Welcome to Scribd, the world's digital library. Read, publish, and share books and documents. See more
Standard view
Full view
of .
Save to My Library
Look up keyword
Like this
1Activity
0 of .
Results for:
No results containing your search query
P. 1
Export Subsidies: Are they justified or should they be abolished?

Export Subsidies: Are they justified or should they be abolished?

Ratings: (0)|Views: 340|Likes:
An essay for the 2011 Undergraduate Awards Competition by Niamh Callaghan. Originally submitted for International Economics at Trinity College, Dublin, with lecturer Catia Batista in the category of Business & Economics
An essay for the 2011 Undergraduate Awards Competition by Niamh Callaghan. Originally submitted for International Economics at Trinity College, Dublin, with lecturer Catia Batista in the category of Business & Economics

More info:

Published by: Undergraduate Awards on Aug 29, 2012
Copyright:Attribution Non-commercial

Availability:

Read on Scribd mobile: iPhone, iPad and Android.
See more
See less

10/27/2013

 
Export Subsidies: Are they justified or should they beabolished?
 
Introduction
The multifaceted question posed in this essay concerns whether export subsides should be abol-ished. Firstly, export subsidies “consist of all subsidies on goods and services that become payable to resident producers when the goods leave the economic territory or when the servicesare delivered to non-resident units” (OECD, 2003
1
). A further definition is provided by the WorldTrade Organisation (WTO) which considers an export subsidy “a financial contribution by a gov-ernment or any public body within the territory of the Member that confers a benefit”
2
. This defi-nition is very broad and thus a financial contribution can encompass direct payments, tax relief,transportation subsidies and the provision of low interest loans to name but a few (Rude, 2007)On the surface, export subsidies can appear an attractive policy tool because they can im- prove the position of domestic firms in non-cooperative rivalries with foreign firms (Brander andSpencer, 1985). However, they can also impose large distortions resulting in damage to the func-tioning of international trading markets (Rude, 2007). The multi-lateral elimination of exportsubsidies could increase world welfare (Collie, 2000) but would result in the creation of manywinners and losers.In this essay, an outline of the economic rationale underpinning the use of export subsi-dies is provided. The effects and costs are also highlighted with reference to some empirical evi-dence. Two sectors of the economy, namely agriculture and high technology, will be analysed indepth. Export subsidies exist in these two sectors but for very different reasons.
Economic theory and rationale for export subsidies
1
2
 
Classical trade theory, which is based upon the assumption of perfect competition, fails to pro-vide an explanation for the incentives which cause a welfare maximising government to imple-ment an export subsidy policy (Collie, 2000). This is due to the loss in terms of trade incurred bythe exporting country
3
. Furthermore, a deadweight loss is imposed upon the rest of the world.In contrast, new trade theory, which encompasses imperfect competition, does provide anincentive for an exporting country to implement a subsidy in the form of profit-shifting
4
(Brander and Spencer, 1985). Imperfect competition is the result of market failure. In contrast to perfectcompetition, there is the possibility to earn monopoly profits in the short-run (Feenstra and Tay-lor, 2008). This type of market structure is conducive to the emergence of strategic trade policyas firms compete for monopoly rents. Although, the exporting country increases it's welfare it isat the expense of competing foreign countries. This type of trade policy may be referred to as a beggar-thy-neighbour strategy. Upon the conclusions of this new theory, individual sectors andcountries may benefit but a multi-lateral elimination of such subsidies would increase world wel-fare through the removal of the deadweight loss.Arguments put forward for the implementation of export subsidies are to expand exports, preserve a country’s international market share and to diversify economic activity. These aimscan be motivated by pressure from interests groups, as in the case of agricultural export subsidiesin the European Union. Diversification is a particularly attractive prospect in developing coun-tries
5
.However, empirical studies, which will be discussed later in the essay, show that the re-sults of export subsidisation often do not outweigh the costs (Panagariya, 1999). There are many3
In classical trade theory models such as the Ricardian model, both domestic and foreign countries gain from tradeand the terms of trade of both countries increase.
4
An illustration of which will be shown later in the essay.
5
Diversification reduces the dependence of these economies on a small number of industries.

You're Reading a Free Preview

Download
/*********** DO NOT ALTER ANYTHING BELOW THIS LINE ! ************/ var s_code=s.t();if(s_code)document.write(s_code)//-->