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Optimal International Agreement and Treatment of Domestic Subsidy

  • Gea Myoung Lee


    (School of Economics, Singapore Management University)

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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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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  1. Horn, Henrik & Maggi, Giovanni & Staiger, Rikard W., 2007. "Trade Agreements as Endogenously Incomplete Contracts," Working Paper Series 689, Research Institute of Industrial Economics.
  2. Robert C. Feenstra & Tracy R. Lewis, 1987. "Negotiated Trade Restrictions with Private Political Pressure," NBER Working Papers 2374, National Bureau of Economic Research, Inc.
  3. MARTIN, Alberto & VERGOTE, Wouter, . "On the role of retaliation in trade agreements," CORE Discussion Papers RP 2037, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  4. Kyle Bagwell, 2009. "Self-Enforcing Trade Agreements and Private Information," NBER Working Papers 14812, National Bureau of Economic Research, Inc.
  5. Athey, Susan & Bagwell, Kyle, 2001. "Optimal Collusion with Private Information," RAND Journal of Economics, The RAND Corporation, vol. 32(3), pages 428-65, Autumn.
  6. Susan Athey & Kyle Bagwell & Chris Sanchirico, 2004. "Collusion and Price Rigidity," Review of Economic Studies, Oxford University Press, vol. 71(2), pages 317-349.
  7. Beshkar, Mostafa, 2010. "Optimal remedies in international trade agreements," European Economic Review, Elsevier, vol. 54(3), pages 455-466, April.
  8. 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.
  9. Josh Ederington, 2001. "International Coordination of Trade and Domestic Policies," American Economic Review, American Economic Association, vol. 91(5), pages 1580-1593, December.
  10. 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.
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