Economic backgrounds on the prohibition of export subsidies under the WTO

Abstract

This paper provides economic backgrounds on the prohibition of export subsidies under the World Trade Organization(WTO). The Agreement on Subsidies and Countervailing Measures under the WTO prohibits subsidies contingent upon export performance in order to eliminate their trade-distorting effects on other member countries. However, using an extended model from Brander and Spencer(1985) and Kang(2006 and forthcoming) this paper shows that the prohibition of export subsidies partly considers the interests of exporting countries at the cost of the importing country, implying that it is not globally optimal to prohibit export subsidies. In addition, it turns out that the global optimum, maximizing world-wide welfare, is not politically attainable in a political economic framework.