LAW 696L Lecture Notes - Lecture 9: Economic And Technological Development Zones, Technology Adoption Life Cycle, Comparative Advantage

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9 Nov 2019
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The Intersection of Free Trade Zones and the World Trade Organization Law
Bashar H. Malkawi
Introduction
Most developing countries have begun to shift from import-substitution to
export-looking trade policies. One dimension of this has been the establishment of
free trade zones (FTZs) for such economic activity as export promotion or industrial
development. It is estimated that, by 1975, there were seventy-nine FTZs spread out
in twenty-five countries and that, by 2011, one hundred thirty-five countries hosted
three thousand five hundred FTZs. The rapid proliferation of these zones, however,
was not limited to developing countries. Some of the richest countries host FTZs, like
Australia, Singapore, the United States, Italy, Ireland, Spain and other European
countries.
These FTZs are considered as one of the government's development tools to
promote its exports. The purpose of these areas is to attract foreign capital, foreign
technology, encourage technology diffusion, and economic development.and
managerial skills. However, the concept of FTZs has been criticized on a number of
grounds. Determining the rules applicable to these zones is challenging, for the law of
the World Trade Organization (WTO) does not regulate them. Indeed, there is neither
a standardized definition of nor a standardized model for FTZs. Their nomenclature
also varies greatly. Some use the terms free trade zones, special economic zones,
maquiladoras, free trade zones, free export zones, special economic zones, economic
and technological development zones, export-oriented units, or foreign trade zone as
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synonyms. Some distinguish between these terms.1 Others adopt the term export
processing zone as a general expression that covers all its different variations.
Nevertheless, the thrust of criticism is that FTZs have limited success in the
development of developing countries economies. First, most zones employ mainly
low skilled workers with lax labor codes and health and safety standards. One of their
supposed advantages, the generation of employment through the attraction of foreign
firms, has its limitations, in terms of the type of jobs generated and the long-term
sustainability of these jobs. As far as zone-host economy backward linkages are
concerned, there is normally very little technology transfer from FTZs to the host
country. The value of tax incentives granted to firms operating in FTZs is also
debatable. Therefore, the revenue forgone and social cost incurred in establishing
FTZs could be higher than actual benefits.
Export Subsidies
Export subsidies have always been a prominent and disputed matter. On the one
hand, some scholars stand for adoption of export subsidies especially by developing
countries. These scholars assert that "[e]conomic theory suggests … that subsidies are
not as trade distorting as other trade instruments (like, for example, quantitative
restrictions or tariffs) which affect two margins (both the producer's and the
consumer's)," whereas "subsidies affect one margin only (the producer's)". On the
other hand, it can be argued that export subsidisation distorts free trade; "such
subsidies cut into the exports of other countries that have a natural comparative
advantage in those products, and so distort the world's allocation of resources".
1 See FIAS, Special Economic Zones: Performance, Lessons Learned, and Implications for Zone
Development 9 (2008), available at
<http://www.ifc.org/ifcext/fias.nsf/AttachmentsByTitle/SEZpaperdiscussion/$FILE/SEZs+report_
April2008.pdf >.
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Despite these academic disputes, it is clear, with respect to export subsidies, that,
since the negotiations that resulted in the adoption of the General Agreement on
Tariffs and Trade of 1947 (GATT 1947), the view that they must be avoided is
prevalent not only in international instruments, such as the GATT and the SCM
Agreement, but also in the dispute settlement of the WTO.
Export subsidies are presumed under the WTO Agreement to cause negative trade
effects. Therefore, to analyze whether the exemption from import duties on goods
entering FTZs is consistent with Art. 3.1(a) of the SCM Agreement, it is sufficient to
determine whether this exemption falls within the definition of "export subsidies" as
included in the SCM Agreement which applies to trade in goods only. There is no
need to prove adverse effects on other members since the damage, in a case where
recourse to a prohibited subsidy is being made, is not the trade effects caused, but
rather the act of subsidization itself.2
Export Subsidies in Light of WTO Law and Jurisprudence
An "export subsidy" is a species of the genus "subsidy." So, it is necessary examine
whether the import duties exemption referred to are subsidies. Under the law of the
WTO, the terms subsidy and prohibited export subsidies have precise technical
meanings. A subsidy is a measure that falls within the provisions of Arts. 1 and 2 of
the SCM Agreement. According to these articles, a subsidy is a (i) financial
contribution or any form of income or price (ii) by a government or a public body (iii)
that confers a benefit (iv) to a specific recipient. Four elements of characterization can
therefore be outlined; each should be examined with respect to the exemptions from
import duties in FTZs.
2 See Mitsuo Matsushita, Thomas J. Schoenbaum, and Petros C. Mavroidis supra note 25, at 369.
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