The Agreement on Subsidies and Countervailing Measures: Tying One's Hand Through the WTO

44 Pages Posted: 7 Dec 2006

See all articles by Meredith Crowley

Meredith Crowley

University of Cambridge - Faculty of Economics

Date Written: November 2006

Abstract

Why would governments agree to restrict their own discretion in setting domestic policies as part of a trade agreement? This paper examines the welfare consequences of the GATT's Agreement on Subsidies and Countervailing Measures (SCM). If countries which join a trade agreement are given free reign over the use of domestic production subsidies, then after negotiating tariff reductions, governments could undermine the agreement by introducing production subsidies to import-competing producers that effectively act as trade barriers. The SCM restricts the use of domestic subsidies by countries which have joined the WTO. Specifically, governments may not use sector-specific subsidies (agriculture is an exception) but they may subsidize their producers if they offer the same subsidy to all producers in their economies. I show that through an agreement like the SCM, governments can better achieve their goals of maximizing domestic welfare. This occurs because terms-of-trade concerns lead to subsidies in import-competing sectors that are higher than globally optimal and in export sectors that are lower than globally optimal. Therefore, a rule to require that subsidies be the same in all sectors forces a country to partially internalize these terms of trade externalities (by reducing subsidies to import-competing sectors and increasing subsidies to export sectors).

Keywords: subsidies, countervailing duties, trade agreements, WTO

JEL Classification: F13, F53, K33

Suggested Citation

Crowley, Meredith, The Agreement on Subsidies and Countervailing Measures: Tying One's Hand Through the WTO (November 2006). Federal Reserve Bank of Chicago Working Paper No. 2006-22. Available at SSRN: https://ssrn.com/abstract=949889 or http://dx.doi.org/10.2139/ssrn.949889

Meredith Crowley (Contact Author)

University of Cambridge - Faculty of Economics ( email )

Sidgwick Avenue
Cambridge, CB3 9DD
United Kingdom

HOME PAGE: http://https://meredithcrowley.weebly.com/

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