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export subsidy

Page history last edited by PBworks 12 years ago

Export Subsidy

 

Export subsidy is a government policy to encourage export of goods and discourage sale of goods on the domestic market through low-cost loans or tax relief for exporters, or government financed international advertising or R&D. An export subsidy reduces the price paid by foreign importers, which means domestic consumers pay more than foreign consumers. The WTO prohibits most subsidies directly linked to the volume of exports.

 

Export Subsidies are also generated when internal price supports as in a guaranteed minimum price for a commodity creates more production than can be consumed internally in the country. That is without undermining the guaranteed minimum price. These price supports are often coupled with import tarrifs. Instead of letting the commodity rot or destroying it the government exports it. Saudi Arabia is a net exporter of wheat, Japan often is a net exporter of rice.

 

Export subsidies can also be a perpetual inflation machine: the government subsidises the industry based on costs, but an increase in the subsidy is directly spent on wage hikes demanded by employees. Now the wages in the subsidised industry are relatively higher than elsewhere, which causes the other employees demand higher wages, which are then reflected in prices, resulting in inflation everywhere in the economy.

 

Examples:  see common agricultural policy of the European Union.

 

 

Compare with:

 

 

 

                                         Price impact                                                  Impact on local                                        Net Impact on

                            for importers         for exporters             Consumers         Producers        Government                Country as whole

tariff                      increases              decreases*                large loss            small gain        large gain                depends on size of terms of trade gain

 

export subsidy       decreases             increases                    small loss            large gain        massive cost            negative (always)

 

import quota           increases             decreases                   large loss            small gain         none**                  depends on size of terms of trade gain

 

 

* only if importer is large country that can influence world prices, and terms of trade

** quota benefit goes to foreigners who benefit from quota rents...excess profits from holding import quota licenses

 

 

 

 

 

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