Market Benchmarks and Government Monopoly : The Case of Land and Natural Resources Under Global Subsidies Regulation

Government provision of land and natural resources has provoked major trade disputes over the issue of subsidies. Yet, how to identify the existence of a subsidy when the government is the sole or predominant provider – a common phenomenon due to the government control of natural resources in many countries – remains unsettled under the law of the World Trade Organization. At heart of the controversy is the issue of benchmarking. Because the normal benchmark of domestic market prices cannot be properly utilized when the market price is the government monopoly price, it becomes necessary to resort to alternative benchmarks. Although the WTO Appellate Body has articulated certain principles and made some suggestions, what has prevailed in practice is the use of external market prices as the benchmark in identifying subsidy in the country of provision. This approach, however, disregards the most basic source of comparative advantage of a trading nation – its natural endowment.This article makes several contributions. First, it traces the drafting history of relevant WTO rules and attempts to discover the rationale of an abandoned proposal that would have completely changed the legal landscape on the issue of government monopoly and subsidies. Second, it systemically examines WTO benchmarking jurisprudence, which has evolved through multiple cases involving Canadian softwood lumber, Indian minerals, Indonesian timber, and Chinese land. Third, it highlights the concept of resource rent and analyzes how the treatment of resource rent in the system of public ownership might affect the application of WTO subsidy regulation. Finally, it proposes the alternative of constructing domestic market benchmarks on the basis of optimal use of natural resources via economic modeling, which may have broad implications for dealing with the special problem of subsidization in China