Final answer:
The WTO found American incentives through the FSC illegal because they were considered unfair competitive advantages, as they provided tax breaks contingent on exports, violating the principle of avoiding trade-distorting subsidies.
Step-by-step explanation:
The World Trade Organization (WTO) ruled that American incentives through the Foreign Sales Corporation (FSC) were illegal because it was an unfair competitive advantage, specifically, any tax break contingent on exports was deemed an illegal subsidy. Under WTO rules, member countries are prohibited from providing subsidies that distort trade by granting exporters unfair advantages. The FSC allowed U.S. companies to create foreign subsidiaries that received a tax exemption for a portion of the income from international sales, thus providing an incentive to export, which other WTO members, such as the European Union (EU), contested as a contravention of free-trade principles.
Defenders of such multinational corporations argued that they promoted international relations and economic benefits like lower consumer prices and higher corporate dividends. However, governments establishing tariffs or other trade barriers aim to protect domestic industries from foreign competition, with the long-term risk of fostering inefficiency and impairing consumer welfare as global markets evolve. The overarching goal of the WTO is to restrict such protectionist measures and ensure a level playing field in international trade.