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Edited by William A. Kerr and James D. Gaisford
Chapter 28: Strategic Export Subsidies
Stefan Lutz Introduction Export subsidies are payments by the government to support the export of a speciﬁed product. They typically take the form of a ﬁxed payment per unit exported (a speciﬁc subsidy) or of a payment as a percentage of export value (an ad-valorem subsidy).1 Most countries provide subsidies to agricultural products as a support for domestic farmers.2 However, as a result of the Uruguay Round, participating countries have agreed to set quantity ceilings by commodity and budgetary limits to possible export subsidies.3 Under perfect competition, an export subsidy normally decreases the price of the exported good abroad, but raises the price of the exportable at home. The situation described here is for a ‘large’ country, that is a country which does aﬀect its terms of trade – the ratio of price of exportables to price of importables – by its own supplies and demands in the world markets. Here, exporters and foreign consumers gain while domestic consumers and foreign competing producers lose. Since the subsidy is costly, government will have ‘negative revenues’. Note in particular that in the case of a subsidy the terms-of-trade eﬀect will go ‘in the wrong direction’ since the subsidy and its supply eﬀect will tend to decrease the world price of the exportable, adding another element to the domestic welfare loss. As a consequence, summing up all the welfare eﬀects for the country applying the subsidy reveals that national welfare falls. Since the subsidy introduces a price distortion...
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