3.3 Export subsidies and quotas

Export subsidies are financial incentives governments give to domestic producers to boost exports. These subsidies aim to make local goods more competitive globally by lowering prices, increasing exports, and supporting domestic industries.

The effects of export subsidies are complex. Domestic producers benefit from reduced costs and increased exports, while foreign consumers enjoy lower prices. However, subsidies can strain government budgets and distort market equilibrium, often resulting in negative overall welfare effects for the subsidizing country.

Export Subsidies

Export subsidies in international trade

Top images from around the web for Export subsidies in international trade

• 

  4.7 Taxes and Subsidies – Principles of Microeconomics View original

  Is this image relevant?

• 

  Reading: Demand and Supply Analysis of International Trade | Macroeconomics View original

  Is this image relevant?

• 

  Reading: Demand and Supply Analysis of International Trade | Microeconomics View original

  Is this image relevant?

• 

  4.7 Taxes and Subsidies – Principles of Microeconomics View original

  Is this image relevant?

• 

  Reading: Demand and Supply Analysis of International Trade | Macroeconomics View original

  Is this image relevant?

1 of 3

Top images from around the web for Export subsidies in international trade

• 

  4.7 Taxes and Subsidies – Principles of Microeconomics View original

  Is this image relevant?

• 

  Reading: Demand and Supply Analysis of International Trade | Macroeconomics View original

  Is this image relevant?

• 

  Reading: Demand and Supply Analysis of International Trade | Microeconomics View original

  Is this image relevant?

• 

  4.7 Taxes and Subsidies – Principles of Microeconomics View original

  Is this image relevant?

• 

  Reading: Demand and Supply Analysis of International Trade | Macroeconomics View original

  Is this image relevant?

1 of 3

• Financial assistance provided by governments to domestic producers encourages exports
• Aims to make domestic goods more competitive in international markets by reducing prices
• Increases the quantity of exports improves the country's trade balance
• Supports domestic industries maintains employment levels (agriculture, manufacturing)

Economic effects of export subsidies

• Domestic producers:
  • Receive financial assistance reduces production costs
  • Sell products at lower prices in international markets
  • Experience increased exports gains market share (Chinese steel industry)
• Foreign consumers:
  • Benefit from lower prices of imported goods due to export subsidies
  • Increase consumption of subsidized products (agricultural products, consumer goods)
• Government expenditure:
  • Requires spending to provide financial assistance to domestic producers
  • May lead to increased budget deficits or higher taxes to fund subsidies (European Union's Common Agricultural Policy)

Market equilibrium with export subsidies

• Export subsidies shift the supply curve to the right producers willing to supply more at each price level
• New equilibrium:
  • Quantity of exports increases (US wheat exports)
  • Price of exported good decreases in the international market
• Domestic market:
  • Reduced supply available for domestic consumers
  • Higher prices in the domestic market (Japanese rice market)

Welfare Effects and Comparison

Welfare effects vs other trade policies

• Export subsidies welfare effects:
  1. Domestic producers gain from increased exports and financial assistance
  2. Domestic consumers face higher prices and reduced supply in the domestic market
  3. Government incurs costs to provide subsidies
  4. Net welfare effect on the subsidizing country is generally negative
• Import tariffs comparison:
  • Raise the price of imported goods in the domestic market
  • Benefit domestic producers by reducing competition from imports (US steel tariffs)
  • Government receives revenue from tariffs
• Import quotas comparison:
  • Limit the quantity of imported goods
  • Benefit domestic producers by reducing competition and increasing prices (US sugar quotas)
  • Government does not receive revenue from quotas
  • May lead to inefficiencies and rent-seeking behavior