Chapter Introduction

On July 21, 2008, representatives of the 152 countries belonging to the World Trade Organization (WTO) met in Geneva, Switzerland, to discuss reforms of the world trading system. Like earlier meetings in Seattle (1999), Cancún, Mexico (2003), and Hong Kong (2005), this meeting was marked by large-scale protests. Groups including farmers from South Korea and fishermen from the Philippines objected to the impact that agricultural reforms could have on lowering food prices, thereby threatening their livelihoods. Farmers in South Korea, along with those in Japan, Europe, and the United States, benefit from an intricate system of tariffs (taxes on imports) and subsidies (payments to exporters) that keeps prices for their crops high but in some cases lowers prices in the rest of the world. The lower world price hurts farmers in land-rich developing countries such as Brazil, India, China, and some African nations by making it harder for them to export their own agricultural products. On the other hand, the lower world prices are a benefit to land-poor developing countries that must import agricultural products. Consumers in those countries will be hurt if prices end up rising as a result of agricultural reforms in the WTO.

The first goal of this chapter is to explain subsidy policies that affect resource-based industries (such as agriculture, mining, and fuel production) and high-tech industries. The primary reason that countries subsidize exports is political, but there are other reasons as well. For example, agricultural subsidies benefit a group in society (such as farmers) that the government wants to support. Such subsidies occur in the United States, Europe, Japan, South Korea, and many other countries. Because these subsidies are costly to the governments of these countries and because they harm exporters from land-rich developing countries, many countries attending the Doha Round of WTO negotiations (2001–present) advocated for the removal of agricultural subsidies. In exchange for the removal of subsidies, it was expected that land-poor developing countries would lower their tariffs on agricultural goods. This complex negotiation (which involved agriculture in many countries) ultimately failed, and the 2008 Geneva meeting of the Doha Round broke up without agreement. More recently, in December 2013 a much smaller deal to streamline customs procedures was agreed to in Bali, Indonesia, but without agreement on agricultural subsidies, as indicated in the quote at the beginning of the chapter.1 In this chapter, we describe the tentative agreements to reduce agricultural subsidies made at the 2005 Hong Kong meeting of the WTO, and the issues that could not be resolved which led to the breakup of the 2008 Geneva meeting.

Police fight rioters outside the World Trade Organization’s meeting. Most of the protesters were South Korean farmers worried about rice imports.

©Lee Jae-Won/Reuters/Corbis

Export subsidies are not the only kind of policy that is used to influence trade in resource-based industries such as agriculture, mining, and fuel extraction. The second goal of this chapter is to explain the effect of two policies, export tariffs and export quotas, on the countries that use them. To raise government revenue, some countries impose export tariffs, taxes applied by the exporting country when a good leaves the country.2 Argentina, for example, charges export tariffs on many agricultural and resource exports. In 2011 the tariffs were 35% on soybeans, 30% on sunflower meal and oil, 23% on wheat, 20% on corn, and 20% on biodiesel (vegetable oil–based diesel fuel). Another trade policy that can sometimes benefit companies is an export quota, a restriction on the amount that producers are allowed to export. China, for example, applied quotas on firms exporting “rare earth” minerals in 2011 and 2012, which led to a substantial increase in the price of these minerals.

The third goal of the chapter is to examine how governments can strategically use export subsidies to bolster domestic companies and industries. Instead of being used to support a particular industry or to raise revenue for the government, some subsidies are meant to give a domestic industry a strategic advantage in international competition. Some high-technology industries, such as Airbus in Europe and Boeing in the United States, receive generous government subsidies, which often leads to political friction. Legislators often believe that subsidies to high-tech industries will raise those industries’ profits and benefit the exporting country.

In this chapter, we assess the arguments for and against the various export policies by examining their effects on prices, the amount of trade, and welfare.