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

  • Kyle Bagwell
  • Robert W. Staiger

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 National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5574.

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Date of creation: May 1996
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Publication status: published as Japan and the World Economy, Vol. 9, issue 4 (1997).
Handle: RePEc:nbr:nberwo:5574
Note: ITI
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  1. James A. Brander & Barbara J. Spencer, 1984. "Export Subsidies and International Market Share Rivalry," NBER Working Papers 1464, National Bureau of Economic Research, Inc.
  2. Kyle Bagwell & Robert W. Staiger, 1996. "Reciprocal Trade Liberalization," Discussion Papers 1150, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  3. 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.
  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. Spencer, Barbara J & Brander, James A, 1983. "International R & D Rivalry and Industrial Strategy," Review of Economic Studies, Wiley Blackwell, vol. 50(4), pages 707-22, October.
  6. Maggi, Giovanni, 1996. "Strategic Trade Policies with Endogenous Mode of Competition," American Economic Review, American Economic Association, vol. 86(1), pages 237-58, March.
  7. 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.
  8. 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.
  9. Varian, Hal R, 1980. "A Model of Sales," American Economic Review, American Economic Association, vol. 70(4), pages 651-59, September.
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