The Evolution of International Subsidy Rules

Why did countries achieve a consensus to restrict export subsidies and export-promoting domestic subsidies when the World Trade Organization (WTO) began in 1995, but not decades earlier under the General Agreement on Tari¤s and Trade (GATT)? This question poses a challenge for the theory of trade agreements because export promotion improves the terms of trade of importers, so subsidy restrictions re-duce the welfare of importing nations. This paper argues that cross-border externalities arising from political economy and pro\u85t-shifting can explain the historical pattern of subsidy rules. Motives to restrict export promotion do not exist when trade policies are chosen noncooperatively, because import tari ¤ revenue neutralizes any motive for export promotion. Once import tari¤s fall, as in the 1950s and 1960s, then motives to restrict export promotion can arise. Governments prefer to protect domestic sales through international subsidy restraints rather than to allow consumers to bene\u85t from unfettered subsidization. Governments could in theory have eliminated the need for subsidy rules by eliminating domestic intersectoral misallocation or by adjusting bot