Countervailing Duties on Green Goods: Implications for the WTO rules

Author Name YOMOGIDA Morihiro  (Sophia University)
Creation Date/NO. October 2015 15-J-056
Research Project A Study on Trade/FDI and the Environment/Energy
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This paper examines an optimal countervailing duty on green goods such as photovoltaic products. In 2013, the United States imposed a maximum of 49.79% countervailing duty on imports of photovoltaic products from China because subsidized exports of China significantly injured the U.S. producers. In response to this trade conflict, some economists and legal scholars argue that the World Trade Organization (WTO) rule should be modified in order to restrict or prohibit the imposition of countervailing duties on photovoltaic products. The reason is that subsidies for photovoltaic products could improve the environmental quality because it helps to reduce greenhouse gas emissions with promoting the use of solar power, and countervailing duties could counteract such environmental benefits. Although this argument seems to be reasonable from an economic viewpoint, none of them have undergone a formal economic analysis. We develop a theoretical model that incorporates the features of China-U.S. trade in photovoltaic products and use the model to examine how the United States' countervailing duty should be modified when the U.S. government maximizes national welfare that includes external environmental benefits generated by the use of green goods such as photovoltaic products. We show that an optimal countervailing duty should be lowered for green goods as compared to ordinary goods that do not generate environmental benefits even when a domestic production subsidy is optimally set to internalize the external effect. We also discuss implications for existing proposals for modification of the WTO rules on subsidy and countervailing measures for green goods.