The regulation of subsidies and regional trade among developing countries in the multilateral trading system: the case of export processing zones in Malawi

Abstract

The paradigm shift engaged by countries in SADC and COMESA, such as Malawi, from the use of import substitution policies which were aimed at protecting their infant industries, to export led growth strategies, necessitated these developing countries to liberalise their economies. The liberalisation of these economies meant that, for them to attain development, they needed to trade more on the international market. However, with underdeveloped industries and a lack of local entrepreneurs who could provide export supplies to fill the void created by the liberalisation policies, developing countries had to look beyond their borders for investors. In pursuit of this objective, governments have been devising ways of attracting foreign direct investment which can stimulate export growth. One of the methods employed is the granting of investment incentives to would-be investors. Unlike developed countries who provide investment incentives in the form of financial incentives, developing countries grant fiscal incentives. These are incentives that reduce tax burdens of enterprises to induce them to invest in particular projects or sectors. One of the mediums of providing the incentives adopted by the developing countries is the use of EPZ schemes. EPZs provide incentives such as exemptions of direct and indirect taxes to companies that operate in the zones. However, being Members of the WTO and SADC and/or COMESA, these countries are bound by obligations regulating trade and investment as found in these Agreements. The expectation is that the fiscal incentives employed in the EPZs do not grant subsidies that are prohibited under the SCM Agreement and rules regulating subsidies in SADC and COMESA. In addition, even though the use of EPZs is not expressly proscribed under the SADC Protocol on Trade, it may be against the objectives of the Protocol - one of which is the pursuance of the inter-jurisdictional goal of cooperation in attainment of free trade among its members. Therefore, this study assesses whether the use of EPZs by some countries in the two RTAs (particularly Malawi) is in tandem with the subsidies regulation as found in the multilateral trading system and at regional level. It also assesses whether, if there is a breach of the same, it might be justified as part of the special and differential treatment accorded to developing countries by developed countries under the WTO. The study further assesses whether the use of EPZs might be against the spirit and objects of FTAs such as SADC.