No.
10209; Agreement relating to a Visa System for Export to the United States of Cotton, Wool and
Man-Made Fiber Textiles and Textile Products, July 23, 25, 1980, United States-China, - U.S.T.
-, T.I.A.S. No. 9836.
86 The Trade Agreement also contained provisions covering the fostering of business
activities, the establishment of private and governmental trade offices and international transactions of
finance, booking and currency. See George, Gullo & Stein, supra note 9, at 23.
87 Agreement on Trade Relations, art. II, para. I(A), supra note 85.
88 Id. art. VI.
89 Id. art. VIII.
Northwestern Journal of
International Law & Business
GATT's multilateral framework. However, the 1980 Trade Agreement
goes further than the GATT by establishing reciprocal obligations such
as the protection of patents, copyrights and trademarks; safeguards
against market disruption; and procedures for settling commercial
disputes. The provisions under the 1980 Trade Agreement illustrate the
basic advantage of dealing with state trading countries on a bilateral
basis: specific, rather than general, obligations and responsibilities can
be negotiated. This avoids ambiguous provisions and amorphous
generalities-as, for example, in the GATT-that are the product of
multilateral compromise and conservatism.
Furthermore, these bilateral agreements illustrate how trade
relations with state trading countries can and do adjust to political change.
Because the United States trade embargo of Communist China in 1950
was politically motivated, its active trade relations with the PRC,
especially since 1976, have paralleled Chinese political change. The deaths
of Mao Tse-tung and Chou En-lai in 1976 occasioned the rise of the
post-Mao pragmatists who have been more willing to stray from
Marxist orthodoxy than their predecessors. 91 This political reorientation in
China has led to an economic reorientation that is sympathetic to
capitalism and favors closer trade relations with the non-communist
West.92 This new economic outlook is reflected partly by China's
experiment during the last three years with a "mixed" economy (i.e., a
planned economy that incorporates features of a market economy) in
its Sichuan Province.93 Increasing numbers of private enterprises and
free markets have been the hallmarks of this successful experiment,
which represents a departure from the traditional forms of control and
planning. Although China's state trading structure94 has not been
altered in the wake of its domestic experiment, the change in domestic
climate reflects a posture that is favorable to capitalism and pervades
much of China's leadership. Thus, as China has grown away from
Maoism politically, and economically has moved closer to capitalism, it
has shed some of the political and economic "evils" that have been
traditionally associated with state trading. In this way, the PRC has
presented itself to the United States as a more ideologically attractive
trading partner. Perceiving this, the United States has been less
reluctant (than it was in 1950) to develop close trade relations with the
The preceding review of the international regulation of state
trading suggests some important implications and challenges that
Article XVII of the GATT should define "state trading enterprise"
or at least provide a standard of state control which, in either case,
avoids overinclusiveness. The modem need to foster commercial
cooperation in an environment of economic interdependence demands a
more liberal exclusion to the "exclusive or special privileges" provision
of article XVII, paragraph l(a). Specifically, the interpretive
qualification to the exclusions----"which do not empower the government to
exercise control over the trading activities of the enterprise" 9 6 -should
either be eliminated (the more liberal approach) or modified by
replacing the criterion of "power" to control, with the criterion of "actual
control" (the less liberal approach). In either case, the problem of
overinclusion would be mitigated.
The duty of notification under the GATT is vacuous as a
consequence of the broad, subjective categories of the "confidential
information" exemption. Although the first and third categories (impeding law
enforcement and prejudicing legitimate commercial interests,
respectively) seem justified, the second category, excluding information that
would "otherwise be contrary to the public interest,"97 is an overbroad
excuse from the disclosure requirement. This "public interest"
exemption should be tailored more narrowly, for example, by replacing it
with "would directly threaten national security." This would help to
restore vitality to the duty of notification. As it is presently stated, the
95 This is indicated by the Trade Agreement of 1980 and the other bilateral trade agreements
with the PRC, which were signed during that year. These treaties are cited supra in note 85. A
similar development of United States trade relations with Hungary culminated in 1978 with a
trade agreement between the two countries. Agreement on Trade Relations, Mar. 17, 1978,
United States-Hungary, 29 U.S.T. 2711, T.I.A.S. No. 8967.
