“STATE TRADING FROM THE LEGAL PERSPECTIVE”


ABSTRACT
State trading, literally refers to a state carrying out economic transactions as any person would. The volume of commercial activities carried on by states in the international arena has presently so increased that there is hardly any aspect of commerce that states are not engaged in. This has made state trading an important phenomenon in international trade. In view of the increasing extensive and varied participation of governments in recent times in economic activities, varying questions often arise with regard to the status or nature of the transaction. Such questions as: what are some of the implications of a business transaction between an individual or a private corporation of one country and the government of another; or between such an individual or private corporation and a corporation in which a foreign government has a substantial interest? What if an individual or corporation, doing business at home or abroad or in international trade should find itself in competition with a foreign government or a corporation; what would be the legal status of the foreign government or corporation? This work attempts at articulating the phenomenon of state trading as well as makes an insight into how various international trade have attempted to regulate activities of states in international trade so as to bring against the backdrop that states are still viewed in the international arena as sovereign entities.


1.      Definition of State Trading
State trading is a situation where a state engages in direct economic transactions with other entities. In other words, the state or sovereign enters[1] into economic agreement itself and executes them either directly or through state owned corporations or agents. State trading is a phenomenon that goes beyond mere governmental measures or policies put in place to facilitate trading activities. The state does not only create the legal , framework within which activities are carried on by its subjects, it delves into the arena just like any of its subjects."[2]

Article xvii of the General Agreement on Tariffs and Trade (GATT) Rules, 1994 defines state trading as occurring where a WTO member "establishes or maintains a state enterprise ... or grants to any enterprise ... exclusive or special privileges". State trading manifests in various forms. It may be a direct involvement of a state government with another state government. The more common form is that of the state contracting with individuals (whether nationals or foreigners) or private companies. In some respect the state carries on trading activities through the instrumentality of its agents or  corporations.

According to Sorenson? state trading is said to exist when a government, an agency of the government or an institution granted exclusive rights by the government controls trade on a transaction-by-transaction basis. He further suggested that the use of tariffs, quotas and other traditional trade instruments does not constitute state trading, while trade[3] by the government chartered boards with monopolies does constitute state trading.

He went further to classify the European Community's (EC) export tender system and the United States exports under the export enchantment programme as state trading because in these cases "decisions are made on a case-by-case basis by the government, whether to export more or less, whether to influence price or in other ways affect the terms of sale."[4]

Comparison of Economic and Legal Definition of State Trading Enterprises
An enterprise need not be state owned or have a monopoly position in order to be covered by Article xvii or be subject to the GAIT Rules. The important thing is that it enjoys exclusive or special rights or privileges and that in the exercise of these rights and privileges, it influences imports or exports by its activities.

The legal definition of State trading enterprises is to be found in Article xvii
of the GAIT Rules. The economic definition however is broader in scope than the legal definition because the former focuses on the trade and price behavior associated with state trading, rather than the institutions that conduct such trade and their relationship with the government as propounded in the legal definition.[5]

However, both the economic and legal definitions of state trading enterprises acknowledge government control through a government agency or an enterprise that receives an exclusive trade authority from the government. They both also recognize a State Trading Enterprise's (that is the organs used by the states in its state trading activities) potential to affect traded quantities and prices.

World Trade Organization (WTO) and the GATT Rules on State Trading
The General Agreement on Tariffs and Trade (GAIT) is the international
regulatory body for state trading. The GAIT Rules on state trading basically apply to state trading enterprises engaged in the import and export of goods.

The GAIT Rules of 1947 does not define state trading but however defines
stat
e trading enterprises as government or private enterprises that had been granted special or exclusive privilege by their governments.

However, the Uruguay understanding 1994 in its Article xvii of the GAIT Rules expanded the 1947 definition of state trading enterprises. This is to assist governments/countries decide which of their enterprises to report to the WTO's (World Trading Organization) Council on Trade in Goods.

Article xvii of the 1994 Understanding gave a working definition of State Trading Enterprises (STEs) as:
"Governmental and non-governmental enterprises including Marketing  Boards which have been granted exclusive or special rights or privileges including statutory or constitutional powers, in the exercise of which they influence through their purchase or sales the level or direction of imports or exports."[6]
The above definition raises three major questions:
(a) How are states trading enterprises structured?
(b) What are the "exclusive or special privileges"?
(c) Must state trading enterprises make purchases or sales to qualify as STE's?

