Dynamic Impacts of Domestic Subsidies on Production, Capital Accumulation, and Agricultural Trade

This paper investigates the dynamic effects of domestic agricultural subsidies on production, capital accumulation, and international trade using a structural gravity model with capital dynamics. Employing a panel of 72 exporters and 256 importers from 2000 to 2019, we link producer support estimates directly to agricultural production and, through it, to bilateral trade. Our results reveal that tariffs reduce trade, while WTO membership strongly promotes it; FTAs, however, show no statistically signicant effect. Production subsidies have a positive but modest impact on output-1% increase in PSEs leads to only 0.016% rise in production. All production inputs show expected positive effects, though capital and land dominate. Capital accumulation dynamics are mostly consistent with theory, but only lagged capital is statistically signicant. Preliminary counterfactual analysis of a 25% subsidy reduction suggests substantial long-term declines in trade, capital, and output, highlighting the importance of carefully designed agricultural policies.