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Page history last edited by PBworks 12 years ago



a payment given to a local firm to help it compete with imports. 


How its done:


Either with tax breaks or with low-cost loans to the domestic company.


The USA offers very few national subsidies, but individual states and counties sometimes do (in order to attract investment, such as FDI).




The government must pay for a subsidy.  So, unlike a tariff which generates extra income for the government....with a subsidy, the government must pay out money.  This means that taxes will have to be raised, and tax payers will have to pay the bill. 



Export Subsidy


An  export subsidy is a type of a subsidy in which the government gives a local firm money (tax breaks or low-cost loans) in order to promote exports, and to generate national income.


The intent and the results are different. First of all the intent:  a subsidy is to help a local producer, but an export subsidy is specifically intended to promote exports.  The result of a domestic subsidy is that it increases local prices and encourages foreign companies to target your market.  The result is that local countries normally also impose tariffs or import quotas to protect the inflated domestic market.  Export subsidies are similar in that the government gives money to a local producer, but in this case the intent is for export, and there is rarely a need for additional tariffs or import quotas .



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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