Trade Policies in the International Economy


The trade policy preference of governments is in an environment in which some of the trade subsidy involves the exchange of customized inputs. The best policies is that entail free trade international goods but not in intermediate inputs.

The export subsidies provide scope to alleviate the international hold-up problem. We identify two novel purposes for trade agreements. First, this analysis highlights the international nature of the market failure that prioritizes the role for subsidies. The domestic subsidies in Foreign might alleviate the hold-up problem, trade taxes. The subsidies will generally continue to be used as part of the set of second-best policies. The international input trade requires relationship-specific investments between domes tic and foreign market that cannot be perfectly contracted over on an ex-ante basis.

In WTO (2006), Negotiations on Environmental Goods and Services introduced the objective of a trade policy which is to induce those governments that have the ability to aspect foreign exporter (international) prices with their trade policy preference to act in an efficient way. The trade policy exhibits some key difference. First, the exporter prices are determined by competitive market conditions in the terms-of-trade theory. The exporter prices are determined as a sequel of ex-post bilateral producer- supplier bargaining. The exporter country will have an incentive to use an export tax to appropriate surplus from the Home country.

Its suppliers will have sufficiently weak bargaining power relative to national good producers at Home1. According to the terms-of-trade policy, there is a single international problem that a trade agreement must be solved in terms-of-trade manipulation. The international trade agreement is precisely to nullify the “bad” terms-of-trade manipulation, while maintaining the “good” terms-of- trade manipulation inherent in the second-best subsidies to input trade policy.

World Trade Report 2006 (Devoted to the analysis of export subsidies)

The U.S suffers setback and growing challenge in international trade. The global system of open trade has brought massive benefits to the U.S. economy. The trade has led to dislocation in certain industries and has faced new risks and uncertainties into the lives of many American staffs. It needs an equitable distribution of the benefits and costs in trade that require effective government policies. The need for such policies like that of China and India become emerging forces in the world economy2.

The United States has achieved solid economic growth since its last Trade Policy Review in 2004, according to a WTO Secretariat report on the trade policies and practices of the United States. During the review period, the United States is the world’s largest import market and a vital engine of global growth. It is continuously making incremental changes to its trade regime, including liberalization on an MFN and preferential basis.

The market access barriers and other distorting measures notably subsidies that addressing these distortions would benefit U.S. consumers and taxpayers and help strengthen the global economic growth. The report demonstrates that it is vital to pre-empt possible protectionist sentiment, which may require efforts in the United States3.

Trade Policy Reviews are an exercise administered by the WTO agreements,. Member countries’ trade and related policies are evaluated at regular intervals. Substantial developments that may have an impact on the global trading system are also supervised.. For each review, two documents are placed, a) a policy statement by the government of the member under review, b) a detailed report written independently by the WTO Secretariat.

Government subsidies can be beneficial tool in overcoming market failures and working towards social objectives. It can distort trade and provoke strong responses from trading partners, according to the WTO’s 2006 World Trade Report which was promulgated. According to the opinion of Director-General Pascal Lamy, WTO economists emphasized on use and the impact of government support to different sectors. With the introduction of subsidies, it can benefit society and remove the negative externalities of economic activity4.

The most significant part of Doha round negotiations involves reducing subsidies which distort trade while encouraging governments to use other forms of support. The absence of systematic information is aggravated by the lack of common definitions of subsidy practices. The Report launched with a review of attempts to clarify subsidies. The Report examines the reasons governments give for using subsidies, and assess the incidence of subsidies in various industries. Finally, the report performs an analysis of the WTO rules on subsidies5.

The findings of the Report are summarized below

  1. Economic theory tells us that subsidies can distort trade by giving an artificial competitive advantage to exporters. This can be a source of tension among trading partners.
  2. The trading partners about subsidies rises in direct proportion have direct trade effects within a narrow segment of economic activity. If the impacts of subsidies play vital role in the marketplace, they may instigate a reaction depriving any advantage from the subsidy.
  3. The Report assess that 21 developed countries disbursed almost $250 billion on subsidies, while all countries spent over $300 billion. The average arithmetic ratio of subsidies to GDP is lower in developing than that of developed countries. There are 31 developing countries the average ratio of subsidies to GDP was 0.6 per cent, on the other hand about 22 developed countries was 1.4 per cent
  4. The WTO rules on subsidies have evolved considerably over the years, becoming more precise and detailed. The Report indicates that while trade growth was lower in 2006 (6.5 percent) than the preceding year (9 per cent)6.

