Export subsidies and countervailing tariffs

Abstract

This paper analyses how retaliation affects the profit-shifting argument for export subsidies. At the first stage the foreign country sets its export subsidy and then at the second stage the domestic country sets its tariff and/or production subsidy. It is shown that if the domestic country pursues an optimal trade policy, then it will always gain from a foreign export subsidy. When the domestic country uses a tariff and a production subsidy, the optimal foreign policy is an export subsidy, but if the domestic country only uses a tariff, then an export tax is usually the optimal policy.