Export Subsidy: Two Countries

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Export Subsidy Two Countries

• Udayan Roy
• http//myweb.liu.edu/uroy/eco41
• September 2006

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Japan implements an export subsidy
This causes its supply to, in a sense, fall by
the extent of the subsidy.
Japan
Europe
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Export Subsidy Two Countries Case
Europe Europe Japan Japan
Before After Before After
Consumer Surplus A ABC F FHI
Producer Surplus BD D HJ EFHJ
Subsidy -- -- -- -EFGHI
Total Surplus ABD ABCD FHJ FHJ-G
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Export Subsidies Create Fake Trade

• Subsidies are the opposite of a tax they reward
  rather than punish
• Export subsidies reward domestic producers for
  the goods that they export
• This artificially boosts the nations levels of
  trade
• The country may export its entire output of a
  commodity and then import back the same commodity
  for its own use!

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Fake Trade is Bad

• The fake trade induced by export subsidies
  reduces the nations welfare (by G) and
• may even leave it worse off under trade than in
  autarky

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Gains and Losses

• When a country imposes an export subsidy, it is
  affected as follows
• Producers gain (EF)
• Consumers gain (HI)
• The country as a whole loses (G), because the
  cost of the subsidy (EFGHI) are not worth the
  benefits (EFHI)

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Gains and Losses

• When a country imposes an export subsidy, the
  other country is affected as follows
• The price of its imported good decreases. As a
  result,
• Consumers gain (BC)
• Producers lose (B)
• The country as a whole is better off (C)

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Export Subsidy and Welfare

• When one country implements an export subsidy,
  that country is worse off (G)
• The other country is better off (C)
• The losses of the worse-off country (G) are
  larger than the gains of the better-off country
  (C). So, the world as a whole is worse off.

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Textbook

• For more on this topic, see Export Subsidies
  Theory in Chapter 8, pages 197-199.