96 See supra note 59 and accompanying text.
97 See supra note 71 and accompanying text.
duty of notification easily can be shirked by a state trading country's
invocation of the broad "public interest" exemption.
The fundamental assumptions underlying the GATT should be
reexamined in the light of subsequent economic and political changes.
Its free market orientation, which is reflected in article XVII, is
incompatible with the state trading of nonmarket economies. The drafter's
assumption that state trading would be practiced only by market
economy members of GATT failed to consider how modem countries
would develop economically. Article XVII should be fine-tuned in
accordance with these subsequent developments.
Whatever modification, if any, is made to article XVII, the
inherent tension between the GATT's basic purpose of de-politicizing
international trade practices and the multidimensional nature of state
trading will remain. Because state trading is political, as well as
economic, in nature, the GATT's attempt to accommodate state trading
enterprises within its framework focuses on trading's inherent political
dimension. To the extent that the obligations and restrictions imposed
on state trading members in article XVII are an attempt to de-politicize
the international state trader, they are a feeble attempt.
The specificity and directness of bilateral arrangements with state
trading countries, as illustrated by current U.S.-PRC trade relations,
contrast sharply with the GATT's shortcomings. Unlike the
multilateral GATT, a bilateral trade agreement such as the 1980 Trade
Agreement between the United States and the PRC is a better international
instrument for adjusting trade relations to political and economic
change. The involvement of multiple contracting parties in the GATT
makes the framework prone to legal ossification and resistant to needed
change. By contrast, the presence of only two parties in a bilateral
trade agreement provides for flexibility in both the negotiation and
adjustment processes. As the record shows, the GATT has not adjusted
its framework to accommodate changes in state trading as well as the
United States has in its bilateral agreements.
In conclusion, if integration of nonmarket, state trading countries
into the world economy is desirable or necessary, the GATT is an
inadequate international legal framework within which this objective can
be accomplished. Absent the equivalent of a global "economic union"
or "community," bilateral agreements provide the best legal framework
within which to pursue the economic integration of market and
* This article first appeared in substantially similar form in the November-December 1982 issue of the Journal of World Trade Law, and is reprinted here with the permission of the copyright holder .
1 See R. MASON , R. MILLER & D. WEIGEL , THE ECONOMICS OF INTERNATIONAL BUSINESS 7 ( 1975 ); Allen, State TradingandEconomic Warfare, 24 LAW & CONTEMP . PROBS. 256 , 257 ( 1959 ).
2 COMPTROLLER GENERAL, U.S. GENERAL ACCOUNTING OFFICE, REPORT TO CONGRESS: UNITED STATES LAWS AND REGULATIONS APPLICABLE TO IMPORTS FROM NON-MARKET ECONOMIES COULD BE IMPROVED 3- 4 , 6 ( 1981 ) [hereinafter cited as COMPTROLLER GENERAL'S REPORT] .
3 See R. BLACKHURST , N. MARIAN & J. TUMLIR , TRADE LIBERALIZATION , PROTECTIONISM AND INTERDEPENDENCE 1-5 (GATT Stud . Int'l Trade No. 5 , 1977 ); D. MARSH, WORLD TRADE AND INVESTMENT 1-6 ( 1951 ).
23 The United States engages in state trading in, for example, nuclear fuel sales, which are handled by the Nuclear Regulatory Commission and the Energy Research Development Administration . See J. JACKSON, LEGAL PROBLEMS OF INTERNATIONAL ECONOMIC RELATIONS 1045, 1046 n.2 ( 1977 ). The British National Oil Corporation (BNOC) is an example of state trading engaged in by the United Kingdom . See Why BNOC ?, THE ECONOMIST, Apr. 2-8 , 1983 , at 12. Other examples of state trading entities in market economies include the Tobacco Monopoly in France, the Food Agency in Japan and the State-Trading Corporation in India. M. KOSTECKI , supra note 14, at 43.
24 See Baban , supra note 12 , at 344.
25 Planning agreements reflect the development of a practice in a number of European countries such as France, Italy and Great Britain . Cranston & Puri,supra note 9 , at 100. See generally J. HAYWARD & M. WATSON, PLANNING, POLITICS AND PUBLIC POLICY-THE BRITISH , FRENCH AND ITALIAN EXPERIENCE ( 1975 ).
