Is a Threat of Countervailing Duties Effective in Reducing Illegal Export Subsidies?

The primary objective of this paper was to explore the effectiveness of a threat of countervailing measures in reducing illegal export subsidies, by establishing a game-theoretical model to analyze the strategic relationship between exporting and importing countries. Analyzing the strategic incentive for the importing country to respond to export subsidies, this paper provides a rationale for the importing country to impose countervailing measures, thus demonstrating that the importing country increases its countervailing duty on the subsidized imports when the exporting country increases its export subsidies to its exporting firm. Additionally, it was determined that the exporting country has an incentive to impose an export tax when the importing country has a right to impose any countervailing duty against subsidized imports, thus implying that a threat of countervailing measures is indeed effective.