On the Political Substitutability between Tariffs and Subsidies

Brou, Daniel; Ruta, Michele

doi:10.1007/bf03399287

“…We come back to this point in the conclusions 6. For a simple model that captures this idea, seeBrou and Ruta (2009).…”

mentioning

confidence: 74%

“…Neither policy provides any net bene…t to society and it is clear that the welfare maximizing policy is to set both the tari¤ and the subsidy equal to zero. 10 Given the socially optimal policies b t; b…”

Section: Welfare Maximizing Policymentioning

confidence: 99%

A Commitment Theory of Subsidy Agreements

Brou

¹

,

Ruta

²

2012

WTO Working Papers

0

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This paper examines the rationale for the rules on domestic subsidies in international trade agreements through a framework that emphasizes commitment. We build a model where the policy-maker has a tariff and a production subsidy at its disposal, taxation can be distortionary and the import-competing sector lobbies the government for favourable policies. The model shows that, under political pressures, the government will turn to subsidies when its ability to provide protection is curtailed by a trade agreement that binds tariffs only. We refer to this as the policy substitution problem. When factors of production are mobile in the long-run but investments are irreversible in the short-run, we show that the government cannot credibly commit vis-à-vis the domestic lobby unless the trade agreement also regulates production subsidies, thus addressing the policy substitution problem. Finally, we employ the theory to analyze the Subsidies and Countervailing Measures (SCM) Agreement within the GATT/WTO system.

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“…10 Given the socially optimal policies b t; b s , per unit of capital pro…ts in the manufacturing sector will be denoted as b (p ) = 1 2 p 2 and aggregate welfare is c W (k) W (0; 0; k). These will serve as useful benchmarks in the analysis that follows.…”

Section: Welfare Maximizing Policymentioning

confidence: 99%

A Commitment Theory of Subsidy Agreements

Brou

¹

,

Ruta

²

2013

The B.E. Journal of Economic Analysis &Amp; Policy

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in A Commitment Theory of Subsidy AgreementsAbstract This paper examines the rationale for the rules on domestic subsidies in international trade agreements through a framework that emphasizes commitment. We build a model where the policy-maker has a tariff and a production subsidy at its disposal, taxation can be distortionary and the import-competing sector lobbies the government for favourable policies. The model shows that, under political pressures, the government will turn to subsidies when its ability to provide protection is curtailed by a trade agreement that binds tariffs only. We refer to this as the policy substitution problem. When factors of production are mobile in the long-run but investments are irreversible in the short-run, we show that the government cannot credibly commit vis-à-vis the domestic lobby unless the trade agreement also regulates production subsidies, thus addressing the policy substitution problem. Finally, we employ the theory to analyze the Subsidies and Countervailing Measures (SCM) Agreement within the GATT/WTO system. JEL-Code: F130, F550, H250, D720.

show abstract

A Commitment Theory of Subsidy Agreements

Brou

¹

,

Ruta

²

2012

Self Cite

View full text Add to dashboard Cite

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in A Commitment Theory of Subsidy AgreementsAbstract This paper examines the rationale for the rules on domestic subsidies in international trade agreements through a framework that emphasizes commitment. We build a model where the policy-maker has a tariff and a production subsidy at its disposal, taxation can be distortionary and the import-competing sector lobbies the government for favourable policies. The model shows that, under political pressures, the government will turn to subsidies when its ability to provide protection is curtailed by a trade agreement that binds tariffs only. We refer to this as the policy substitution problem. When factors of production are mobile in the long-run but investments are irreversible in the short-run, we show that the government cannot credibly commit vis-à-vis the domestic lobby unless the trade agreement also regulates production subsidies, thus addressing the policy substitution problem. Finally, we employ the theory to analyze the Subsidies and Countervailing Measures (SCM) Agreement within the GATT/WTO system. JEL-Code: F130, F550, H250, D720.

show abstract

On the Political Substitutability between Tariffs and Subsidies

Abstract: ). 1 The model presented here is a simplified version of Brou and Ruta (2009). We refer the reader to the latter work for additional results and generalizations.

Cited by 3 publications

References 2 publications

A Commitment Theory of Subsidy Agreements

A Commitment Theory of Subsidy Agreements

A Commitment Theory of Subsidy Agreements

A Commitment Theory of Subsidy Agreements

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