Global Policy Forum

By Tom Barry

Editor's note: Corporate welfare for U.S. transnational corporations isn't a hot issue in the current budget fight on Capitol Hill. But it should be. Although budget reformers have largely ignored the issue, citizens opposing corporate welfare may find an unlikely ally in the World Trade Organization (WTO).

Thanks to a European Union (EU) challenge of U.S. export subsidies, the WTO may soon rule that the Foreign Sales Corporations (FSC) provision of the U.S. tax code is an illegal export subsidy. The FSC, which allows U.S. exporters to exempt up to 15% of export earnings, costs the U.S. taxpayer in excess of $1.8 billion annually.

Boeing Co., the biggest beneficiary of the FSC tax break, saved $130 million in U.S. income taxes in 1998, according to Business Week (August 16, 1999). The forthcoming WTO decision should come as no surprise to Washington. The Domestic International Sales Corporation, the predecessor of the FSC tax loophole, was declared a violation of the free trade rules of the General Agreement on Tariffs and Trade GATT).

The EU's challenge before the WTO is the latest round in an ongoing battle between Europe and the U.S. to shape the rules of free trade. Having prided itself on its successful challenges before the WTO of the EU's quotas on U.S. bananas and its ban on hormone tainted U.S. beef, Washington now finds that the logic of free trade may threaten its cozy relationship with Corporate America. A WTO ruling that the FSC program is an unfair trade practice is one of the few WTO decisions that fair trade and consumer advocates can support.

This WTO ruling on this type of export subsidy highlights a central issue in the free trade-managed trade-fair trade debate: namely, the degree to which national governments or international trade authorities should intervene in the international market. Critics of the WTO regularly assert that individual nations, when acting in the interests of promoting national economic development, should be able to determine whether certain trading sectors should be subsidized or protected. In contrast, advocates of a globalized trading structure insist on the establishment of enforceable international rules that prohibit most production subsidies and set limits on nationally imposed constraints on trade.

A virtue of having an international arbiter such as the WTO that uniformly enforces trade rules and possibly investment rules is that powerful nations like the U.S. may find that they, too, are subject to the international rule of law. Unfortunately, however, the international rules governing trade and investment have been written mostly to favor the wealthier trading nations and their leading corporations--with the result that GATT and now the WTO serve mainly to facilitate the extension of Northern economic power (See WTO and Developing Countries, FPIF Vol. 3, No. 37, available at: http://www.foreignpolicy-infocus.org/briefs/vol3/v3n37wto.html).

The recent spate of disputes between the EU and the U.S.--bananas, growth hormones, and export subsidies--will do little to alter the North's domination of the WTO. Rather these are intra-hegemonic disputes that refine the character of a neoliberal trading regimen. Although a ruling by the WTO against the FSC export subsidy is not a direct attack on a trading system that privileges transnational corporations and the wealthiest countries, it may help focus more international attention on the subsidized, favored position of U.S. and other Northern corporations in the global "free market."

FPIF recently released a special report entitled Corporate Welfare and U.S. Foreign Policy by corporate welfare expert Janice Shields. In that report, Shields argued that if the U.S. government as part of its budget process decides against cutting corporate welfare, then at least the government should require that "corporate welfare programs be periodically reviewed and, if costs exceed public benefits, eliminated." In a recent op-ed in the Journal of Commerce (July 29, 1999), Shields of the Institute for Business Research and James Sheehan of the Competitive Enterprise Institute conclude: "Now is the time for Congress to stop doling out favors to special interests and start protecting the public interest."

One reader of the FPIF special report on corporate welfare pointed out that a narrow accounting of costs and benefits of subsidy programs and their impact on the free flow of trade should not be the only criteria to evaluate U.S. international corporate welfare. Also critical is an evaluation of the impact of these programs on global sustainable development. Just as U.S. subsidized logging programs within the United States need to be evaluated by their environmental impact (in addition to their economic costs and benefits), so too should international corporate welfare programs be subject to sustainable development criteria. Not only should companies with bad environmental records be barred from receiving subsidies, but the programs themselves--from military export sales subsidies to the market access program--should also be subject to regular environmental review if they are included in the federal budget.

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