A subsidy is a government payment to individuals, businesses, other governments, and other domestic institutions and organizations. Unlike government purchases, for which the government receives goods or services, subsidies do not provide the government with any goods or services in return. The purpose of government subsidies is to ensure the availability of necessary goods and services.
A wide range of domestic businesses, individuals, and other organizations in the United States are eligible for government subsidies. A complete listing of all federal subsidies can be found in the government publication, Catalog of Federal Domestic Assistance. Among the areas receiving government subsidies are agriculture, maritime industries, and mass transportation.
A subsidy may take the form of direct payments from the government, as is the case in a variety of agricultural crop and livestock production programs. The purpose of direct payments to wheat, cotton, wool, and other agricultural producers is to ensure adequate production to meet domestic and foreign demand and to protect or supplement the income of farmers.
A subsidy may also be in the form of a project grant. While direct payments may be used by the recipient for virtually any purpose, project grants usually carry stipulations regarding how the subsidy may be applied. The federal government provides project grants for a wide range of projects ranging from rural housing to urban mass transportation. Project grants and other federal subsidies that are given directly to state or local governments are also called grants-in-aid.
The federal government also subsidizes a range of services that its own agencies provide below cost to the public. When a government agency provides services to the public at a loss, the agency's income does not correspond to the value of the agency's output. Consequently, when calculating national income and gross national product, subsidies less surpluses of government enterprises are added to the value of output to arrive at national income.
In the area of international trade, export subsidies are government subsidies that are given to domestic producers of goods that will be exported. Export subsidies may take the form of a variety of government benefits, including direct payments, support prices, tax incentives, and funds for training. Export subsidies are given on the condition that the goods being produced will be exported. In the European Union (EU), export subsidies are called variable subsidies. Rules affecting variable subsidies of EU countries are found in the Common Agricultural Policy of the EU.
The General Agreement on Tariffs and Trade (GATT') contains restrictions on the use of export subsidies. Developed countries are forbidden to use subsidies to support the export of most manufactured goods, for example. Under GATT, less-developed nations are permitted to subsidize manufactured goods that will be exported, provided the subsidies do not significantly damage the economies of developed countries. GATT also provides for remedies, such as countervailing duties, when it has been determined that one trading partner is unfairly using export subsidies.
[ David P. Bianco ]
Collins-Williams, Terry, and Gerry Salembier. "International Discipline on Subsidies: The GATT, the WTO, and the Future Agenda." Journal of World Trade, February 1996, 5-17.