Structure of State Trading Enterprises (STE's)
Ownership structure is an important factor in explaining STE behaviours, especially their influence on trade. Many of the enterprises reported to the WTO are governmental agencies or corporations. Some are fully integrated into government administration (departments, ministries etc) and the government guides their day-to-day management, others manage themselves autonomously even though the government may subscribe to their capital stock wholly or partially. STE's could also include subsidiaries of parastatals or institutions where the government may hold minority shares, but exert influence through other means[7]

Exclusive or Special Rights or Privileges

The question asked here is: what are the "exclusive or special rights or privileges" granted to the STE and their relevance to trade? Government privileges may be statute or decree that establishes the agency or firm as sole exporter/importer for the country or as chief administrator of import/ export licenses. The government may authorize the firm to export government surpluses or import for government inventories. STE's operating in domestic markets may set producers or consumers prices in the home market or act as exclusive marketer or distributor of domestic production or of imported goods .Some privileges are financial, that is, government grants, loans, loan guarantees, underwriting of operational costs or priority for obtaining foreign currencies.

Must the STE make Purchases or Sales to Qualify as an STE?
Another way of putting the above question is whether institutions that are not physically involved with sales but only with contract with exporters or importers or institutions, that merely have a regulatory or supervisory roles, could be called STE's? Such institutions include the regulatory boards, fiscal monopolies and other types of agencies. These institutions though not themselves involved in buying and selling, can be described as STE's because they equally affect the level and direction of exports or imports even
though they generally do not involve in trade per
se.[8]

3. Types of State Trading Enterprises

Since state trading activities of a state are carried out by organs otherwise known as State Trading Enterprises (STEs), it is pertinent to examine the various types of STE as anticipated by Art xvii, GATT Rules 1994. These STE’s are.

a.      These could be classified as a form of “statutory marketing Authorities and control Boards appear to be the most important common type state trading enterprise especially in the agricultural sector. They often combine a monopoly of foreign trade with responsibility for management of domestic production and distribution.
b.       Export Marketing Boards: These could be classified as a form of a statutory marketing board, with their defining feature being that they deal only with exports. They generally are producer – controlled bodies that pursue export promotion in foreign markets.

c.      Regulatory Marketing Boards: These boards have functions similar to statutory marketing boards, but with one distinctive feature: they do not themselves engage in foreign trade operations but rather contract out the actual trading operations to private entities

d.      Fiscal Monopolies: These are a type of STE typically established to cover trade in goods for which domestic and foreign demand is relatively price-elastic and with respect to which the government may have a policy of protecting public health. Ethyl alcohol, alcoholic beverages, tobacco, salt, and matches and  other inflammables are products frequently covered by such monopolies

e.      Canalization Agencies: This is the term used by a number of developing countries to describe the STE they maintain. The term refers to the channeling or cannalising of imports and exports through designated enterprise. Their sole aim is to provide some degree of price stabilization for producers as well as ensure availability of supplies for domestic consumers.

f.        Foreign Trade Enterprise: This is the term used for the trading enterprise of some current and former non-market economies. They are also known as foreign trade organizations

Statutory Regulation of State Trading
The main Article on state trading - Article xvii of the GAIT Rules and some
few others provide the rules and regulations for state trading
. The sole aim
of the rules is to ensure that state trading enterprises-
(a)  Operate on the basis of commercial considerations and in a non discriminatory manner.
(b) Do not erode or nullify the value of negotiated tariff concessions.
(c) Do not serve to implement otherwise WTO inconsistent measures.
(d) Are fully notified to the WTO on a regular basis.
(e) Ensure transparency.
Legal Status of State Trading Enterprises before the Municipal Courts
In international law, certain persons and institutions are immune from the
legal jurisdiction of foreign Municipal Courts. Under Customary International Law
, a foreign state or foreign Head of State could sue in a foreign Court but cannot however be sued without his consent. In R v. Bow Street Metropolitan Stipendiary Magistrate, exparte Pinochet (no 3),8 the House of Lords held that

"It is a basic principle of international law that one sovereign state (the forum state) does not adjudicate on the conduct of a foreign state. The foreign state is entitled to procedural immunity from the processes of the forum state. This immunity extends to both the criminal and civi1liability."

