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

Listed author(s):
  • Meredith A. Crowley

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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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
Handle: RePEc:fip:fedhwp:wp-06-22
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  1. Dixit, Avinash, 1988. "Anti-dumping and countervailing duties under oligopoly," European Economic Review, Elsevier, vol. 32(1), pages 55-68, January.
  2. Pinelopi Koujianou Goldberg & Michael M. Knetter, 1997. "Causes and Consequences of the Export Enhancement Program for Wheat," NBER Chapters, in: The Effects of U.S. Trade Protection and Promotion Policies, pages 273-296 National Bureau of Economic Research, Inc.
  3. Bagwell,K. & Staiger,R.W., 2000. "Strategic trade, competitive industries and agricultural trade disputes," Working papers 11, Wisconsin Madison - Social Systems.
  4. Bagwell, Kyle & Staiger, Robert W., 2001. "Reciprocity, non-discrimination and preferential agreements in the multilateral trading system," European Journal of Political Economy, Elsevier, vol. 17(2), pages 281-325, June.
  5. Kyle Bagwell & Robert W. Staiger, 2001. "Domestic Policies, National Sovereignty, and International Economic Institutions," The Quarterly Journal of Economics, Oxford University Press, vol. 116(2), pages 519-562.
  6. Collie, David, 1991. "Export subsidies and countervailing tariffs," Journal of International Economics, Elsevier, vol. 31(3-4), pages 309-324, November.
  7. Baldwin, Richard, 1987. "Politically realistic objective functions and trade policy PROFs and tariffs," Economics Letters, Elsevier, vol. 24(3), pages 287-290.
  8. Grossman, Gene & Helpman, Elhanan, 1993. "Protection for Sale," CEPR Discussion Papers 827, C.E.P.R. Discussion Papers.
  9. Barbara J. Spencer, 1988. "Capital Subsidies and Countervailing Duties in Oligopolistic Industries," NBER Working Papers 2519, National Bureau of Economic Research, Inc.
  10. Kyle Bagwell & Robert W. Staiger, 2006. "Will International Rules on Subsidies Disrupt the World Trading System?," American Economic Review, American Economic Association, vol. 96(3), pages 877-895, June.
  11. Ronald D. Fischer & Thomas J. Prusa, 2003. "WTO Exceptions as Insurance," Review of International Economics, Wiley Blackwell, vol. 11(5), pages 745-757, November.
  12. Pinelopi Koujianou Goldberg & Giovanni Maggi, 1997. "Protection for Sale: An Empirical Investigation," NBER Working Papers 5942, National Bureau of Economic Research, Inc.
  13. repec:iie:ppress:64 is not listed on IDEAS
  14. Bruce Gardner, 1996. "The Political Economy of the Export Enhancement Program for Wheat," NBER Chapters, in: The Political Economy of Trade Protection, pages 61-70 National Bureau of Economic Research, Inc.
  15. Robert W. Staiger, 1994. "International Rules and Institutions for Trade Policy," NBER Working Papers 4962, National Bureau of Economic Research, Inc.
  16. Brian R. Copeland, 1990. "Strategic Interaction among Nations: Negotiable and Non-negotiable Trade Barriers," Canadian Journal of Economics, Canadian Economics Association, vol. 23(1), pages 84-108, February.
  17. Michael O. Moore, 1996. "The Rise and Fall of Big Steel's Influence on U.S. Trade Policy," NBER Chapters, in: The Political Economy of Trade Protection, pages 15-34 National Bureau of Economic Research, Inc.
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