The Value of Domestic Subsidy Rules in Trade Agreements

This paper investigates the efficient design of rules on domestic subsidies in a trade agreement. A clear trade-off emerges from the economic literature.

Weak rules may lead Member governments to inefficiently use domestic subsidies for redistributive purposes or to lower market access granted to trading partners once tariffs are bound. On the other hand, excessive rigidity may inhibit tariff negotiations or induce governments to set inefficiently high tariffs, as strict regulations would reduce policy makers' ability to use subsidies to offset domestic market distortions. Efficient subsidy rules are, therefore, the ones that strike the right balance between policy flexibility and rigidity. This economic approach provides a framework to interpret the provisions on domestic subsidies in the WTO.

No: ERSD-2009-12

Michael Ruta — WTO
Daniel Brou — University of Western Ontario
Edoardo Campanella — WTO

Manuscript date: November 2009

Key Words:

WTO/GATT, Subsidy Rules, Trade Agreements, Trade Policy Credibility

JEL classification numbers:

F13, F55, H25, D72


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This is a working paper, and hence it represents research in progress. This paper represents the opinions of the author, and is the product of professional research. It is not meant to represent the position or opinions of the WTO or its Members, nor the official position of any staff members. Any errors are the fault of the author. Copies of working papers can be requested from the divisional secretariat by writing to: Economic Research and Statistics Division, World Trade Organization, Rue de Lausanne 154, CH 1211 Geneva 21, Switzerland. Please request papers by number and title.

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