How Do International Trade and Investment Rules Affect Public Finance for Development?

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Summary:

In the wake of the global financial crisis, there is increased interest in the role that development banks and other forms of public finance can play in supporting job creation and stable, sustainable development. Efforts to expand public finance, however, could clash with subsidies restrictions in international trade and investment agreements. The purpose of this paper is to raise awareness of the potential obstacles posed by World Trade Organization (WTO) agreements as well as regional and bilateral trade and investment treaties. It also provides brief summaries of some of the complaints that have been filed against governments over public financing programs.

Subsidies and Countervailing Measures (SCM) Agreement: This WTO agreement covers subsidies related to goods. It prohibits export subsidies and those that are conditioned on the use of a certain level of domestic content. It also allows governments to impose countervailing duties if they can demonstrate that another country’s subsidies are having an adverse effect on their economic interests. Governments have filed numerous complaints related to public finance, including a series of tit-for-tat disputes over government loans and other supports to aircraft manufacturers.

General Agreement on Trade in Services (GATS): The WTO has not yet negotiated specific rules for subsidies related to services. But subsidies are not automatically exempted from the GATS general obligations, including national treatment. Governments may list limitations on these obligations in their schedules.

U.S. trade agreements and bilateral investment treaties (BITs): Under the investment chapters of U.S. trade agreements and some recent BITs, governments are prohibited from conditioning “an advantage” (likely interpreted to mean a subsidy) on compliance with export or domestic content requirements. In U.S. BITs, the United States has claimed exemptions from national treatment for its own subsidies, but in 25 cases the partner country did not, opening them up to possible “investor-state” challenges if they provide subsidies to domestic but not to U.S. companies.