Strategic Export Subsidies and Reciprocal Trade Agreements: The Natural Monopoly Case

33 Pages Posted: 1 Nov 1996 Last revised: 27 Mar 2021

See all articles by Kyle Bagwell

Kyle Bagwell

Stanford University - Department of Economics; National Bureau of Economic Research (NBER)

Robert W. Staiger

Stanford University; University of Wisconsin - Madison - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: May 1996

Abstract

Why do governments seek restrictions on the use of export subsidies through reciprocal trade agreements such as GATT? With existing arguments, it is possible to understand GATT's restrictions on export subsidies as representing an inefficient victory of the interests of exporting governments over the interests of importing governments. However, to our knowledge, there does not exist a formal theoretical treatment that provides circumstances under which GATT's restrictions on export subsidies can be given a world-wide efficiency rationale. In this paper, we offer one such treatment in the context of a natural monopoly market. We emphasize that subsidy competition between governments can serve to coordinate the entry decisions of firms, finding that consumers in the importing countries may suffer if the coordination afforded exporters by government subsidy programs does more to prevent entry than to promote it. In such circumstances, we show that the existence of export subsidy programs can lead to inefficiencies, and importing countries and the world as a whole can be better off when such programs are banned.

Suggested Citation

Bagwell, Kyle and Staiger, Robert W., Strategic Export Subsidies and Reciprocal Trade Agreements: The Natural Monopoly Case (May 1996). NBER Working Paper No. w5574, Available at SSRN: https://ssrn.com/abstract=4387

Kyle Bagwell

Stanford University - Department of Economics ( email )

Landau Economics Building
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Stanford, CA 94305-6072
United States

National Bureau of Economic Research (NBER)

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Robert W. Staiger (Contact Author)

Stanford University ( email )

Stanford, CA 94305
United States

University of Wisconsin - Madison - Department of Economics ( email )

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Madison, WI 53706
United States
608-262-2265 (Phone)

National Bureau of Economic Research (NBER)

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United States

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