The Value of Domestic Subsidy Rules in Trade Agreements

World Trade Organization Staff Working Paper ERSD-2009-12

19 Pages Posted: 30 Nov 2009 Last revised: 19 Dec 2009

See all articles by Michele Ruta

Michele Ruta

Economic Research Division, WTO; Columbia Business School - Economics Department; International Monetary Fund (IMF)

Daniel Brou

University of Western Ontario

Edoardo Campanella

World Trade Organization (WTO)

Date Written: November 2, 2009

Abstract

This paper investigates the efficient design of rules on domestic subsidies in a trade agreement. A clear trade-off emerges from the economic literature. Weak rules may lead Member governments to inefficiently use domestic subsidies for redistributive purposes or to lower market access granted to trading partners once tariffs are bound. On the other hand, excessive rigidity may inhibit tariff negotiations or induce governments to set inefficiently high tariffs, as strict regulations would reduce policy makers' ability to use subsidies to offset domestic market distortions. Efficient subsidy rules are, therefore, the ones that strike the right balance between policy flexibility and rigidity. This economic approach provides a framework to interpret the provisions on domestic subsidies in the WTO.

Keywords: WTO/GATT, Subsidy Rules, Trade Agreements, Trade Policy Credibility

JEL Classification: F13, F55, H25, D72

Suggested Citation

Ruta, Michele and Brou, Daniel and Campanella, Edoardo, The Value of Domestic Subsidy Rules in Trade Agreements (November 2, 2009). World Trade Organization Staff Working Paper ERSD-2009-12. Available at SSRN: https://ssrn.com/abstract=1513927 or http://dx.doi.org/10.2139/ssrn.1513927

Michele Ruta (Contact Author)

Economic Research Division, WTO ( email )

Rue de Lausanne 154
CH-1211 Geneva
Switzerland

HOME PAGE: http://www.iue.it/Personal/Fellows/MicheleRuta/Welcome.htm

Columbia Business School - Economics Department ( email )

420 West 118th Street
New York, NY 10027
United States

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Daniel Brou

University of Western Ontario ( email )

London, Ontario N6A 5B8
Canada
519-661-2111 x84815 (Phone)

HOME PAGE: http://publish.uwo.ca/~dbrou/

Edoardo Campanella

World Trade Organization (WTO) ( email )

Rue de Lausanne 154
Geneva 21, CH-1211
Switzerland

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