Chapter 7: Conditions for imposition of countervailing measures
6. General introduction to the agreement on subsidies and countervailing measures: ‘thou shall not subsidize’ It is important to look at the economic analysis of subsidies – because it is often misrepresented or misunderstood – before introducing the GATT and WTO approaches. The economic views change substantially when export subsidies or production subsidies are examined. A EXPORT SUBSIDIES Economic analysis makes a clear distinction between export and production subsidies. It shows that export subsidies have a net negative welfare impact on the subsidizing country that is symmetrical to the one imposed by tariffs. Export subsidies induce the producers of the subsidizing country to produce ‘too much’ (more than they would do if only relying on their economic advantages) and they induce the consumers of the subsidizing country to consume ‘too little’ of the domestic product (less than in case of no export subsidy). This second effect is often neglected by policy makers. It is caused by the fact that, if the domestic price of the subsidized product does not match the domestic producers’ revenue on the world market, these domestic producers would sell their whole output on the world market. In order to avoid such a situation, the domestic price of the subsidized product has to match the world price plus the export subsidy that constitutes the domestic producers’ revenue on the world market; hence, it has to increase, reducing by the same token domestic demand. In sum, like tariffs, export subsidies hurt both sides (producers and consumers) of the domestic market...
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