Lord Atkin in the case of Compania Navieta Vascongado v. S.S. Cristina?
encapsulated this principle in two rules:

(1)  Courts of a country will not implead a foreign sovereign, that is, they
will not by their process make him against his wi
ll a party to legal proceedings whether the proceedings involve process against his person or seek to recover from him specific property or damages.
(2)   They will not by their process, whether the sovereign is a party to the proceedings or note, seize or detain property which is his or of which he is in possession or control.

This principle of state immunity was originally absolute, but as a result of increased commercial activities of states, most states now follow what is known as the restrictive immunity doctrine herein a foreign state is allowed immunity for only public functions ordinarily associated with states. Most courts of western and industrialized countries follow and apply this doctrine.[9]

In the Schooner exchange v. Mcfaddon[10]the court held that when private individuals of one nation spread themselves and mingle indiscriminately with thy inhabitants of another state, it would be dangerous to society if such individuals do not owe temporary and local allegiance and are not subject to the jurisdiction of that country. However, according to the court, this is different in that case of a public armed ship which constitutes a part of the military force of her nation and also acts under the immediate  command of the sovereign.
Acta Jure Imperii and Acta Jure Gestionis
The increasing involvement of governments in commercial activities has led to several states distinguishing between purely governmental functions (acta jure imperil) and commercial activities (acta jure gestionis). When governments restrict themselves to purely governmental functions, it was easy to concede them immunity. According to the House of Lords in 1 Congresso Del Partidot[11]

"The basis upon which one state is considered to be immune from the territorial jurisdiction of the courts of another state is that of 'par in parem' which effectively means that the sovereign or governmental acts of one state are not matters upon which courts of other states will adjudicate."

The recent increase in the involvement of governments in commercial activities or what is known as state trading has led to many states distinguishing between purely governmental functions and commercial activities and consequently restricting immunity to only the former.
According to Lord Wilberforce in 1 Congresso Del Partidot", the rationale
for this distinction is becau
se -
(a) It is necessary in the interest of justice to individuals having such transactions with the state to allow them to bring such transactions before the courts.
(b) To require a state to answer a claim based upon such transactions does not involve a challenge to the government act of the state. It is, in accepted phrases, neither a threat to the dignity of that state nor any interference with its sovereign function ... "

The court went further to state that when a state is used and it claims immunity, then it is necessary to consider the relevant act that is the subject matter of the action. Is it an act jure gestionis or is it an act jure imperii, that is, is it a private act or is it a sovereign or public act. According to the Court-

A case, which aptly brings to fore this distinction is the English case of the Parlement Belgo[12] where a Belgium vessel, the property of the king was employed in the service of carrying mails between Dover and Osten in Belgium. It was also engaged in carrying passengers and merchandise and in earning passage money and freight. It was the contention of the plaintiff that the vessel lost its immunity by reason of it. being used for trading purposes. It was the position of the court first that the ship was by the usual means declared to be in the possession of the sovereign of Belgium and to be a public vessel of the state. That the truth of the declaration by another sovereign cannot be inquired into by contentious testimony in court. Secondly, that even if such an inquiry could properly be instituted, itseems clear that in the present case, the ship has been mainly used for the purpose of carrying mails and only subserviently to that main object, for the purposes of trade. The court held that the parlement could not submit to its jurisdiction, as the act of carrying of passengers and merchandise (that is jure gestionis) has been subordinated to the duty of carrying the mails (jure  imperii).

