Why are Countervailing Duties Imposed? The Firms’ Viewpoint

Abstract:     
This paper studies the relationship between firms’ profits and countervailing duties in vertically related markets characterized by oligopolies. It is shown that a countervailing duty equal to the foreign export subsidy is required to neutralize the impact of foreign export subsidies on the domestic firms’ profits. The domestic country has an incentive to impose a countervailing duty on the foreign final good even though the foreign government only subsidizes exports of the intermediate good. Additionally, the foreign exporting firms may benefit from a countervailing duty more than a foreign export subsidy.

Keywords: profits, countervailing duties, vertically related markets

JEL Classifications: F12, F13, L13

Working Paper Series