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Subsidies and the World Trade Organization

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The Expando Co. in State A receives a wide variety of general subsidies from the State A government (including tax breaks, low interest financing, and technical assistance) that State A offers to all domestic enterprises within its territory.

Expando manufactures wristwatch bands that it recently began to sell in State B. The Flexo Co. in State B manufactures similar watchbands and it has began to lose some of its market share to Expando. State A and State B are both WTO member states. Flexo would like State B to impose a countervailing duty to offset the subsidies received by Expando from State A, and Flexo has asked the State B Customs Service (which is responsible for imposing such duties) to do so.

After making an investigation, the Customs Service refused to impose any duties. Flexo has appealed to a court. Should the court overrule the decision of Customs Service? Explain.

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Solution Summary

What is a subsidy? What is a countervailing duty? When can these options be used? By what means can help be sought against a subsidy that creates an unfair market? Need a quick example? These issues are addressed in this solution.

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Since both States A and B are members of the WTO, they must abide by the WTO agreement for subsidies and countervailing measures. This agreement does two things: it disciplines the use of subsidiaries and it regulates the actions countries can take to counter the effects of subsidies. It says a country can use the WTO's dispute settlement procedure to seek the withdrawal of the subsidy or the removal of its adverse effects or a State can launch its own investigation and charge extra duty (or, "countervailing duty") on subsidized imports that are found to be hurting domestic ...

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