## Trade Spillovers of Domestic Subsidies

_IMF Working Papers, March 1, 2024_

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## Bibliographic details
- Authors: Lorenzo Rotunno, Michele Ruta
- Published: March 1, 2024
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798400269486.001

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### Summary and research question
- Governments have increasingly resorted to industrial policies; the number of subsidies implemented each year has more than tripled in the last decade.
- The paper empirically investigates the effects of domestic subsidies on international trade flows using detailed data across a large number of advanced and emerging economies.
- Methods include a difference-in-difference specification and gravity estimates to assess subsidies’ effects on exports, imports, and international versus domestic trade.

### Key empirical findings
- On average, subsidies promote both exports and imports (difference-in-difference estimates).
- Selection plays a role: governments target export-oriented and import-competing products, which partly drives the observed effects.
- Heterogeneous country effects:
  - Exports of subsidized products from G20 emerging markets increase 8 percent more than exports of other products, with no evidence of selection.
- Gravity estimates confirm that subsidies promote international relative to domestic trade.
- Industry and instrument heterogeneity:
  - Spillover effects are concentrated in some industries, such as electrical machinery.
  - Spillovers are stronger when subsidies are given through tax breaks than when provided through other policy instruments.

### Policy implications and recommendations
- The subsidy-led rise in trade raises risks of retaliatory actions and possible drifts towards a subsidy war.
- The authors call for international cooperation to manage these risks.

### Data, scope, and approach notes
- Empirical strategies: difference-in-difference specification and gravity estimates.
- Sample: detailed data across a large number of advanced and emerging economies (as described in the paper).

### Publication and document metadata (exact)
- Title: Trade Spillovers of Domestic Subsidies
- Authors: Lorenzo Rotunno, Michele Ruta
- Date: March 1, 2024
- Series: IMF Working Papers
- Working Paper No.: 2024/041
- Pages: 61
- Volume: 2024
- Issue: 041
- DOI: https://doi.org/10.5089/9798400269486.001
- Stock No: WPIEA2024041
- ISBN: 9798400269486
- ISSN: 1018-5941
- Subjects/Keywords: Export competitiveness, Exports, Imports, International trade, Trade balance, Trade policy; 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

*IMF Working Paper — "Trade Spillovers of Domestic Subsidies" by Lorenzo Rotunno and Michele Ruta, March 1, 2024.*

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_Source: https://www.imf.org/en/publications/wp/issues/2024/03/01/trade-spillovers-of-domestic-subsidies-545453_