What is trade-distorting subsidy ?

Question

What is trade-distorting subsidy ?

Answer 1

A financial contribution, even indirect, that allows the product to be sold at a price that is less than the seller would otherwise want, and that the competition must sell at because of the absence of this same financial benefit.

As an example, imagine that the government in country A lets the lumber industry cut wood from its forests without requiring a payment.  This would be a subsidy, because the uncut wood has a real value and the loggers are not paying this.  As a result. they can sell their wood products for less.  These logging interests could then sell their wood products in country B for less than the loggers getting their wood in country B (where they have to pay the real value of the trees they log).

This means that country A will export a lot more wood to country B than it otherwise would.  This is a trade distortion.  The distortion is caused by a subsidy.

The subsidy allows the product to be sold at a lower cost, effectively undercutting the market price and making the subsidized product have an unfair advantage in the marketplace.