The WTO’s SCM Agreement and R&D Subsidies: A Ricardian Analysis and Evidence from Korea∗

The WTO’s SCM Agreement contained a safe harbor for R&D subsidies from 1995 to 1999, but reclassified R&D subsidies as actionable since 2000. We theoretically analyze the basis for regulating R&D subsidies and empirically assess whether the SCM Agreement has had any impact on government’s support for R&D subsidies. We modify and develop a Ricardian trade model in which R&D subsidies can be designed as a strategic policy instrument to bring mutual benefits or beggar-thyneighbor effects. We find that R&D subsidies targeting a specific and narrow range of goods entail beggar-thy-neighbor effects. Empirical evidence from Korea shows that the government/public sector tends to allocate R&D funds strategically and responds sharply to the new regulation environment imposed by the SCM Agreement.