Free Zones and the WTO Agreement on Subsidies and Countervailing Measures

Abstract

Free zones have become increasingly popular as trade promotion policy instruments in developing countries. This article explains how the obligations in the WTO Agreement on Subsidies and Countervailing Measures apply to free zones. An analysis of the most common requirements for companies operating in free zones and the benefits they derive shows that in many cases such benefits may be considered prohibited subsidies. Since not all WTO Members have the same obligations with respect to prohibited subsidies, the article also explains the specific rules governing the special and differential treatment for the different categories of developing countries. The article then looks at what steps WTO Members can take to make their free zones less likely to be challenged in the WTO. Information is provided on how a Member could modify the conditions and benefits of their free zone programmes to conform to WTO rules. The Article also focuses on the extensions of the transition periods for the elimination of export subsidies, that were obtained by certain developing countries for some of their fiscal incentives programmes. The article concludes by stating that, even if bringing free zones into conformity with the SCM Agreement may involve eliminating some of their fiscal benefits, the long-term attractiveness of free zones as catalysts for investment and development go far beyond the tax incentives that they may offer.

Keywords: Free Zones, Export Processing Zones, Subsidies, Free Trade Zones, Fiscal Incentives, WTO, SCM Agreement, Export Subsidies, Tax Exemptions, Special Economic Zones

JEL Classification: F13, F21, H2, K33, K34, L52