World Trade Report 2006

Exploring the Links Between Subsidies, Trade and the WTO

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The annual World Trade Report focuses on trade policy issues - the core topic addressed in 2006 is subsidies. The Report also takes a look at recent trade developments and examines a range of trade topics, including trade in textiles and clothing, flows of international receipts and payments of royalties and license fees, trends in the trade of least-developed countries, and the impact of natural disasters and terrorist acts on international trade flows. The World Trade Report is useful for policymakers and for any individuals or groups interested in global trade policy.

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The economics of subsidies

The purpose of this Section is to assist the reader to better understand the twin questions of why governments use subsidies and how subsidies impact international trade. As is frequently the case in economic analysis, the starting point for what follows is a “benchmark” economy featuring perfectly competitive markets. This approach provides the basis for general insights into the impact of policy interventions such as subsidies. As discussed further below, under the condition of a perfectly competitive market, no case can be made for a subsidy. Introducing a subsidy or some other government measure within a perfect market framework will be inefficient and welfare-diminishing. But if the perfect market assumption is relaxed, situations may arise where a government measure like a subsidy improves welfare. An efficient subsidy would correct a market failure, bringing social and private costs and benefits into alignment.

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