The rationale for this position by the courts is one of policy and reciprocal gesture between sovereigns. As opined by a jurist, questions of immunity of foreign sovereign powers are ordinarily determined under international law as matters of comity involving, therefore, considerations of expediency in  international intercourse rather than the principles of municipal law[13]

The difficult question that arises when a restrictive immunity clause is adopted is: what criterion is used to distinguish acts jure imperii and acts jure gestionis. In The Claim Against the Empire of Iranl[14] the court stated that-
"the distinction between sovereign and non sovereign state activities cannot be drawn according to the purpose of the transaction and whether it stands in a recognizable relation to the sovereign duties of the state... neither should the distinction depend on whether the state has acted commercially... As a means for determining the distinction between the commercial and the sovereign acts of the state, one should rather refer to the nature of the state transaction or the resulting legal relationships and not to the motive or purpose of the state activity ... "
According to the same court, the application of general international law is
made more difficult and the desired uniformity is hindered if the nature of
the transaction is allowed to be used to determine the distinction between
sovereign and non sovereign acts.

The issues arising from state trading in international law are more intricate
as regards state owned corporations or agents. In the case of Hannes v. Kingdom of Romania Monopolies[15] Institutei" the defendant was an autonomous corporate entity created pursuant to the laws of Romania with capacity to sue and be sued in its name. It appeared to be wholly owned and controllable by the Kingdom of Romania. It was created for the purpose of inter-alia issuing bonds and obtaining monies from investors in connection with international loans, the plaintiff owned some unpaid coupons attached to some bonds issued by the defendants in the United States of America. The plaintiff proceeded by warrant of attachment levied against monies of defendants deposited in two New York banks. One of the issues for consideration was whether a claim of sovereign immunity would prevail on behalf of a corporation wholly owned and operated by a foreign government. It was the position of the court that a variety of factors must be considered before coming to a just conclusion in that respect. According to the court, in
determining the extent to which immunity be granted, we should consider not only that the agency is engaged in commercial enterprise dealing with citizens like an ordinary business corporation, but we must also consider how closely it is related to the foreign sovereign. We should consider whether is-acts are public or private and whether the monies attached are property of the government of Romania held by its agent or of the defendant, held in its private capacity as a corporate entity.

Thus, in a suit bordering on a vessel owned by the Khedive (Prince) of Egypt[16] the vessel was employed for the ordinary purpose of trading and belonged to what may be called a commercial fleet. It entered an English port and was treated in every material respect by the authorities as an ordinary merchantman, with full consent of her master. The court held that the sovereign prince could not assume the character of a trade': when it is for his benefit, and when he incurs an obligation to a private subject, to throw off his disguise and appear as a sovereign, claiming for his own  benefits, and to the injury of a private person.

In Trendtex Trading Corp .V. CBN[17], the Central Bank of Nigeria Issued letters of credit in favor of the paintiffs, a Swiss company, for the price of cement to be sold by the plaintiffs to a company that got a contract with the Nigerian government to supply it with cement) for the building of an army barrack in Nigeria. When the CBN refused to honor the letter of credit on the instruction of the Nigerian government, the plaintiffs brought this suit against the bank. They claimed sovereign immunity. The court in refusing this contention said that-
 
"if a government department goes into the market places of the world and buys boots or cements as a commercial transaction, that government department should be subject to all the rules of the market place ... "

The distinction between the governmental and commercial activities of a state has been adopted in a number of multi-lateral treaties, the first being the Brussels Conference of 1926. The 1926 conference produced a convention on the immunity of state owned ships. This Convention
Concerning Seamen's Articles of Agreement, equally provides in essence that state owned ships engaged in commerce shall as to legal actions and remedies
, be subjected to ordinary maritime law. Art 4 (1) of the Convention specifically provides that,

'Adequate measures shall be taken in accordance with national law for It has to be emphasized here that it is not always very easy to distinguish between 'acta jure gestionis' and 'acta jure imperi'. The court, most often, will have to inquire into the nature of activity involved and also find out if it can be carried out by a private person. The court may also inquire into the final purpose or object of the trade and then confer immunity on acts connected with public functions.

In the case of Kingdom of Romania v. Guarantee Trust Co. of Ny23 the court held that immunity covers the purchase of army boots.

In the case of Kuwait Airways Corporation v. Iraqi Airways CO,24 Iraq
invaded Kuwait and subsequently transferred all aircrafts of the pl
aintiff to the defendant. The issue was whether the defendant was entitled to immunity as an entity exercising sovereign authority in the circumstances where the state itself would have been immune. It was held that the defendants were not immune in respect of the action of the purported transfer of the plaintiff's aircraft as the action was not done in the exercise of sovereign authority. In the words of the court –

"where an act done by a separate entity of the state on the directions of the state does not posses the character of a governmental act, the entity will not be entitled to state immunity, though it may invoke a substantive defence such as force majeure, despite the fact that it is an entity of the state ... the mere fact that the purpose or motive of the act was to serve the purposes of the state will not be sufficient to enable the separate entity to claim immunity ...

