Subsidies and trade barriers

Abstract

Despite the net economic and social benefits of reducing most government subsidies and opening economies to trade, almost every national government intervenes in markets for goods and services in ways that distort international commerce. Those interventions have been reduced considerably over the past two decades, but many remain. Distortionary policies harm most the economies imposing them, but the worst of them (in agriculture and clothing) are particularly harmful to the world's poorest people. This paper focuses on how costly those anti-poor policies are and examines possible strategies to reduce remaining distortions, including via the Doha Development Agenda of the World Trade Organization (WTO) and sub-global preferential reforms such as the Free Trade Area of the Americas (FTAA) initiative. Arguments for removing trade barriers The standard comparative static analysis of national gains from international trade emphasises the economic benefits from production specialization and exchange so as to exploit comparative advantage in situations where a nation's costs of production and/or preferences differ from those in the rest of the world. Domestic industries become more productive as those with a comparative advantage expand by drawing resources from those previously protected or subsidized industries that grow slower or contract following reform. The static gains from trade tend to be greater as a share of national output the smaller the economy, particularly where economies of scale in production have not been fully exploited and where consumers (including firms importing intermediate inputs) value variety so that intra- as well as inter-industry trade can flourish.