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*Columbia FDI Perspectives*
Perspectives on topical foreign direct investment issues
No. 131 September 29, 2014
Editor-in-Chief: Karl P. Sauvant ([log in to unmask])
Managing Editor: Shawn Lim ([log in to unmask])
*How to deal with the growing incentives competition*
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by
Kenneth P. Thomas*
<https://ca-mg6.mail.yahoo.com/neo/launch?.partner=rogers-acs&.rand=8u6qshegcnb57#_edn1>
As I discussed in an earlier *Perspective*,[1]
<https://ca-mg6.mail.yahoo.com/neo/launch?.partner=rogers-acs&.rand=8u6qshegcnb57#_edn2>
the use of investment incentives is pervasive and growing. The most recent
example 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]
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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.
In addition, 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 are failing quickly, but Australia
(2003-2011) and Canada (1994-present) have been more successful.[3]
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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.
------------------------------
*
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Kenneth P. Thomas ([log in to unmask]) is Professor of Political Science at
the University of Missouri-St. Louis. The author is grateful to Lise
Johnson, Sebastian James and Peter Nunnenkamp for their helpful peer
reviews. *The views expressed by the author of this Perspective do not
necessarily reflect the opinions of Columbia University or its partners and
supporters. Columbia FDI Perspectives (ISSN 2158-3579) is a peer-reviewed
series.*
[1]
<https://ca-mg6.mail.yahoo.com/neo/launch?.partner=rogers-acs&.rand=8u6qshegcnb57#_ednref2>
Kenneth P. Thomas, “Investment incentives and the global competition for
capital,” *Columbia FDI Perspectives*, No. 54, December 30, 2011.
[2]
<https://ca-mg6.mail.yahoo.com/neo/launch?.partner=rogers-acs&.rand=8u6qshegcnb57#_ednref3>
Emelie Rutherford, “EU wants $12 billion in U.S. sanctions over Boeing
subsidy spat,” *Defense Daily*, September 27, 2012.
[3]
<https://ca-mg6.mail.yahoo.com/neo/launch?.partner=rogers-acs&.rand=8u6qshegcnb57#_ednref4>
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.
*The material in this Perspective may be reprinted if accompanied by
the following acknowledgment: “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 (www.ccsi.columbia.edu
<http://www.ccsi.columbia.edu>).” A copy should kindly be sent to the
Columbia Center on Sustainable Investment at [log in to unmask]
<[log in to unmask]>.*
For further information, including information regarding submission to the
*Perspectives*, please contact: Columbia Center on Sustainable Investment,
Adrian Torres, [log in to unmask] or [log in to unmask]
*Most recent Columbia FDI Perspectives*
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- No. 130, Catherine Kessedjian, “Good governance of third party
funding,” September 15, 2014
- No. 129, Armand de Mestral, “The Canada-China BIT 2012: Perspectives
and implications,” September 2, 2014.
- No. 128, Wenhua Shan and Lu Wang, “The China-EU BIT: The emerging
‘Global BIT 2.0’?,” August 18, 2014.
*All previous FDI Perspectives are available at
**http://ccsi.columbia.edu/publications/columbia-fdi-perspectives/
<http://ccsi.columbia.edu/publications/columbia-fdi-perspectives/>**. *
*Other relevant CCSI news and announcements:*
- *Call for Papers:* The *Yearbook on International Investment Law and
Policy* is currently accepting submissions for the 2014/2015 edition.
Papers will be accepted on a rolling basis up to the deadline of October
15, 2014. For more information, please download our complete *call for
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- On *November 12-13, 2014*, CCSI will host its Ninth Annual Columbia
International Investment Conference, entitled* “Raising the Bar: Home
Country Efforts to Regulate Foreign Investment for Sustainable
Development” *at *Columbia University.* More information about the
Conference, including the current program, information about logistics, and
the registration link, is available at:
http://ccsi.columbia.edu/2014/01/01/raising-the-bar-home-country-efforts-to-regulate-foreign-investment-for-sustainable-development/.
Registration for the conference is *free, but required*.
- On *December 5, 2014*, CCSI is offering a one day workshop with CLE
credit on investment arbitration and human rights
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This workshop will examine which human rights issues may be implicated in
investment disputes, as well as how and to what extent the issues have been
handled by parties and arbitrators. *Philippe Sands* (Barrister in the
Matrix Chambers, Professor of International Law at University College
London; and frequent arbitrator in investor-State disputes) will deliver
the Keynote.
Karl P. Sauvant, Ph.D.
Resident Senior Fellow
Columbia Center on Sustainable Investment
Columbia Law School - Earth Institute
Ph: (212) 854-0689
Fax: (212) 854-7946
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