The role of Subsidies in Trades

The tariffs have been deducted by successive multilateral trade liberalization agreements. The subsidies have emerged as a major issue in international trade policy. It has been recognized that subsidies can have significant environmental implications. In the preceding year, the aspects of subsidies and the environment has been included in the work plans of the World Trade Organization’s Committee on Trade and the Environment.

The economic role of subsidy is directly related to the central environmental principle of full-cost pricing. The economic idea of subsidy has extracted from the assumption that the market allocates resources more effectively than any other mechanism. The government Payment to the producer of a particular good reduces the private cost of the good so that it no longer reflects id social cost7.

It is assumed that the social cost of a good should be reflected in its price. It is depend on economic theory for opposing export subsidies: subsidies allow the natural advantages possessed by one country to be offset by an artificial advantage created by another. The subsidies distort relative international trade prices that would have been determined by the principle of comparative advantage. Antràs, P., and Staiger, R. W. (2007) defined the term subsidy as a government directed market-distorting intervention, which decreases the cost of producing a specific good, or service. The logical implication of an economic definition of a subsidy is that any intervention that alters the price of the good artificially should be recognized as a subsidy.8

In 2003, Commerce and USTR continued their close monitoring worldwide subsidy practices of foreign governments that might bring adverse impact on American companies. USTR and SEO staffs depend on the website as a cross-check for review of foreign governments’ subsidy notifications to the WTO. This SEO website provides information about every subsidy program investigated by Commerce since 1980. It also provides access to WTO subsidies notifications and easily accessible links to other useful U.S. and foreign government sites.

Commercial Tools

WTO (2006), World Trade Report-2006 it was mentioned that the Uruguay Round of global trade negotiations included a new subsidies agreement on agricultural subsidies and an agreement to establish a new Committee on Trade and environment. The new subsidies agreement will affect some natural resource subsidies, but will leave others untouched. It defines subsidy as a “financial contribution” provided by, or at the government, including a direct transfer of funds. The WTO code cover the use of tariff policies to subsidize natural resource producers, either by protecting high-cost producers through high tariffs on imports9.

In Warren F. (1996) argued that the existing subsidies agreement establishes multilateral disciplines on subsidies and provides mechanisms for challenging government programs that violate these disciplines. The remedies in such circumstances can include the withdrawal of a subsidy program, or the elimination of the subsidy’s adverse effects. On the basis of these categories of discipline, the Subsidies Agreement provides remedies for subsidies affecting competition in one’s domestic market, in the world markets. These disciplines serve as an important complement to the U.S. CVD law is limited to addressing the effects of foreign subsidized competition in the United States10.

Commercial Policies

The Subsidies Agreement provides an alternative tool to assess decorative foreign subsidies that affect U.S. businesses and workers in the global market The U.S. trade policy responses to the problems connected with foreign subsidized competition provide USTR In general, it is USTR’s role to coordinate the development and implementation of overall U.S. trade policy with respect to subsidy matters.

The role of Commerce is to enforce the CVD law, monitor the subsidy practices of other countries, and provide the technical expertise needed to analyze and understand the impact of foreign subsidies on U.S. trade. The existing WTO disciplines on subsidies prohibit only two types of subsidies. The other permitted subsidies also distort markets and international trade patterns.

The United States has frequently emphasized that the Doha mandate to protect the effectiveness of the trade remedy rules in evaluating any proposals for changes to the Subsidies Agreements. It has been identified specific issues relevant to ensuring that these trade remedies remain effective with addressing problem of circumvention of subsidies11.

The improved procedures could reduce costs. Since U.S. exporters are a major target of foreign trade remedy proceedings. It is essential to improve transparency and due process so that U.S. companies are treated competent. We have emphasized the need to address trade distorting practices that are the fundamental causes of unfair trade. It has been made a number of submissions to the Rules Group with a view to strengthening of subsidies procedures. In the subsidies domain, it has raised the issue of whether a provision establishing a special standard of review (analogous to Article 17.6 of the Antidumping Agreement) is apposite for the Subsidies Agreement.

In summary, the United States has identified numerous issues for discussion related to antidumping and trade subsidies disciplines, in accordance with the principles. The United States has involved in addressing the submissions from other Members, and ensures that the Doha mandate for the Rules Group is materialized.

While recognizing the role that special treatment plays in the WTO system, the U.S. submission notes that the Subsidies Agreement envisions that the special and treatment provisions were not intended to be in effect. The submission makes obvious the U.S. view that the Subsidies Agreement does not approve indiscriminate subsidization policies as an effective, permanent economic development strategy. However, the U.S. subsidy procedure raise questions whether government equity investment is appropriate in countries with well-developed capital markets mechanism.

