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Optimal International Agreement and Treatment of Domestic Subsidy

Author

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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.

Suggested Citation

  • Gea Myoung Lee, 2011. "Optimal International Agreement and Treatment of Domestic Subsidy," Working Papers 01-2011, Singapore Management University, School of Economics.
  • Handle: RePEc:siu:wpaper:01-2011
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    File URL: https://mercury.smu.edu.sg/rsrchpubupload/18576/IntAgreementSMU0211.pdf
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    References listed on IDEAS

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    1. Kyle Bagwell, 2009. "Self-Enforcing Trade Agreements and Private Information," NBER Working Papers 14812, National Bureau of Economic Research, Inc.
    2. Susan Athey & Kyle Bagwell & Chris Sanchirico, 2004. "Collusion and Price Rigidity," Review of Economic Studies, Oxford University Press, vol. 71(2), pages 317-349.
    3. Athey, Susan & Bagwell, Kyle, 2001. "Optimal Collusion with Private Information," RAND Journal of Economics, The RAND Corporation, vol. 32(3), pages 428-465, Autumn.
    4. 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.
    5. Robert C. Feenstra & Tracy R. Lewis, 1991. "Negotiated Trade Restrictions with Private Political Pressure," The Quarterly Journal of Economics, Oxford University Press, vol. 106(4), pages 1287-1307.
    6. 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.
    7. 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.
    8. Beshkar, Mostafa, 2010. "Optimal remedies in international trade agreements," European Economic Review, Elsevier, vol. 54(3), pages 455-466, April.
    9. 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 2032-2065, December.
    10. Josh Ederington, 2001. "International Coordination of Trade and Domestic Policies," American Economic Review, American Economic Association, vol. 91(5), pages 1580-1593, December.
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    Cited by:

    1. Maggi, Giovanni, 2014. "International Trade Agreements," Handbook of International Economics, Elsevier.

    More about this item

    Keywords

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

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations

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