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.
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Notes
An agreement is considered complete if it specifies the exact levels of tariffs and export subsidies. For example, if the agreement is incomplete, at this stage, special interest groups might lobby for the values of the tariff and export subsidy ceilings.
Capital in the numeriare sector is generic,whereas capital in the manufacturing sectors is sector-specific. The adjustment cost of capital movements between the manufacturing sectors is sufficiently high, so capital always moves from and to the numeraire sector.
To investigate the rationale of asymmetric treatment between export subsidies and import tariffs, we assume that the production functions of the manufacturing goods are identical, and so, they are not a source of the asymmetry. Nonetheless, our results are independent of the endowments.
We can allow for a continuous decrease in transportation costs. The results are independent of the structure of the reduction in transportation costs.
The idea of this assumption is that firms anticipate exogenous technology improvements that save transportation costs over time.
We can easily allow for discounting. The parameter \(\theta \) can be chosen such that the equilibrium allocation without discounting under the chosen \(\theta \) and the equilibrium allocation with discounting are equivalent.
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This paper was previously circulated under the title “Import Tariffs and Export Subsidies in the WTO: A Small-Country Approach” and “Why Does the WTO Prohibit Export Subsidies but not Import Tariffs?” We are grateful to Robert Staiger, Yeon-Cho Che, John Kennan, Bijit Bora, James Lake, and Kiriya Kulkolkarn for their invaluable comments. We thank editors Emily J. Blanchard and Gerald Willmann, as well as two anonymous referees, for their helpful suggestions. We have benefited from discussions with seminar participants at the Midwest International Trade conference (Fall 2017), Kentucky Economic Association conference (2017), Eastern Economics Association conference (2018), Southern Economics Association conference (2018), American Economics Association conference (2019), and World Trade Organization (WTO). Tanapong Potipiti thanks the WTO for its financial support. All remaining errors are our own.
Appendix
Appendix
1.1 Proof of Lemma 1
Proof
According to the equations in Proposition 1 and Proposition 2, the government prohibits only export subsidies but not import tariffs if \(\sigma \left( 1-\theta +\epsilon \right) \left( \frac{1}{2}+\frac{\theta ^{2}}{\theta -\epsilon }\right) >\left( \frac{1-\sigma }{2}\right) ^{2}\left( 1-\theta \right) ^{2}\) and \(\sigma \left( 1-\theta -\epsilon \right) \left( \frac{1}{2}+\frac{\theta ^{2}}{\theta +\epsilon }\right) <\left( \frac{1-\sigma }{2}\right) ^{2}\left( 1-\theta \right) ^{2}\). The two conditions can be satisfied simultaneously if \(\epsilon >0\). \(\square \)
1.2 Proof of Proposition 4
Proof
The functions \(\Omega _{X}\left( \lambda \right) \) and \(\Omega _{Y}\left( \lambda \right) \) in Eqs. (40) and (46) are continuously differentiable with the property that under the same set of parameter values, \(\text {d}\Omega _{X}\left( \lambda \right) /\text {d}\lambda >\text {d}\Omega _{Y}\left( \lambda \right) /\text {d}\lambda \) for all \(\lambda \). Therefore, the maximizers \(\lambda ^{\tau *}\) and \(\lambda ^{s*}\) must be such that \(\lambda ^{\tau *}\ge \lambda ^{s*}\). \(\square \)
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Potipiti, T., Suwanprasert, W. Why does the WTO treat export subsidies and import tariffs differently?. Rev World Econ 158, 1137–1172 (2022). https://doi.org/10.1007/s10290-022-00457-2
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DOI: https://doi.org/10.1007/s10290-022-00457-2