The Uruguay Round was fruitful in clarifying methodological concepts in the subsidies agreement regarding the benefit of various types of subsidies mechanism. The U.S. subsidy paper relate to various procedural issues and subsidy notifications12. Gabriele, A. (2005) stated that in 2004, the United States always play a leadership role on subsidy issues in the Rules Negotiating Group to ensure that the work mandated by Ministers remains focused on strengthening the existing disciplines.

The United States playing a leading role as these negotiations evolves into the next phase of shaping the structure and content of subsidy disciplines. The United States has proposed dynamic reform by reducing high levels of allowed protection and trade-distorting support through reduce tariff and subsidy disparities across countries, as well as strengthening WTO rules. The United States has proposed that WTO Members agree to eliminate all trade-distorting subsidies mechanism13.

Economic arguments for and against different kinds of subsidization

The United States safeguard U.S. rights under the Subsidies Agreement through WTO dispute settlement measures. The objective of the U.S. is to discouraging detersive subsidization and preventing harm caused to U.S. producers, farmers and workers by such subsidies. This cooperation is also crucial to the success of our efforts to protect and defend U.S. interests in other circumstances involving subsidy rules. The U.S. industry also raised concerns related to India’s failure to provide timely information about the subsidy amounts.

More recently WTO (2007), Recent Trade Developments and Selected Trends in Trade it is mentioned that The Department of Commerce’s is responsible for coordinating multilateral subsidies enforcement endeavors. The primary objective is to assist the private sector by monitoring foreign subsidies. It is identifying government assistance programs that can be remedied under the Subsidies Agreement of the WTO, of which the United States is a member.

The Subsidies can take a variety of forms. Various types of foreign subsidies that could be place a U.S. exporter at a competitive disadvantage vis-à-vis a foreign competitor. The SEO congratulate any information about foreign subsidy practices that may adversely affect U.S. companies’ export endeavors. The SEO can appraise the subsidy in relation to U.S. and multilateral trade rules to assess what action may be possible to tackle such adverse impacts14.

This section discusses the main aspects that a subsidy regime for trade in services should analyze procedures of the Agreement on Subsidies Measures of the WTO. The subsidy regime should incorporate the vital enforceable provisions that would provide adequate guarantees to all Members. The subsidy mechanism in the GATS would benefit by the introduction of transparency disciplines providing for the notification of all measures of support granted by the members.

This is another factor that needs to be taken into account when considering how to treat subsidies to trade in services. The categorization of subsidies on trade in services in line with the SCM would tend to introduce substantive rules about subsidies preferences.

The analysis has clarified on the economics of subsidies and raised the question of how subsidies affect international trade. It extracts why governments subsidize and evaluates policy objectives that are pursued through subsidy procedure. The report appraises the lack of adequate information on the use of subsidies because databases use different classification procedures. WTO (2006), World Trade Report-2006, p-84 provided that from 1998 to 2002, there are 22 developed and 31 developing countries, found that average ratio of subsidies to GDP was 0.6 per cent for the developing as against 1.4 per cent for developed countries.

From 1998 to 2002, the average subsidies as percentage of GDP for the US, EU (25), Brazil, India & China are 0.5, 1.5, 0.3, 2.6 and 1.1 respectively. The report shows that international sources of data on the incidence of subsidies in the services as well as industrial sector are practically not available. Finally, the report depict authentic scenario in WTO relating to subsidies and offers competing views15.

The evolution of the subsidies rule in WTO

The WTO’s Report has been evaluating topical issues in trade policy in the context of salient trends in international trade. The World Trade Report 2006 (WTR 06) discusses the area of subsidies. It is one of the most challenging topics in trade policy. The first section of the WTR 06 evaluated the recent developments in international trade issues such as developments in trade in textile in the post quota regime, the evolution of international royalty, and trade among least developed countries.

The world economy was boomed by 3.3 per cent in 2005, less rapidly than in 2004. The annual real rate of growth of world exports averaged 6 per cent in 2005, following the strong growth of 9.5 per cent in the previous year. and price indicators is widening of the US current account deficit in the coming years, which currently stands at over US $ 800 billion. The United States and Japan respectively allow 51 per cent and 62 per cent of their imports from LDCs to be duty free. Among developing countries, 93.3 per cent of LDCs exports to China enter duty free16.

Are Trade Deficits a Drag on U.S. Economic Growth?

The universal consensus opines that the U.S. trade deficit for 2006 was a drag on U.S. economic growth. The consensus shows basic principles that growing imports to the United States disrupt domestic production. It is reducing growth of real gross domestic product. The consensus on trade deficits and growth ignores the actual record of the U.S. economy in recent decades. The U.S. Commerce Department reported a record U.S. trade deficit for 2006 of $763.6 million.