26 Cranston & Pur, supra note 9, at 99.
27 Id. at 101.
28 See Allen , supra note 1 , at 258; Baban, supra note 12, at 336-37, 344; Brenscheidt, supra note 9, at 198-99 ( five main functions of state trading from the Soviet perspective ).
29 For discussions of the economics of state trading , see Humphrey , The Economic Conse-
44 The trading partner would be wise to seek political risk insurance if it perceives such risks .
45 General Agreement on Tariffs and Trade, openedfor signatureOct. 30 , 1947 , 61 Stat. A3, T.I.A.S. No . 1700 , 55 U.N.T.S. 187 [ hereinafter cited as GATT]. For a discussion of the history of the GATT , see R. HUDEC , THE GAT LEGAL SYSTEM AND WORLD TRADE DIPLOMACY 3-55 ( 1975 ).
46 The dates of their accession to the GATT are: Cuba , Jan. 1 , 1948 ; Czechoslovakia, Apr. 20 , 1948 ; Yugoslavia, Aug. 25 , 1966 ; Poland, Oct. 18 , 1967 ; Romania, Nov. 14 , 1971 ; and Hungary, Sept. 9 , 1973 . THE CONTRACTING PARTIES TO THE GENERAL AGREEMENT ON TARIFFS AND TRADE , GATT STATUS OF LEGAL INSTRUMENTS 1-2.3 , 3 - 10 .1, 3 - 15 .1, 3 - 18 .1, 3 - 20 .1 ( 1980 & Supp ., Apr . 1981 ).
47 For a discussion of Comecon, see supra note 21. Although Yugoslavia is a communist country, it is nonetheless regarded by many has having a market-type economy . COMPTROLLER GENERAL'S REPORT, supra note 2 , at 1 n. a; Grzybowski, supra note 21, at 186-87.
81 See generally P. LORTIE, ECONOMIC INTEGRATION AND THE LAW OF GATT 43-63 , 101 - 57 ( 1975 ); V. MUHAMMAD, supra note 51, at 242-47, 261 - 69 ; Lipsey, The Theory ofCustoms Unions: A GeneralSurvey, in XI AMERICAN ECON . ASS'N, READINGS IN INTERNATIONAL ECONOMICS 261- 78 ( 1968 ).
82 See M. HARVEY , EAST-WEST TRADE AND UNITED STATES POLICY 97- 114 ( 1966 ); George, Gullo & Stein, supra note 9, at 21-24, 28 - 33 ; Scott, China's Trade PolicyandPractice: Continuity and Change, 13 J. INT'L L . & ECON . 607 , 607 - 08 , 610 - 17 ( 1979 ).
83 See Fensterwald , supra note 13, at 369-70 , 381 - 85 , 396 - 97 ; Parsons, Recent Developments in East-West Trade: The U .S. Perspective, 37 LAW & CONTEMP . PROBS. 548 , 549 - 52 ( 1972 ).
91 See Wren , Chinese Exhortedto Orthodoxy, N.Y. Times , Feb. 14 , 1982 , § 12 , at 41 (International Economic Survey); Wiley, China'sCapitalistRoad, NEWSWEEK , Apr. 12 , 1982 , at 42; Scott, supra note 82, at 608-11; Speech of J.M. George , Acting Deputy Director, Bureau of East-West Trade , U.S. Dep't of Commerce, Federal Bar Association, United States-China Trade Law Conference, Washington, D.C. , Apr . 30 -May 1, 1979 , printedin U.S.- CHINA TRADE LAW CONFERENCE 22 , 26 (Fed. Bar Assoc. unpublished transcripts of Conference proceedings , 1979 ) (a copy of the speech is on file at the offices of the Northwestern Journal of International Law &Business).
92 See B. SzuPROwicz & M. SzuPROWiCZ , DOING BUSINESS WITH THE PEOPLE'S REPUBLIC OF CHINA 10- 43 , 54 - 63 ( 1978 ).
93 See Wiley, supra note 91.
94 China's foreign trade is conducted by eight Foreign Trade Corporations that are state trading monopolies. The Ministry of Foreign Trade supervises China's trade and is accountable to the State Council for trade planning and execution . B. SzupROWiCZ & M. SzuPRowIcz , su ra note 92 , at 63 , 65 . See Scott, supra note 82, at 613.