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Optimal International Agreement and Treatment of Domestic Subsidy

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  • Gea Myoung Lee

    ()
    (School of Economics, Singapore Management University)

Abstract

TWe investigate how a domestic subsidy is treated in an international agreement, when a government, having incentive to use its subsidy as a means of import protection, can disguise its protective use of subsidy as a legitimate intervention with which to address a market imperfection in the import-competing sector. We show that any optimal agreement permits the use of a positive domestic subsidy, but it restricts the home government’s freedom to select domestic subsidy in order to increase the market-access level for foreign exporters. Our finding implies that proper restrictions on domestic subsidies are somewhere between GATT and WTO rules.

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Bibliographic Info

Paper provided by Singapore Management University, School of Economics in its series Working Papers with number 01-2011.

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Length: 48 pages
Date of creation: Feb 2011
Date of revision:
Publication status: Published in SMU Economics and Statistics Working Paper Series
Handle: RePEc:siu:wpaper:01-2011

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Keywords: Treatment of domestic subsidy; International agreement; GATT/WTO rules;

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  1. Kyle Bagwell, 2004. "Collusion and Price Rigidity," Theory workshop papers 658612000000000081, UCLA Department of Economics.
  2. Josh Ederington, 2002. "Trade and Domestic Policy Linkage in International Agreements," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 43(4), pages 1347-1368, November.
  3. Henrik Horn & Giovanni Maggi & Robert W. Staiger, 2010. "Trade Agreements as Endogenously Incomplete Contracts," American Economic Review, American Economic Association, vol. 100(1), pages 394-419, March.
  4. Martin, Alberto & Vergote, Wouter, 2008. "On the role of retaliation in trade agreements," Journal of International Economics, Elsevier, vol. 76(1), pages 61-77, September.
  5. Christian Broda & Nuno Limao & David E. Weinstein, 2008. "Optimal Tariffs and Market Power: The Evidence," American Economic Review, American Economic Association, vol. 98(5), pages 2032-65, December.
  6. Beshkar, Mostafa, 2010. "Optimal remedies in international trade agreements," European Economic Review, Elsevier, vol. 54(3), pages 455-466, April.
  7. Feenstra, Robert C & Lewis, Tracy R, 1991. "Negotiated Trade Restrictions with Private Political Pressure," The Quarterly Journal of Economics, MIT Press, vol. 106(4), pages 1287-307, November.
  8. Josh Ederington, 2001. "International Coordination of Trade and Domestic Policies," American Economic Review, American Economic Association, vol. 91(5), pages 1580-1593, December.
  9. Athey, Susan & Bagwell, Kyle, 2001. "Optimal Collusion with Private Information," RAND Journal of Economics, The RAND Corporation, vol. 32(3), pages 428-65, Autumn.
  10. Kyle Bagwell, 2009. "Self-Enforcing Trade Agreements and Private Information," NBER Working Papers 14812, National Bureau of Economic Research, Inc.
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