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Strategic Export Subsidies and Reciprocal Trade Agreements: The Natural Monopoly Case

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  • Kyle Bagwell
  • Robert W. Staiger

Abstract

Why do governments seek restrictions on the use of export subsidies through reciprocal trade agreements such as GATT? With existing arguments, it is possible to understand GATT's restrictions on export subsidies as representing an inefficient victory of the interests of exporting governments over the interests of importing governments. However, to our knowledge, there does not exist a formal theoretical treatment that provides circumstances under which GATT's restrictions on export subsidies can be given a world-wide efficiency rationale. In this paper, we offer one such treatment in the context of a natural monopoly market. We emphasize that subsidy competition between governments can serve to coordinate the entry decisions of firms, finding that consumers in the importing countries may suffer if the coordination afforded exporters by government subsidy programs does more to prevent entry than to promote it. In such circumstances, we show that the existence of export subsidy programs can lead to inefficiencies, and importing countries and the world as a whole can be better off when such programs are banned.

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Paper provided by Northwestern University, Center for Mathematical Studies in Economics and Management Science in its series Discussion Papers with number 1156.

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Date of creation: Apr 1996
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Handle: RePEc:nwu:cmsems:1156

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  1. repec:fth:stanho:e-92-1 is not listed on IDEAS
  2. Maggi, Giovanni, 1996. "Strategic Trade Policies with Endogenous Mode of Competition," American Economic Review, American Economic Association, vol. 86(1), pages 237-58, March.
  3. Varian, Hal R, 1980. "A Model of Sales," American Economic Review, American Economic Association, vol. 70(4), pages 651-59, September.
  4. Bagwell, Kyle & Staiger, Robert W, 1992. "The Sensitivity of Strategic and Corrective R&D Policy in Battles for Monopoly," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 33(4), pages 795-816, November.
  5. Dixit, Avinash K & Kyle, Albert S, 1985. "The Use of Protection and Subsidies for Entry Promotion and Deterrence," American Economic Review, American Economic Association, vol. 75(1), pages 139-52, March.
  6. Bagwell, Kyle & Ramey, Garey, 1994. "Coordination Economies, Advertising, and Search Behavior in Retail Markets," American Economic Review, American Economic Association, vol. 84(3), pages 498-517, June.
  7. Barbara J. Spencer & James A. Brander, 1982. "International R&D Rivalry and Industrial Strategy," Working Papers 518, Queen's University, Department of Economics.
  8. Eaton, Jonathan & Grossman, Gene M, 1986. "Optimal Trade and Industrial Policy under Oligopoly," The Quarterly Journal of Economics, MIT Press, vol. 101(2), pages 383-406, May.
  9. Kyle Bagwell & Robert W. Staiger, 1996. "Reciprocal Trade Liberalization," NBER Working Papers 5488, National Bureau of Economic Research, Inc.
  10. Brander, James A. & Spencer, Barbara J., 1985. "Export subsidies and international market share rivalry," Journal of International Economics, Elsevier, vol. 18(1-2), pages 83-100, February.
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Cited by:
  1. Jost, Peter-J., 2011. "Joint ventures in patent contests with spillovers and the role of strategic budgeting," Journal of Economics and Business, Elsevier, vol. 63(6), pages 605-637.
  2. Uwe Dulleck, 2005. "WTO's Anti-dumping Rule and the Protection of Incumbents," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 14(2), pages 229-239.
  3. Kyle Bagwell & Robert W. Staiger, 2004. "Subsidy Agreements," NBER Working Papers 10292, National Bureau of Economic Research, Inc.
  4. Kyle Bagwell & Robert W. Staiger, 1997. "Reciprocity, Non-discrimination and Preferential Agreements in the Multilateral Trading System," NBER Working Papers 5932, National Bureau of Economic Research, Inc.
  5. Mihir A. Desai & James R. Hines Jr., 2004. "Market Reactions to Export Subsidies," NBER Working Papers 10233, National Bureau of Economic Research, Inc.
  6. Bagwell,K. & Staiger,R.W., 2000. "Strategic trade, competitive industries and agricultural trade disputes," Working papers 11, Wisconsin Madison - Social Systems.
  7. Conconi, P., 2000. "Trade Bloc Formation Under Imperfect Competition," The Warwick Economics Research Paper Series (TWERPS) 571, University of Warwick, Department of Economics.
  8. Konrad, Kai A., 2000. "Trade contests," Journal of International Economics, Elsevier, vol. 51(2), pages 317-334, August.
  9. Steffen Huck & Kai A. Konrad & Wieland Müller, 2000. "Merger in Contests," CESifo Working Paper Series 241, CESifo Group Munich.
    • Huck, Steffen & Konrad, Kai A. & Müller, Wieland, 2000. "Merger in contests," SFB 373 Discussion Papers 2000,3, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
  10. David Collie, 2000. "A Rationale for the WTO Prohibition of Export Subsidies: Strategic Export Subsidies and World Welfare," Open Economies Review, Springer, vol. 11(3), pages 229-245, July.

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