State Trading and International Negotiations                                                                            
State trading has evoked different views from different people. It has been
posited on the one hand thus:
 "I should at this point raise a related issue concerning state trading, in other words where a government gives a special right to a designated corporation to import or export or to distribute certain goods ... I think that if we look at international competition rules seriously, the time is ripe to consider whether this antiquated form of monopoly can be phased out all together"[18]

However there is another group which feels that such trade institutions are essential for producers in markets dominated by a small number of multi-national traders. Accordingly the maintain that;
“the export market were deregulated, we would loose a great deal of our clout. The world market is not a level playing field and without a single desk we would be depowering a valuable marketing firm.. export market deregulation would give a dangerous amount of market influence to large multinational traders. They could force down the market price to suit their own means”[19]

Conclusion
In the sphere of international trade, there is a general presumption that trading enterprises will act on the basis of commercial considerations and that based on the theory of comparative advantage, they will expand their international trade in order to reap the benefits. This is distinct from a private firm which may exercise this power in a way that distorts trade and thus cause economic detriment rather than benefit. The drafters of the General Agreement on Tariffs and Trade sought to place state trading enterprise in the same competitive position with regard to governmental support or protection as the private firm. That is, they sought to make state traders behave as private competitive traders and thus remove the potential  for trade distortion that normally exists with government involvement in an. enterprise State trading is a common feature of many economic where agriculture is an important sector of trade. Thus, state trading enterprises are found in developed countries with significant agricultural trading interests as well as in developing countries that are agriculturally based.

In the area of industrial goods, state trading has been a positive tool in the nationalization of an ailing industry or as a means of pursuing government policies on products or industries considered to have strategic importance.

It is however suggested that emphasis be placed on ensuring that STEs are not used to circumvent negotiated disciplines. Emphasis has to be placed on providing more details in the relationship between states and their governments. In this way, potential support can be identified and dealt with in the same manner that similar support is dealt with. It must therefore be finally concluded that state trading has been a veritable tool for the development of several economies especially for most developing Asian and African countries which have agriculture as their main economic stay.


[1]Okpara J. O., Lecturer, Faculty of Law Ebonyi State University, Abakaliki.
[2] WTO – The results of the Uruguay Round of Multilateral Trade Negotiation: The texts, 1994, pg 509
[3] An introduction to State Trading in Agriculture” – Economic Research Service (1996) p. 12
[4] Ibid. p. 14
[5] Sorenson, op. cit, (see note 2) p. 15
[6] Article xvii Uruguay Understanding (1994) of the GATT Rules
[7] Sovension, op. cit (see note 2) p. 21
[8] Ibid (see note 4)
[9] Harris D. J. Cases and Materials on International Law, London, (Sweet and Maxwell) 1998
[10] 7 Cranch 116 (1812) U. S. Supreme Court
[11] (1981) 3 WLR 328
[12] 15. (1880) LR 5PD 197, 214
[13] Hannes v. Kingdom of Romania Monoplices Institute (1940) 260 App. Civ 189 cited in M. Katz and K. Brewster The Law of International Transactions and Relations: Cases and Material, London, Stevens
[14] (1880) LR 5 PD 197, 214
[15] Hannes v. Kingdom of Romania Monopolies Institute (Supra)
[16] The Charkish (1973) L. R. 4 cited in Parry and G. Ftizmurice British Digest of International Law Part 7 London: Stevens & Sons 1965 pg. 396
[17] (1977) QB 529
[18] Toward Intenrantional Rules in the WTO” speech presented to the Institute for international Economics Washington DC; Nov 1997.
[19] “The Land” November, 27, 1997, p. 41.
Share on Google Plus

Declaimer - MARTINS LIBRARY

NB: Join our Social Media Network on Google Plus | Facebook | Twitter | Linkedin