Trade Spillovers of Domestic Subsidies

March 1, 2024

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Format: Chicago

Lorenzo Rotunno, and Michele Ruta. Trade Spillovers of Domestic Subsidies, (USA: International Monetary Fund, 2024) accessed December 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

As governments resort to industrial policies to achieve economic and non-economic objectives, the number of subsidies implemented each year has more than tripled in the last decade. Using detailed data across a large number of advanced and emerging economies, we empirically investigate the effects of domestic subsidies on international trade flows. Estimates from a difference-in-difference specification show that on average subsidies promote both exports and imports. These effects are partly driven by selection into subsidies, as governments target export-oriented and import-competing products. The results however mask significant differences across countries. Specifically, exports of subsidized products from G20 emerging markets increase 8 percent more than exports of other products, with no evidence of selection. The gravity estimates confirm that subsidies promote international relative to domestic trade. These spillover effects are concentrated in some industries, such as electrical machinery, and are stronger when subsidies are given through tax breaks than other policy instruments. The subsidy-led rise in trade calls for international cooperation to manage risks of retaliatory actions and possible drifts towards a subsidy war.

Subject: Export competitiveness, Exports, Imports, International trade, Trade balance, Trade policy

Keywords: Effects of subsidy, Export competitiveness, Exports, Global, Imports, Industrial Policy, International Trade, Spillover effect, Spillovers, Subsidies, Subsidized product, Subsidy share, Trade balance, Trade policy, Trade spillover

Publication Details

Pages:

61
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2024/041
Stock No:

WPIEA2024041
ISBN:

9798400269486
ISSN:

1018-5941

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