Why does the WTO treat export subsidies and import tariffs differently?

Tanapong Potipiti () and Wisarut Suwanprasert
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Tanapong Potipiti: Chulalongkorn University

Review of World Economics (Weltwirtschaftliches Archiv), 2022, vol. 158, issue 4, No 6, 1137-1172

Abstract: Abstract We develop a three-stage lobbying game to explain why the WTO prohibits export subsidies but not import tariffs. In this model, the government chooses trade policies (i.e., import tariffs or export subsidies) to maximize a weighted sum of social welfare and lobbying contributions. We argue that the economic rents from export subsidies cannot be contained exclusively within lobby groups, because new capitalists, who will enter the growing export sector, freely benefit from export subsidies without paying political contributions at the time of lobbying. In the contracting import-competing industries, no new entrants erode the protection rents from tariffs. Therefore, the government receives large political contributions by protecting these import-competing industries. We show that, given that capital reallocation is costly, when the free-rider problem is severe, the government will sign a trade agreement that prohibits only export subsidies. In the extended model in which the government has a continous policy space, we show that there is a non-empty set of parameter values such that the government would prohibit export subsidies while allowing for positive tariffs.

Keywords: WTO; Export subsidy; Import tariff; Trade negotiations (search for similar items in EconPapers)
JEL-codes: F13 F15 F53 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1007/s10290-022-00457-2

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