As I discussed
in an earlier Perspective,[1] the
use of investment incentives is pervasive and growing. The most recent example [this was completed prior to the Tesla auction]
of a big bidding war was when Boeing threatened to move production of its 777-X
aircraft out of Washington state, prompting some 20 states to offer incentive
packages to the company (including $1.7 billion from Missouri). In the end, Washington
gave Boeing a package of tax incentives worth a record-breaking $8.7 billion
over the 2025 – 2040 period to stay, and the unions made substantial
concessions regarding pensions.
What can be done
to control such auctions, which are often international in scope? The most
robust control method, regional in scope, is embodied in the European Union
(EU) Guidelines on Regional Aid. These rules guarantee transparency, set
variable limits (in terms of “aid intensity,” which equals subsidy/investment)
for aid levels based on each region’s per capita income, and reduce the value
of aid to large investment projects over €50 million. They require projects to
stay at least five years and mandate the use of clawbacks for firms that fail
to meet their commitments in investment contracts. Moreover, the guidelines
provide demerits for firms in a dominant position in their industry, although
they do not mandate a particular reduction in aid.
The other
international control measure comes under the World Trade Organization (WTO)
Agreement on Subsidies and Countervailing Measures. While these rules are more
tailored to production subsidies than to investment incentives, the latter
certainly come under the purview of the Agreement as well, as illustrated by
the EU’s successful complaint against subsidies for Boeing in the states of
Washington, Illinois and Kansas.
However, this
case also illustrates the limits of WTO subsidy control. The EU has already
filed a compliance complaint,[2]
and there is little likelihood the United States (US) will comply anytime soon
(the US Trade Representative’s office claims that the US has complied, but as
long as the state and local tax credits continue in Washington state, that is
not correct). Indeed, as mentioned, Washington state has approved a new round
of subsidies for Boeing that is likely to initiate a new WTO dispute.
While the WTO
rules require frequent notification of subsidies, there is no penalty for
failure to notify, with the result that subsidy notifications are of very
uneven quality. Federal states outside the EU frequently make poor quality
notifications regarding subnational subsidies. Finally, the TRIMs and GATS
agreements regulate performance requirements, but not investment incentives.
What, then, can
be done against incentives competition? First, there must be continuing efforts
to improve the transparency of location subsidies. This is necessary for
jurisdictions to make effective investment promotion policy (especially in a
region such as the European Union and the United States, where there are many
competing governments) as well as for international policy discussion.
Second, the EU’s
example shows that incorporating subsidies rules into regional agreements can
be a fruitful way to bring bidding wars under control. For many products, such
as automobile assembly and steel, corporate location decisions still focus on a
single region, meaning that such rules would be geographically comprehensive
enough for a variety of industries. Consequently, major stakeholders—including
the Columbia Center on Sustainable Investment, the International Institute for
Sustainable Development, the United Nations Conference on Trade and
Development, the World Association of Investment Promotion Agencies, the
International Monetary Fund, the World Bank, and the Organisation for Economic Co-operation
and Development—should unite in promoting location subsidy guidelines within
regional trade areas. There are no doubt numerous other non-governmental
organizations that would endorse such a move.
Third, WTO
notifications should be strengthened. Incomplete notifications should be
flagged and countries involved should be pressured to give cost estimates for
subsidies at all levels of government. Still, it is difficult to envision that
sanctions for non-compliance will be introduced.
Fourth,
no-raiding zones could be a first step for countries to negotiate controls over
investment subsidies. A no-raiding agreement simply commits a state to not give
a subsidy to relocate an existing facility from another state; it would not
apply to new investments. Their track record is mixed—several agreements among
US states failed quickly, but Australia (2003-2011) and Canada (1994-present)
have been more successful.[3]
Despite these mixed results, it is easier to demonstrate to policymakers the
futility of relocation subsidies, since they create no new jobs, than it is to
do for incentives for new investment, which could make this a more feasible
first step.
Though national
and subnational jurisdictions have incentives to offer location subsidies,
these proposed measures would help keep their value to more reasonable levels
with a lower likelihood of distorting competition and international investment
flows.
[1] Kenneth P.
Thomas, “Investment incentives and the global competition for capital,” Columbia FDI Perspectives, No. 54,
December 30, 2011.
[2] Emelie
Rutherford, “EU wants $12 billion in U.S. sanctions over Boeing subsidy spat,” Defense Daily, September 27, 2012.
[3] Kenneth P.
Thomas, “Regulating investment
attraction: Canada’s Code of Conduct on Incentives in a comparative context,”
37 Canadian Public Policy, 3 (2011),
pp. 343-357; Kenneth P. Thomas, “EU control of state aid to mobile investment
in comparative perspective,” 34 Journal
of European Integration 6 (2012), pp. 567-584.
From: Kenneth P. Thomas, "How to deal with the growing incentives competition," Columbia FDI Perspectives, No. 131, September 29, 2014. Reprinted with permission from the Columbia Center on Sustainable Investment (ccsi.columbia.edu).
Cross-posted at Angry Bear.
There is something of a non sequitur going on here. If subsidies are bad for the governments that provide them, why would the EU have a problem with our subsidizing US companies?
ReplyDeleteBecause our subsidizing US companies harms EU companies. It thereby puts pressure on EU countries to subsidize EU companies. Just as one US state offering subsidizes pressures other states to do the same.
ReplyDeleteHow does our selling them products below cost harm their companies?
ReplyDeleteYou are missing two important distinctions here. First, receiving subsidies lets you sell more cheaply, but it does not mean that you will be selling below cost. In trade law, the selling more cheaply is the realm of subsidy law and the response is countervailing duties. Selling below cost is dumping, and the remedy is anti-dumping duties. Similar, but not the same. Indeed, you could sell below cost without necessarily receiving a subsidy.
ReplyDeleteThe second is the difference between the effect on the consumer and the effect on competitors. Reducing consumer prices is good for consumers in the short run. If, however, it destroys other competitors so that there is no competition, a monopolist can raise prices eventually. Furthermore, the damage to domestic competitors can increase unemployment even if the companies aren't put completely out of business.
You said, "Our subsidizing US companies harms EU companies."
DeleteWhile subsidizing a specific company may harm that company's competitors, those companies not in competition with the subsidized company will get the products from the subsidized company at a lower cost. They will be helped by the subsidy, not harmed.
Our providing subsidies so that our products can export more cheaply helps the countries that get those exports -- and helps them at our expense.