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The agreement on subsidies and countervailing measures: tying one's hands through the WTO

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  • Meredith Crowley

Abstract

Why would governments agree to restrict their own discretion in setting domestic policies as part of a trade agreement? This paper examines the welfare consequences of the GATT's Agreement on Subsidies and Countervailing Measures (SCM). If countries which join a trade agreement are given free reign over the use of domestic production subsidies, then after negotiating tariff reductions, governments could undermine the agreement by introducing production subsidies to import-competing producers that effectively act as trade barriers. The SCM restricts the use of domestic subsidies by countries which have joined the WTO. Specifically, governments may not use sector-specific subsidies (agriculture is an exception) but they may subsidize their producers if they offer the same subsidy to all producers in their economies. ; I show that through an agreement like the SCM, governments can better achieve their goals of maximizing domestic welfare. This occurs because terms-of-trade concerns lead to subsidies in import- competing sectors that are higher than globally optimal and in export sectors that are lower than globally optimal. Therefore, a rule to require that subsidies be the same in all sectors forces a country to partially internalize these terms of trade externalities (by reducing subsidies to import-competing sectors and increasing subsidies to export sectors).

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Bibliographic Info

Paper provided by Federal Reserve Bank of Chicago in its series Working Paper Series with number WP-06-22.

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Date of creation: 2006
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Handle: RePEc:fip:fedhwp:wp-06-22

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Keywords: General Agreement on Tariffs and Trade (Organization) ; Tariff;

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References

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  1. Spencer, Barbara J., 1988. "Capital subsidies and countervailing duties in oligopolistic industries," Journal of International Economics, Elsevier, vol. 25(1-2), pages 45-69, August.
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  13. Collie, David, 1991. "Export subsidies and countervailing tariffs," Journal of International Economics, Elsevier, vol. 31(3-4), pages 309-324, November.
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Cited by:
  1. Pascal L. Ghazalian, 2012. "Home Bias in Primary Agricultural and Processed Food Trade: Assessing the Effects of National Degree of Uncertainty Aversion," Journal of Agricultural Economics, Wiley Blackwell, vol. 63(2), pages 265-290, 06.
  2. Pascal Ghazalian & Ryan Cardwell, 2010. "Did the Uruguay Round Agreement on Agriculture Affect Trade Flows? An Empirical Investigation for Meat Commodities," International Advances in Economic Research, Springer, vol. 16(4), pages 331-344, November.

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