3RD-COUNTRY EFFECTS AND 2ND-BEST GRAIN TRADE POLICIES - EXPORT SUBSIDIES AND BILATERAL LIBERALIZATION

An incumbent export subsidy will affect the size and distribution of g ains from bilateral trade liberalization but, in theory, may still per mit increased trade volume and mutual benefits from freer trade. These points are illustrated using the case of Canada-U.S. durum wheat trad e, which grew rapidly following the 1989 Canadian-U.S. Free Trade Agre ement (CUSTA). An empirical analysis suggests that, given its Export E nhancement Program (EEP), the United States lost from freer trade in d urum. Conversely, freer trade in durum means greater gains to the Unit ed States from eliminating EEP.