International Trade Subsidy Rules and Tax and Financial Export Incentives

This book is a revised and expanded version of my Harvard Law School LL.M. Long Paper, which had the careful guidance and supervision of my advisor, Professor ALVIN C. WARREN JR. It is an inquiry into the interrelations between the international trade rules concerning subsidies and the use of tax and financial export incentives by developing countries. Its central claim is that developing countries should be allowed to adopt such incentives without violating those rules, based on their right to development. The logic behind the body of international law governing trade, in the context of the WTO, has been that of free trade and liberalization, without the necessary concern to the developing needs of developing countries. Except for some isolated “special and differentiated treatment” provisions of dubious effectiveness, the profound differences between developed and developing countries are largely ignored, which contributes to maintaining or widening the gap between them. In particular, international trade subsidy rules bar developing countries from adopting more aggressive development policies grounded on the concession of tax or financial export incentives. Such policies can be conducive to progress, leading to a national welfare gain, if their overall return exceeds their costs and the developing countries are able to enhance their competitive position. However, the success of these strategic trade policies often depends on the adoption of specific export incentives, targeted to certain key sectors and conditioned to performance goals, as the East Asian experience shows. Therefore, the current WTO subsidy rules are incompatible with the developing needs of developing countries, impairing their right to development—a human right universally recognized under international law. Although international trade law prevails over domestic law, the issue of how far it can meddle with fiscal sovereignty is still an unresolved one. But it is clear that trade rules cannot interfere with a country’s development sovereignty, and as far as tax and financial policies are instrumental to developing countries’ development goals, they should be immunized from the reach of the subsidy concept, through the introduction of a built-in exception for developing countries in the text of the Agreement on Subsidies and Countervailing Measures (ASCM).