Subsidies: Rationales and Trade and Investment Distortions
(16 pages of text)
Governments throughout the world have offered subsidies for a wide variety of reasons, including increasing investments and jobs (particularly those that are high-tech), stimulating economically depressed regions, supporting domestic agriculture, and preventing bankruptcies through “bail-outs.” Subsidies now play a key role in business location decisions, and impact international competitiveness. Recipients of subsidies can offer their goods and services for sale at lower prices than would exist in the absence of subsidies. Foreign-based corporations may regard these lower prices as unfair competition in international trade. Consequently, international trade negotiations have come to focus on many of these subsidy programs as trade distortions that should be limited by formal international agreements. Some countries, especially the United States, impose special countervail duties if their corporations are being hurt by foreign subsidies. With current and projected reductions in trade barriers, subsidies will become relatively more important as a trade-determining process. Nevertheless, subsidies are implemented to pursue certain social objectives, and so an intergovernmental pact that limits subsidies may diminish, rather than improve, the well being of signatories.
This note discusses subsidies’ external benefits, the ambiguous definition of subsidies, implicit subsidies, investment subsidies, bailouts, tax concessions, and special economic zones, as well as agricultural and aircraft subsidies.
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