Here's an excerpt from a paper by Daniel Brou and Michele Ruta, entitled "A Commitment Theory of Subsidy Agreements":
What is the role of subsidy agreements within international trade treaties? Why do governments value such agreements? And what is the appropriate treatment of subsidies in the multilateral trading system? In this paper, we focus on production subsidies to the import-competing sector and develop a political economy theory to address these questions. Political considerations may support excessive protection for a given sector and trade agreements allow the government to commit to welfare improving policies. But in a political environment where special interests compensate the government for deviations from welfare maximizing policies, it is not clear that the government would be willing to limit its discretion. We argue that, since capital is allocated in anticipation of the protection it may receive, the government can benefit from trade agreements because they prevent the misallocation of capital. Subsidy rules play an important role because they prevent the erosion of gains from reduced tari¤s caused by shifting protection from one policy instrument (tariffs) to another (subsidies).
A while back, I did a post here on this blog (based on a law journal article I wrote) in which I argued that anti-protectionism is (and should be) the purpose of subsidy agreements. Here's my question: Is the quote above consistent with my view? When I read the quote by itself, I sort of feel like it is. However, when I read the rest of the paper, I get the sense they are saying something different. But that may be because of different views on the purpose of trade agreements in general, which carries over into the subsidies context.
