WTO Working Papers

WTO working papers usually represent research in progress. Such research may be conducted in the preparation of WTO Secretariat reports, studies or other material for WTO members. The papers are circulated for comment because the WTO considers critical review of professional research to be extremely important.


The Value of Domestic Subsidy Rules in Trade Agreements

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: Trade Agreements, Subsidy Rules, Trade Policy Credibility, WTO/GATT
JEL: F55: International Economics / International Relations, National Security, and International Political Economy / International Institutional Arrangements; D72: Microeconomics / Analysis of Collective Decision-Making / Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior; H25: Public Economics / Taxation, Subsidies, and Revenue / Business Taxes and Subsidies; F13: International Economics / Trade / Trade Policy; International Trade Organizations
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