Export subsidies

Export subsidy

An export subsidy a payment to a firm that exports a good abroad. As with tariffs, export subsidies can be ad-valorem or specific, although this distinction is not important in the analysis. First, we shall note that, differently from before, in this case we shall assume that Home exports a good, this is, the autarky price at Home is lower than the international price.

Effects of an export subsidy

When a countri subsidizes its exports, the domestic price of the product increases. This is because now, a local producer can sell it a Home at the world price $p^w$, or ship it abroad and gain the world price plus the subsidy: $p^w + s$. At the same time, the subsidy encourages more local produces to start producing, world supply for the good increases and the world price goes down (here we just focus on the case where the country is large enough to meaningfuly affect world supply). Thus, as with the tariff, the change in prices implied by the subsidy is shared between consumers at Home, who pay a higher price, and consumers abroad who enjoy a lower price; firms earn the subsidy and the government has to pay for it.

However, different from before, we can show that the net effect of an export subsidy is negative:

Thus, the effects of an export subsidy are:

  • Reduce the price in foreign markets, hurting the terms of trade,
  • Increases the domestic price,
  • Represents a fiscal cost.

A question arises: if export subsidies hurt the exporting country that implements them, why do they exist? The answer is “political economy”. Typically, export subsidies benefit a relatively small but very well organised group of people, for instance, European farmers.

Last, usually, to avoid re-imports of the goods just exported, an equivalent import tariff is levied. Otherwise, an exporter could export the good and touch the subsidy, immediately import it and re-export it again to gain again the subsidy, etc. Tariffs prevent this from happening.