Globally Optimal R&D Subsidy Policy:An Economist's View on the WTO Subsidy Agreement

Abstract

We provide economic backgrounds to the Agreement on Subsidies and Countervailing Measures under the World Trade Organization. Permitting R&D subsidy under Article 8 of the Agreement can be interpreted as an inefficient victory of an individual exporting country in the non-cooperative game, harnessing strategic relationship over a foreign rival firm into its domestic industrial policy. In addition, we show that the expiration of Article 8 can be understood as a result of the global optimum, where we maximize the sum of welfares over exporting and importing countries in the symmetric case with a linear demand. JEL classification: F10, F13