Welfare implications of upstream subsidy in the presence of countervailing duties under limited verifiability

Sang-Kee Kim () and Young-Han Kim
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Sang-Kee Kim: Chungbuk National University

International Tax and Public Finance, 2020, vol. 27, issue 3, No 7, 643-663

Abstract: Abstract This paper examines how a politically biased strategic export subsidy influences social welfare when an importing country imposes countervailing duties on imported goods if the subsidy is verified. Based on a simple model that integrates the political contribution provided by exporting firms and the verifiability problem of an export subsidy for the upstream firms within a vertically fragmented production process, this paper demonstrates that politically biased strategic export policies can deteriorate social welfare. Moreover, when it is more difficult to identify hidden government subsidies, welfare loss due to politically biased subsidy is increased. Interestingly, an importing country is not motivated to fully countervail the politically biased export subsidies when it is concerned about social welfare, including consumer surplus. These results provide an answer on why the conflicts over hidden subsidies are increasing with deepening fragmentation of exporting firms’ production processes. In addition, the results imply that it is imperative to make further efforts to enhance the verifiability of the hidden subsidies in order to reduce the welfare deterioration caused by the politically biased strategic trade policies.

Keywords: Strategic trade intervention; Political contribution; Verifiability of hidden subsidy; Beggaring thyself; Beggaring thy neighbor (search for similar items in EconPapers)
JEL-codes: F12 F13 L13 L52 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1007/s10797-019-09571-8

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