From economist Don Boudreaux:
As an empirical matter ... the costs of subsidies are borne chiefly by citizens of the country whose government uses subsidies while the benefit of subsidies is enjoyed overwhelmingly by that country’s trading partners.
Still – because trade makes markets less and less national and more and more global – the possibility is real that, especially over the very long run, subsidies do reduce the net welfare not only of citizens of the countries that use subsidies but reduce also the welfare of citizens of other countries. And economists have long recognised that it is possible, in principle, for a home government to beneficially use retaliatory trade restrictions to pressure foreign governments to end their subsidies and other market-distorting policies.
Economists, however, have also long been sceptical of the ability of such retaliatory measures to work in practice. Because subsidies and protectionist tariffs typically result from successful rent-seeking by politically powerful interest groups, home-governments’ retaliations against these market-distorting policies are unlikely to end these policies. The reason is that retaliation seldom diminishes either the absolute or relative power of those interest groups whose political manoeuvres are responsible for the policies in the first place. As long as these rent-seeking groups remain disproportionately influential in determining the economic policies of their countries, these groups will continue to successfully exercise their influence over their governments to maintain the market-distorting policies.
Economists’ reluctance to endorse the use of retaliatory trade restrictions springs also from the recognition that home governments cannot be trusted to pursue retaliatory trade policies in welfare-enhancing ways. Home governments, after all, are subject to rent-seeking pressures just as are foreign governments. It is simply too tempting and too easy for a home government to falsely portray its own market-distorting policies – policies implemented for reasons no more noble than to create rents for powerful domestic producer groups – as being parts of a quest to cleanse the global economy (or at least the home economy) of subsidies and other market distortions introduced by dastardly foreign governments.
Economists’ realisation that – over the short and medium run – subsidies chiefly benefit, not the countries that impose them but, rather, their trading partners, combines with (1) economists’ scepticism of the ability of retaliation to end foreign-governments’ subsidies, and (2) with economists’ fear of home-economy rent-seeking, to cause economists, generally, to recommend treating foreign-government subsidies as facts of nature to be taken as given rather than as alterable variables that ought to guide a home-government’s policy-making.
It's a good piece, but Boudreaux seems very focused on the unilateral response. I might ask a different question: Do subsidies need international regulation? I have an article coming out in the Melbourne Journal of International Law in which I argue that the purpose of international subsidies rules is to restrain the use of subsidies as a form of protectionism. Implicit in that piece is the view that, yes, subsidies need international regulation. More on that later.
Putting these issues in more concrete terms, here's someting from recent news reports:
The tight-lipped Fast opened the vault slightly when it came to a recently announced U.S. inquiry into allegations that the Canadian ports of Vancouver and Prince Rupert are unfairly swiping lucrative cargo traffic from American West Coast ports.
The five-member Federal Maritime Commission is holding the inquiry following complaints from American ports that Canada is unfairly subsidizing the diversion of cargo ships away from its U.S. competitors.
The agency will deliver its findings to U.S. Congress after it completes the inquiry amid concerns that American lawmakers are mulling over a US$143-per-container levy on cargo entering the United States from B.C. ports as a retaliatory measure.
"Canadian and Mexican ports are free to compete with U.S. ports for U.S. cargo, but they should do so on a playing field that is not artificially tilted by governments' policies," Richard Lidinsky, chairman of the commission, said recently.
...
Trade Minister Ed Fast must meet with his U.S. counterpart to head off talk of a new tariff for goods shipped through Canada and into America, the head of the Canadian Chamber of Commerce said Monday.
Fast says the attempt by the U.S. Federal Maritime Commission to add a tariff to cargo shipped into Canadian ports and across the U.S. border is in its infancy. He says it's too soon to say what could come of it.
