International Economics: Overcoming the Subsidy for Free Trade

Considering subsidies economic effects, their regulation relies not only on the knowledge of their nature, concept, political and economic facts but also economic theories that underlie free trade once subsidies can divert economic resources impeding trade. To comprehend how subsides produce effects on international trade, it is crucial to go through the main economic theories that underpin current trade structure such as absolute advantage and comparative advantage in comparison to the Keynesian welfare state theory once governments migrate between intervening or not in economy according to their interests and circumstances. In the same way, trade law had been built based on those facts. By this, the chapter shows that free trade is not possible to accomplish fully because of markets failures that need to be corrected by law, in this case, by a complex multilateral law system. On the other hand, the system faces new challenges when governments compete for investment attraction by using subsidies to provide a more favorable environment for industries and companies.