Incentives for Levying Countervailing Duties on Foreign Competitive Goods

Abstract

Objective: The relationships between firm profits, foreign export subsidy, and countervailing duties (CVDs) have not been discussed sufficiently in the existing related literature. The purpose of the present study is to analyze the effects of CVDs and formulate policy advice regarding CVDs to fill this knowledge gap. Methods: A game theoretic model with oligopolistic market structure is adopted. Results: The proposed model indicates that when a foreign country provides an export subsidy to a foreign final good, a domestic country has an incentive to levy a CVD whose value exceeds that of the foreign export subsidy on the foreign final good because domestic intermediate- and final-good firms might benefit from the CVD. Conclusions: A CVD whose value equals that of a foreign export subsidy is enough to counter the subsidy’s negative effects on the profits made by domestic intermediate- and final-good firms.