Untangling the Market and the State

• Jurisdiction: United States,Federal
• Publication year: 2017
• Citation: Vol. 67 No. 2

Untangling the Market and the State

Wentong Zheng

UNTANGLING THE MARKET AND THE STATE

Wentong Zheng^*

Abstract

The government plays increasingly active and diversified roles in the modern economy. How to draw the boundary between the market and the state has emerged as a contentious issue in various areas of law, including constitutional law, antitrust, and international trade. This Article surveys and critiques the law's current approaches to the market-versus-state divide, embodied in four tests based on ownership, control, function, and role, respectively. This Article proposes an alternative market-versus-state test based on the nature of the power being exercised in the challenged action. This power-based test not only better distinguishes between the market and the state, but also illuminates why the market-versus-state distinction needs to be made in the first place. Applying this power-based test would bring much needed logic and clarity to many market-versus-state issues in various legal contexts.

[Page 244]

Introduction..............................................................................................245

I. The Market Versus the State: The Legal Landscape.............248

A. The Governmental-Proprietary Distinction .............................. 249

1. Dormant Commerce Clause ................................................ 249
2. Positive Commerce Clause.................................................. 251
3. Antitrust............................................................................... 252

B. The Public-Private Distinction .................................................. 253

1. Dormant Commerce Clause ................................................ 253
2. Antitrust ............................................................................... 255
3. International Trade ............................................................. 256

C. Market Distortion by the State................................................... 258

II. The Existing Market-Versus-State Tests.................................260

A. Ownership-Based Test............................................................... 260
B. Control-Based Test .................................................................... 263
C. Function-Based Test .................................................................. 265
D. Role-Based Test ......................................................................... 268

III. Toward a Power-Based Market-Versus-State Test...............272

A. Governmental Power Versus Market Power ............................. 273
B. A Purpose Inquiry ...................................................................... 277

IV. Applying the Power-Based Market-Versus-State Test.........278

A. Constitutional Law .................................................................... 279
B. Antitrust Law ............................................................................. 285
C. International Trade Law ............................................................ 289

Conclusion..................................................................................................291

[Page 245]

Introduction

The government is on the march. Having grown out of the pre- progressive mode of governance where all commercial disputes were resolved through private litigation, the tentacles of the government are reaching far and wide, extending regulatory oversight over a plethora of social and economic activities, including competition, railroad pricing, food and drug safety, and many others.¹ Supported by a rapidly growing number of regulatory agencies, the government has assumed greater control over the economy, expanding its role from correcting market failures to administering social and economic justice.²

Aside from its traditional role as a market regulator, the government is also emerging as a major participant in market activities. Among other things, governments own corporations,³ employ workers,⁴ and buy large amounts of goods and services.⁵ The footprint of the government has grown larger particularly because of the 2008-2009 global financial crisis, which sparked unprecedented state intervention in the marketplace.⁶

The rise of the government is even more dramatic if one's horizon is broadened to include emerging economies on the world stage. Powerful state-owned enterprises from countries like China, Russia, and Saudi Arabia are

[Page 246]

ushering in a new form of doing business, generally dubbed as "state capitalism."⁷ As one indication of the ascendancy of state capitalism, the thirteen biggest oil firms in the world, which control more than three-quarters of the world's oil reserves, are all state-backed.⁸ The government has been so successful in the new era of capitalism that one influential commentator has pronounced "the end of the free market."⁹

The changing dynamics between the government and the market have far-reaching implications not just for the economy, but for the law as well. Courts and dispute settlement tribunals around the world are grappling with the increasingly active and diversified roles of the government. Since 2007, the U.S. Supreme Court has ruled on whether the government could require waste hauling firms to bring waste to publicly owned waste transfer and processing facilities,¹⁰ whether a state-owned hospital should be required to answer antitrust complaints when it attempted to acquire the only competing hospital in the region,¹¹ and whether a state dental licensing board should be accorded immunity from antitrust law when it prohibited nondental practitioners from providing teeth-whitening services.¹² In the meantime, the World Trade Organization (WTO) opined on whether Chinese state-owned enterprises should be treated as public bodies akin to government agencies¹³ and whether a Canadian provincial government provided a subsidy to renewable energy producers when it purchased electricity from them at above-market rates.¹⁴

[Page 247]

This Article is an attempt to systematically examine how the government interacts with the market and how the law treats such interactions. For ease of reference, this Article labels the various issues arising from the government-market interactions as "market-versus-state"¹⁵ issues. While the market-versus-state dynamics have shifted in leaps and bounds, legal scholarship has not kept up with the changes. Scholarly discussions of the market-versus-state divide date mostly back to several decades ago, when the state was still playing a static, confined role in the economy.¹⁶ And the existing academic literature approaches market-versus-state issues in isolated manners, paying essentially no attention to the systemic implications of the different ways of handling market-versus-state issues in different areas of law.¹⁷

This Article sets out to narrow the gap in understanding how the law should deal with market-versus-state interactions. It starts with a survey of how market-versus-state interactions are being treated in three distinct areas of law: constitutional law, antitrust, and international trade.¹⁸ This Article discusses how the law in those areas employs four tests, based on ownership, control, function, and role, respectively, to draw the boundary between the market and the state. These tests, however, suffer serious limitations. They either presume that all conduct by the government is governmental in nature, or base legal outcomes on factors that do not lend themselves to objective determinations.

[Page 248]

Alternatively, they are implicitly predicated on a value judgment that needs support on a case-by-case basis.¹⁹

This Article contends that a more reliable way of distinguishing between the market and the state is to look at the nature of the power being exercised in the challenged action. If the power is a coercive one, backed up by state-sanctioned violence with no recognized basis in property rights, then the state is exercising governmental power and is acting in a governmental capacity. But if the state exercises coercive power by virtue of its control of economic resources, then it is exercising market power that could have been exercised by private actors, and therefore is acting in a proprietary or market capacity. ²⁰ This power-based test, coupled with an inquiry as to the fundamental purpose of the legal regime at issue, not only better distinguishes between the market and the state, but also illuminates why the market-versus-state distinction needs to be made in the first place.²¹ This Article argues that applying this power-based test would bring much needed logic and clarity to many market-versus-state issues in constitutional law, antitrust, and international trade.²²

This Article proceeds as follows. Part I provides an overview of the major market-versus-state issues that have come up in the law. Part II discusses the law's current approaches to the market-versus-state divide, embodied in four tests based on ownership, control, function, and role, respectively. Part III proposes an alternative market-versus-state test based on power and an analytical framework within which the power-based test will be situated. Part IV discusses the application of the power-based test in various legal contexts.

I. The Market Versus the State: The Legal Landscape

The interaction between the market and the state figures prominently in many areas of law, including constitutional law, antitrust, and international trade. In those areas of law, the legal consequences of an action by the state often depend on whether the state acts in a governmental or proprietary capacity, whether the individual or entity carrying out the disputed action is considered to be acting in a public or private capacity, and whether state participation in the market is considered to distort the market. In this Part, this Article surveys the legal treatment of these market-versus-state interactions. This survey revolves around three...