Export Subsidy
What is Export Subsidy?
An export subsidy is a government payment to domestic producers for each unit they sell abroad, which raises exports above the free-trade level.
The subsidy lets producers earn the world price plus the payment on every unit they export, so they will not sell at home for less than that. The domestic price therefore rises to the world price plus the subsidy, domestic output expands, domestic consumption falls, and the gap between them is shipped abroad. Producers gain, domestic consumers lose, and taxpayers fund the payment; in the standard small-country model the taxpayer cost exceeds the combined gain, leaving a net loss. Trading partners often respond with countervailing duties, tariffs designed to offset the subsidy. An export subsidy is a policy chosen by a government, which is what separates it from dumping, a pricing decision made by a firm.
Export Subsidy: a worked example
Suppose the world price of wheat is $5 a bushel. At that price domestic farmers supply 100 million bushels while domestic buyers want 60 million, so 40 million are exported. The government now pays $1 for every bushel exported, so no farmer will sell at home below $6 and the domestic price rises to $6. Supply climbs to 120 million and domestic purchases fall to 50 million, so exports rise to 70 million. The subsidy bill is $1 × 70 million, or $70 million, and domestic bread buyers are paying a dollar more per bushel.
The mistake students make with export subsidy
Students assume a subsidy must be good for domestic buyers because the word sounds generous. It is the opposite: the payment pulls output toward foreign buyers and pushes the domestic price up to the world price plus the subsidy, so home consumers pay more. The other frequent slip is treating export subsidies and dumping as one thing. A government grants a subsidy; a firm dumps by selling abroad below its home price or below cost.
Export Subsidy questions
Who benefits from an export subsidy?
Domestic producers benefit, while domestic consumers and taxpayers lose. Producers receive a higher price on every unit and sell more, consumers pay the higher domestic price, and taxpayers cover the payment. Standard trade analysis finds the losses outweigh the gain for the exporting country as a whole.
Are export subsidies allowed under WTO rules?
WTO rules prohibit most export subsidies on industrial goods and restrict them tightly in agriculture. Importing countries that can show injury may impose countervailing duties to cancel out the subsidy. Support that is not tied to exporting, such as general research funding, faces far fewer restrictions.
How is an export subsidy different from a tariff?
An export subsidy pays producers to sell abroad, while a tariff taxes goods coming in. The subsidy costs the government money and expands exports; the tariff raises revenue and shrinks imports. Both push the domestic price of the good up and both shrink the gains from trade.
Formula / Example
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Related terms
Common comparisons
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