Handbook on International Trade Policy
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Handbook on International Trade Policy

Edited by William A. Kerr and James D. Gaisford

The Handbook on International Trade Policy is an insightful and comprehensive reference tool focusing on trade policy issues in the era of globalization. Each specially commissioned chapter deals with important international trade issues, discusses the current literature on the subject, and explores major controversies. The Handbook also directs the interested reader to further sources of information.
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Chapter 28: Strategic Export Subsidies

Stefan Lutz


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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