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Quantity restrictions imposed by the government of one nation on imports from other nations. The primary goal of export subsidies is to reduce imports and increase domestic production. Because the quantity of imports is restricted, the price of imports increases, which thus encourages domestic consumers to buy more domestic production. Export subsidies are one of three common foreign trade policies designed to discourage imports and/or encourage exports. The other two are tariffs and export subsidies. Export subsidies are foreign trade policies undertaken by domestic governments that are intended to "protect" domestic production by restricting foreign competition. In general, a quota is simply a quantity restriction placed on a good, service, or activity. For example, employers often face hiring quotas for different demographic groups and sales representatives often have quotas for sales activities.
Export subsidies are then merely legal restrictions on the quantities of imports from the foreign sector that are imposed by the domestic government.
The goal of export subsidies is to increase the limit the availability of imports in the domestic economy and thus encourage domestic consumers to purchase domestic production.
The Why of Export SubsidiesThe imposition of export subsidies on foreign imports, as well as other foreign trade policies, are commonly justified for at least five of reasons.
While export subsidies and other foreign trade policies can be beneficial to the aggregate domestic economy they tend to be most beneficial, and thus most commonly promoted by, domestic firms facing competition from foreign imports. Domestic firms benefit with higher sales, greater profits, and more income to resource owners. In addition, domestic consumers also benefit with more production and lower prices. However, export subsidies are paid for by domestic taxpayers.
- Domestic Employment: Because foreign imports are produced in other countries by foreign workers, subsidizing exports and increasing domestic production also increases domestic employment.
- Low Foreign Wages: Subsidizing the exports of domestic production "levels the competitive playing field" compared to imports produced by foreign workers who receive lower wages.
- Infant Industry: If foreign imports compete with a relatively young domestic industry that is not mature enough nor large enough to benefit from economies of scale, then export subsidies protect the "infant industry" while it matures and develops.
- Unfair Trade: Foreign imports might be sold at lower prices in the domestic economy because foreign producers engage in unfair trade practices, such as "dumping" imports at prices below production cost. Export subsidies once again seek to "level the competitive playing field."
- National Security: Export subsidies can also encourage domestic production of goods that are deemed critical to the security of the national economy.
Sundial Imports to Csonda: An ExampleConsider if you will, how one hypothetical country, the United Provinces of Csonda might be inclined to make use of export subsidies. Csonda, like any real world sovereign nation, is inclined to implement export subsidies and other foreign trade policies that are designed to increase net exports. In particular, Csonda has decided to subsidize the domestic sales of one particular good -- sundials. The principal target of Csonda export subsidies is to level the playing field for sundial imports from the Republic of Northwest Queoldiola, which coincidentally has a comparative advantage in sundial production.The left panel in this exhibit contains the domestic Csondan market for sundials. The domestic market demand is represented by the negatively-sloped demand curve, labeled Dc. The domestic market supply is represented by the positively-sloped supply curve, labeled Sc. In the absence of imports, the domestic Csondan market achieves equilibrium at a price of 12 csonds (which is the domestic currency in Csonda). The quantity exchanged at this equilibrium is 200 sundials.
Imports of Queoldiolan sundials changes this domestic equilibrium. The right panel presents the international market for sundials. The import demand curve, labeled Dm, is the shortage derived from the Csondan sundial market for prices less than 12 csonds. The export supply curve, labeled Sx, is based on the surplus generated by the Queoldiolan sundial market (not shown) for prices above 8 csonds.
The international market achieves a sundial price of 10 csonds such that Csonda imports 100 sundials from Northwest Queoldiola. The goal of the Csondan Sundial Manufacturers Association is to reduce the quantity of imports and to increase the price. Click the [Imports] button to highlight this situation.
Now a SubsidySuppose that the Csondan government pays domestic Csondan sundial producers a subsidy for each domestic sundial produced. Let's say that the goal of the subsidy is to reduce imports to 50 Queoldiolan sundials. A click of the [Subsidy] button reveals the new equilibrium that achieves this result.
To achieve that 50 import quantity, the domestic Csondan market supply curve must shift from Sc to Sc'. The new supply curve shifts lower and to the right because a 4 csond subsidy effectively reduces the cost of producing Csondan sundials. However, this shift of the Csondan market supply also causes a shift of the import demand curve in the international market, causing it to shift from Dm to Dm'.
This shift of the import demand curve generates a new equilibrium in the international market at a price of 9 csonds per sundial and a quantity of 50 sundials imported from Queoldiola by Csonda.
Some of he consequences of this quota are much as expected, others not.
While this might seem like a win-win situation for Csondan sundial producers and consumers, someone in the Csondan economy is paying the price. The gains accruing to the domestic sundial producers and consumers are offset by the extra taxes that others in the economy must pay to finance the sundial subsidy.
- First, the sundial subsidy increases the supply of Csondan sundials, resulting in an increase in production from 50 sundials to 125 sundials. On the other side of the market, with the addition of the 50 sundials imported from Northwest Queoldiola, the total domestic sundial consumption increases to 175.
- Second, these quantity values are achieved with a decrease in the price from 10 csonds to 9 csonds. The lower price is attributable to the government subsidy.
- Third, Csondan sundial manufacturers produce a larger quantity (225 versus 150). And even though the price paid by the consumers declines, the overall price received (a price paid of 9 csonds plus the subsidy of 4 csonds) increases to 13 csonds per sundial. As a result, decidedly more revenue flows to the domestic Csonda producers. They are definitely better off, which is just the result they were seeking.
- Fourth, unlike a tariff or quota, Csondan sundial buyers consume a larger quantity (275 versus 250), and they pay a lower price (9 csonds versus 10 csonds). They are paying less for sundials and are receiving more sundials. As a result, they are also better off.
- Fifth, the Csondan government must pay a subsidy of 4 csonds per domestic sundial produced to generate the situation presented in the exhibit. The government must come up with 900 csonds (225 domestic sundials at 4 csonds each) to pay this subsidy, which they presumably obtain through taxes on the Csondan citizenry.
Two Other Foreign Trade PoliciesExport subsidies are one of three common foreign trade policies that are designed to increase net exports by decreasing imports or increasing exports. The other two are tariffs and import quotas.
- Tariffs: Tariffs are simply taxes imposed by the government of one nation on imports from other nations. They work like any other taxes. A tariff is added to the price of the imported good. The resulting price of the import is thus higher, which tends to decrease the quantity purchased. And if fewer imports are purchased, then more domestic production is sold. Of course, while domestic producers benefit from tariffs, domestic consumers tend to suffer. They pay higher prices for both imports and domestic production.
- Import Quotas: Import quotas are legal restrictions on the quantities of imports that are imposed by the domestic government. Import quotas can be established as a simple aggregate, presumably satisfied on a first-come-first-serve basis. Once the total is reached, then no more imports of the particular good are allowed. Alternatively, the total quota can be divided among foreign producers, perhaps pro-rated based on past imports. While import quotas benefit domestic producers they are harmful to domestic consumers. With fewer imports available in the domestic economy, consumers have fewer choices and those choices more often than not come at higher prices.
EXPORT SUBSIDIES, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2024. [Accessed: February 25, 2024].
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