Washington International Law Journal


Thomas P. Holt


In the summer of 2005, the Chinese state-owned oil company CNOOC, Ltd. (“CNOOC”) attempted to purchase American-owned Unocal Corporation on very favorable terms. There was a serious problem with the merger, however—the U.S. Congress was not about to let the People’s Republic of China (“China”) buy up an American company, no matter how much it was willing to pay. Following a period of increasingly heated rhetoric about the deal, the U.S. Congressman representing competitor Chevron Corporation’s home district inserted a provision in the Energy Policy Act of 2005 that was intended to, and did, scuttle the deal. The U.S. Congress’ underlying concern that Chinese ownership of a U.S. oil company would threaten national security (whether justified or not) obscured a potentially larger issue. China had already agreed not to grant the type of subsidy that made CNOOC’s offer possible when it acceded to the World Trade Organization (“WTO”). Incorporated into the Protocol on the Accession of the People’s Republic of China (“China Protocol”) was a commitment that China would not use unprofitable “noncommercial” loans from its state-owned enterprises to further state policy. The Unocal acquisition was to be funded by precisely this type of subsidized loan. The unique WTO rules contained in the China Protocol do more than prevent China from buying U.S. companies, however. The rules are applicable only to China, and prevent conduct that would be allowed under any generally applicable WTO agreement. As such, they undermine the core nondiscrimination principles on which the WTO was founded. More seriously, unresolved interpretative conflicts between the China Protocol and the set of agreements into which it is putatively “integrated” will force the WTO’s panels and Appellate Body to make “WTO common law,” a function specifically forbidden to them. This will seriously undermine the legitimacy of the WTO’s crucially important Dispute Settlement Understanding, and call into question the continued efficacy of the organization as a whole.

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