Achieving World Trade Organization Compliance for Export Processing Zones While Maintaining Economic Competitiveness for Developing Countries

By Waters, James J. | Duke Law Journal, November 2013 | Go to article overview

Achieving World Trade Organization Compliance for Export Processing Zones While Maintaining Economic Competitiveness for Developing Countries


Waters, James J., Duke Law Journal


ABSTRACT

Export processing zones (EPZs) are statutorily created investment parks that developing countries establish to attract foreign investment in exchange for government-granted fiscal incentives. At their core, EPZs are a quid pro quo between host governments and investor companies: in exchange for the promise of job creation, technological transfer, economic development, and compliance with export performance requirements, investor companies receive substantial fiscal incentives, such as tax and tariff exemptions.

Most EPZ statutes are inconsistent with Article 3.1(a) of the World Trade Organization's Agreement on Subsidies and Countervailing Measures (SCM Agreement) because EPZ incentives qualify as prohibited export subsidies. Fortunately, many developing countries have received exemptions from this prohibition to maintain their EPZ systems. The exemptions, however, are set to permanently expire for many countries on December 31, 2015, spurring the need for EPZ reform.

This Note proposes a framework for achieving WTO-compliance for EPZ statutes by conditioning EPZ incentives on an investor company's implementation of standards of corporate social responsibility. This proposal will permit developing countries to maintain fiscal incentives--thus helping preserve their economic competitiveness as attractive destinations for foreign investment--while also offsetting potential harm that the mandatory elimination of EPZ export requirements may cause to developing-country industries.

INTRODUCTION

Just after takeoff, attentive passengers flying out of Managua, Nicaragua's international airport can catch a glimpse of Las Mercedes Industrial Park, a foreign investment park where companies have established operations that employ about twenty four thousand workers. (1) A walk through the investment park's streets will reveal a surprisingly bustling batch of merchants catering to workers and passersby. With such a dynamic pedestrian culture, it may seem as if Las Mercedes were its own city of economic activity, providing employment opportunities for workers and an economic stimulus for the surrounding communities.

Las Mercedes is a quintessential example of an export processing zone (EPZ). EPZs are geographically delimited areas that developing countries establish to attract foreign investment in exchange for fiscal incentives granted by the host government. (2) EPZs, which "range in size from single factories to large cities," (3) have been called "vehicles of globalization" (4) and "essential tools" of economic growth for developing countries. (5) EPZs employ sixty eight million people worldwide, or about 3 percent of the global workforce, (6) and exist in over 119 countries (7) across Asia, Latin America, Eastern Europe, the Middle East, and sub-Saharan Africa. (8)

EPZs bring substantial investment to developing countries. In Costa Rica, for example, EPZs account for about half of all foreign direct investment in the country. (9) In Haiti, former U.S. President Bill Clinton and then-Secretary of State Hillary Clinton helped launch a new EPZ in October 2012 as part of U.S. efforts to help put Haiti on a path toward "sustainable economic growth" and "'long-term prosperity."' (10) This EPZ is expected to create twenty thousand jobs and provide homes for five thousand families. (11)

Despite the important role that EPZs play in sustainable economic development, it is not widely known that most EPZs are inconsistent with the World Trade Organization (WTO) Agreement on Subsidies and Countervailing Measures (SCM Agreement). (12) Article 3.1(a) of the SCM Agreement prohibits "subsidies contingent, in law or in fact ... upon export performance." (13) As explained later in this Note, EPZ fiscal incentives qualify as subsidies conditioned on export performance (14) because most EPZ statutes require companies to export most or all of their products as a condition of receiving the statutorily enumerated incentives.

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Achieving World Trade Organization Compliance for Export Processing Zones While Maintaining Economic Competitiveness for Developing Countries
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