The wto-minus Strategy: Development and human rights under wto law

3.3 Constraints on building up non-agricultural industries

Industrial supports and subsidies

Most ordinary developing countries have well-established agricultural industries, albeit dominated by small and resource-poor farmers. Most are also industrialising, to a greater or lesser extent, and this could be assisted by the provision of industrial subsidies. Although these countries have more often had to tax than subsidise their manufacturers, until recently some supported local manufacturing export industries by providing export subsidies. Additionally, they often protected local industries from foreign competition by providing ‘local content subsidies.’ Local content subsidies are payments which are tied to the use of domestically-produced, rather than imported, component parts or other inputs in a manufacturing process. These protective measures have, of course, been central instruments in the development strategies of those countries which pursued import-substitution industrialisation.¹²⁴ However, under the Agreement on Subsidies and Countervailing Measures (the SCM), the use of these industrial subsidies is now prohibited.¹²⁵ As part of Special and Differential Treatment, developing countries were given up to eight years from the introduction of the SCM to withdraw these subsidies.¹²⁶ A second WTO agreement, the Agreement on Trade-Related Investment Measures (TRIMs), prohibits local content requirements in investment legislation in most situations where the requirements affect trade.¹²⁷ Ordinary developing countries had previously used such measures to ensure that the benefits of foreign investment flowed back into their domestic economies through inputs being sourced locally.

Other types of industrial subsidy, although not prohibited under WTO law, are open to challenge (are ‘actionable’) under the SCM if they injure or seriously prejudice an industry of another Member country.¹²⁸ A wide range of subsidies of potential utility in the development of ordinary developing countries, such as subsidies for research and development, for aid to disadvantaged regions and for environmental assistance, became actionable from 1999.¹²⁹ A developing country which insisted on maintaining these subsidies could face counter-measures imposed by other Member countries to offset damage caused to their industries. However, no action has yet been taken and it seems that the prevailing mood is against an industrialised country doing so for the present.
The dominant view among trade economists is undoubtedly that export subsidies and local content requirements lead countries in entirely the wrong direction, distorting trade and development and drawing resources into inefficient sectors.¹³⁰ Even if they can be justified as merely temporary supports, it is argued that inefficient, subsidised industries may never be able to obtain the economies of scale necessary to become viable, yet it may be difficult for governments to withdraw the subsidies as interests become entrenched.¹³¹ This reasoning underlies the WTO law prohibition on the use of industrial subsidies. Moreover, no Special and Differential Treatment permission has been made available for ordinary developing countries regarding the use of industrial subsidies, beyond the granting of a phased withdrawal.
However, the view has been challenged by both development economists and developing countries, who argue that industrial subsidies can be demonstrated, historically, to be very powerful development stimulants. If it can be shown that these subsidies are likely to help stimulate strong industrial development which reduces poverty and related deprivation, the traditional economic analysis should not be the primary determinant of their utility. The human rights approach to development would assess their utility against the type of development defined in the Development Declaration, that is, against their contribution to a development process which is broad, inclusive and equitable, which facilitates the realisation by all of human rights and fundamental freedoms and which does not create any retrogression of rights and freedoms. Manufacturing which must source its labour and component parts locally, employing both men and women from diverse local communities and stimulating a build-up of satellite businesses and new skills, may meet these requirements more readily than manufacturing which imports many of its inputs.
Developing countries have argued that their industrial development is constrained by their restricted ability to utilise subsidies of this kind, particularly to favour local sources. In a 2002 submission to the WTO, India argued that, “subsidies contingent upon use of domestic over imported goods [are] crucial to the process of industrialization and development of developing countries.”¹³² Moreover, the historical evidence against the traditional economic analysis creates considerable room for scepticism about the prohibition in WTO law. Medhi Shafaeddin cites the significant fact that, “[w]ith the exception of Hong Kong, no country has developed its industrial base without resorting to infant industry protection.”¹³³ Similarly, Birdsall, Rodrik and Subramanian report that,
“[a]lmost all successful cases of development in the last 50 years have been based on creative—and often heterodox—policy innovations. South Korea and Taiwan, for example, combined their outward trade orientations with unorthodox policies: export subsidies, directed credit, patent and copyright infringements, domestic-content requirements on local production, high levels of tariff and non-tariff barriers, public ownership of large segments of banking and industry, and restrictions on capital flows, including direct foreign investment.”¹³⁴
Ajit Singh explores the measures used by Japan and Korea during their period of strong economic growth and lists an extensive set of protectionist export promotion, import restriction and industrial policy measures.¹³⁵ Professor Moran refers to economic studies which show that subsidies can be beneficial to development where they result in “dynamic gains from learning” or where they create “industrial complexes” with substantial “forward and backward linkages” in the local economy.¹³⁶ Moreover, Robert Wade points out that the economic growth performance of Latin American countries which adopted import-substitution industrialisation policies during the post-Second World War period was, during that time, “better by several measures than it has been during the subsequent era of liberalization and privatization.”¹³⁷ Ken Shadlen is critical of the TRIMs agreement’s reducing the ability of ordinary developing countries to use subsidies, which he sees as “important policy instruments to increase local value-added, employment and industrial upgrading.”¹³⁸