1. Chapter analyzed export subsidies in agriculture, mining, and high-tech industries using demand and supply models. As in the S-F model, export subsidies benefit producers.
2. However, subsidies also lower consumer surplus and cost the government revenue, so there is a deadweight loss for a small country, similar to that of with an import tariff. For a large country, however, the welfare implications are different: Both import tariffs and export subsidies increase domestic prices (of either the import good or the export good). However, the export subsidy also creates a TOT loss for the exporter.
3. Production subsidies have smaller welfare losses than export subsidies because they do not change consumer prices.
4. Export taxes benefit consumers, hurt producers, and produce government revenue. For a large country they can create a TOT gain by restricting world supply. However, this is a beggar-thy-neighbor policy.
5. Strategic export subsidies may be effective in imperfectly competitive markets if they lead to much higher profits for domestic exporters. This is most likely to happen if the subsidy drives the foreign firm from the market.
Countries use export subsidies in a wide range of industries, including agriculture, mining, and high technology. For agriculture, the underlying motivation for the export subsidies is to prop up food prices, thereby raising the real incomes of farmers. This motivation was also discussed at the end of Chapter 3 using the specific-factors model. In this chapter, we used supply and demand curves to analyze the effect of export subsidies, but obtain the same result as in the specific-factors model: export subsidies raise prices for producers, thereby increasing their real income (in the specific-factors model) and their producer surplus (using supply curves).
Shifting income toward farmers comes with a cost to consumers, however, because of the higher food prices in the exporting country. When we add up the loss in consumer surplus, the gain in producer surplus, and the revenue cost of the subsidy, we obtain a net loss for the exporting country as a result of the subsidy. This deadweight loss is similar to that from a tariff in a small country. On the other hand, for a large country, an import tariff and an export subsidy have different welfare implications. Both policies lead to a rise in domestic prices (of either the import good or the export good) and a fall in world prices. For an export subsidy, however, the fall in world prices is a terms-of-trade loss for the exporting country. This means that applying an export subsidy in a large exporting country leads to even greater losses than applying it to a small country: there is no possibility of gain, as we found for a large-country import tariff.
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The losses arising from an export subsidy, for either a small or a large country, are less severe when we instead consider production subsidies. A production subsidy provides a farmer with an extra payment for every unit produced, regardless of whether it is sold at home or abroad. So consumer prices do not change from their world level. Since consumer prices are not affected, exports increase only because domestic supply increases. In other words, the excess supply in response to production subsidies will indirectly spill over into international markets but production subsidies do not exclusively subsidize those exports (as export subsidies do). For these reasons, the losses arising from production subsidies in an exporting country are less severe than the losses arising from export subsidies. At the Hong Kong meeting of the WTO in December 2005, countries agreed to eliminate export subsidies in agriculture by 2013, but that agreement was not ratified and has not been implemented. In addition, the countries made a much weaker agreement for production subsidies and other domestic farm supports.
The losses experienced by an exporting country due to subsidies are reversed when countries instead use export tariffs, as occurs for some natural resource products. With export tariffs in a large country, the exporter obtains a terms-of-trade gain through restricting supply of its exports and driving up the world price. This terms-of-trade gain comes at the expense of its trade partners who are buying the products, so like an import tariff, and export tariff is a “beggar thy neighbor” policy.
The losses experienced by an exporting country due to subsidies also change when we consider high-technology industries, operating under imperfect competition. In this chapter, we examined an international duopoly (two firms) producing a good for sale in the rest of the world: Boeing and Airbus, competing for sales of a new aircraft. We showed that it is possible for an export subsidy to lead to gains for the exporting country, by increasing the profits earned by the exporting firms by more than the cost of the subsidy. But that result often requires the subsidy to force the other firm out of the market, which does not necessarily occur. In this case, if both firms stay in the market and are subsidized by their governments, then it is unlikely that the subsidies are in the national interest of either the United States or the European Union; instead, the countries purchasing the aircraft gain because of the lower price, while the United States and Europe lose as a result of the costs of the subsidies.
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