It is reflected a deficit in goods of $836.1 billion, which was offset in part by a surplus of $66.0 billion in services in 2006. The growing trade deficit acts as a drag on overall economic growth. The government will have to revise its estimate of the nation’s fourth-quarter gross domestic product.17

The WTO was established with a new legal framework to ensure that trade laws evaluated the world economy and its multilateral trade policy. In 1994, One hundred and twenty countries signed the foundational document (Marrakesh,), after seven years of negotiations. The number of member countries had risen to 151 in 2007. The WTO is one of the organizations whose work is closely monitored by non-governmental organizations.


The purpose of this paper is threefold. The first objective is analytical and the second is policy oriented. In the first phase of the paper, it has been illustrated a few basic concepts on world trade report 2006 which extracted analytical clarification of export subsidies. In the second phase, it is assessed the institutional feasibility of implementing subsidy program from a commercial policies, tools and the role of subsidies. The third phase evaluated the outcomes of the controversies on subsidies in the WTO system of multilateral trade rules and regulation. Finally, the paper depicts a synthetic economic scenario of different kinds of subsidization and evolution of subsidies role in WTO18.


Antràs, P., and Staiger, R. W. (2007). Offshoring and the Value of Trade Agreements. Preliminary Version, pp 9-56. Web.

Barg, S. (1996), Eliminating Perverse Subsidies: What’s the Problem in Subsidies and Environment: Exploring the Linkages. Published by Organization for Economic Cooperation and Development (OECD), Paris, pp. 27-39.

Gabriele, A. (2005), Subsidies to Services Sectors: A Neo-Protectionist Distortion or A Useful Development Tool? Division on International Goods and Services, and Commodities, UNCTAD, pp. 1-43. Web.

Hufbauer,G. C., and Shelton, J. R. (1984), Subsidies in International Trade, 1st edition, Peterson Institute for Intl Economics, ISBN-10: 0881320048, pp. 10-19, pp. 76-102, pp. 253-278.

IUCN (2006), High-Level Roundtable on Trade And Environment, Bridges Trade BioRes Special Issue. pp 1-9. Web.

Porter, G. (2006), Natural Resource Subsidies, Trade and Environment: The Cases of Forests and Fisheries. Center for International Environmental Law, pp. 5-28. Web.

Runge, F. and Jones, T. (1995), Subsidies, Tax Incentives and the Environment: An Overview and Synthesis in OECD, Subsidies and the Environment, p. 10, OECD, Paris, France.

Warren F. Schwartz and Eugene W. Harper, Jr., (1996), The Regulation of Subsidies Affecting International Trade, Michigan Law Review. Web.

WTO (2007), Recent Trade Developments and Selected Trends in Trade, UNCTAD, UNCTAD Investment Brief, No.1, pp 20-31. Web.

WTO (2006), Openness fuels solid economic growth, Trade Policy Review: United States, Press Release: PRESS/TPRB/261. Web.

WTO (2006), Negotiations on Environmental Goods and Services, ICRIER-SRTT Quarterly WTO Newsletter, WTO News & Views, Vol. 2, No. 3. Web.

WTO (2006), World Trade Report-2006: Exploring the links between subsidies, trade and the WTO. Web.


  1. WTO (2006), Negotiations on Environmental Goods and Services.
  2. WTO (2006), World Trade Report-2006.
  3. WTO (2006), World Trade Report-2006.
  4. WTO (2006), World Trade Report-2006.
  5. WTO (2006), Openness fuels solid economic growth.
  6. WTO (2006), World Trade Report-2006.
  7. Porter, G. (2006, p-7).
  8. Antràs, P., and Staiger, R. W. (2007, p-44).
  9. WTO (2006), World Trade Report-2006 p-xxxvii, 168).
  10. Warren F. Schwartz and Eugene W. Harper, Jr., (1996, p-47).
  11. Warren F. Schwartz and Eugene W. Harper, Jr., (1996 p-55).
  12. Gabriele, A. (2005, p. 32).
  13. IUCN (2006 p-7).
  14. WTO (2007), Recent Trade Developments and Selected Trends in Trade, p-24.
  15. WTO (2006), World Trade Report-2006 p-84.
  16. WTO (2007), Recent Trade Developments and Selected Trends in Trade, p-29.
  17. WTO (2006), Openness fuels solid economic growth, Trade Policy Review.
  18. WTO (2006), World Trade Report-2006.