Assume that country A provides a subsidy on its exports to country B. Country B is about to impose a countervailing duty (of the same magnitude as the export subsidy) on the imports from country A. Which of the following statements is true in this context?
A)The exporters in country A gain surplus when the government of country B imposes a countervailing duty.
B)The import-competing producers in country B are worse off after the imposition of the countervailing duty by the government.
C)The overall national well-being of country B would be lower when the domestic government imposes a countervailing duty to offset the impact of the export subsidy.
D)The consumers in country B are better off after the government of country B imposes a countervailing duty.

Question

Quizplus · Accepted Answer

When country B imposes a countervailing duty to offset the impact of the export subsidy provided by country A, it may lead to a trade war. This will result in reduced trade between the two countries and can lead to an overall decrease in national well-being due to the loss of gains from trade. Both exporters in country A and import-competing producers in country B are worse off due to reduced trade. Consumers in country B may face higher prices due to reduced competition from imported goods. Hence, overall national well-being of country B would be lower when the domestic government imposes a countervailing duty to offset the impact of the export subsidy.

Assume That Country a Provides a Subsidy on Its Exports