Trade Policy Note Final-rev08 - Development

water and sanitation. Sustainability can be promoted by giving priority to
environmentally friendly technologies.
Universal access to energy and environmental services, essential to the achievement
of MDGs, will require huge amounts of investment over the next few decades. The
terms under which this investment will take place are being defined in the current
GATS negotiations, as described in Annexes A and B to Section V.
The same goals can be pursued through investment incentives of a fiscal and financial
nature. However, such incentives may result in a loss of precious revenue for the
government of the host country and provoke competition among host countries to
attract investors, leading to a race to the bottom, which can undermine human
development goals (e.g. suspension of labour rights in FTZs). Fiscal incentives may
also be inconsistent with WTO rules (e.g. the prohibition on export subsides).
Incentives can be used in parallel and as a complement to performance requirements.
However, fiscal incentives can lead to a race to the bottom scenario. It is estimated
that developing countries lose $35 billion annually due to competitive pressures to
reduce corporate tax rates combined with the transfer of profits out of developing
countries to low tax regimes 68
Among the different approaches to the use of investment measures, the example of
the Republic of Korea has been cited as the most successful. Its strategy was to first
encourage investment in labour intensive export industries, following the logic that
export earnings should finance industrialization. The government of the Republic of
Korea mobilized an arsenal of tools, including investment measures such as national
ownership and export and transfer of technology requirements, combined with trade
measures such as subsides, quantitative restrictions and tariffs (see Section 3), with
the sole purpose of increasing its bargaining power with foreign firms. The objective
was to move up the technological ladder, the virtuous spiral described in Section III. 69
China has followed similar goals, using some of the same techniques, moving rapidly
up the technological ladder in export production. 70 Different countries have achieved
considerable success follo wing different approaches, the common factor being that
overly successful countries have adopted selective and strategic, rather than
ideological approaches that either uncritically welcoming or overly restrict foreign
investment 71 Such investment measures have also been a component of a broader
industrial strategy that incorporated trade measures (e.g. tariffs and QRs) as well as
subsidies (see Section III).
68 See Stiglitz and Charlton, op. cit., pp. 266-267, drawing from Charlton, Andrew, “Incentive Bidding
Wars for Mobile Investment; Economic Consequences and Potential Reponses ”, OECD Development
Centre technical paper 203, OECD (Paris, 2003) (http://www.oecd.org/dataoecd/39/63/2492289.pdf).
See also OXFAM, Tax Havens, Releasing the Hidden Billions for Poverty Eradication (Oxford, 2000)
(http://www.oxfam.org.uk/what_we_do/issues/debt_aid/tax_havens.htm).
69 See Shin, Jang-Sup and Ha-Joon Chang, “Foreign Investment Policy and Human Development
Country study: Republic of Korea”, in Seih Mei Ling, op. cit..
70 See Rodrik, Dani, “What’s So Special about China’s Exports?” CEPR Discussion Paper No. 5484
(London: Centre for Economic Policy Research, February 2006) (www.nber.org/papers/w11947).
71 See Shin and Chang, op.cit.
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