Export Subsidy

9 Key excerpts on "Export Subsidy"

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  eBook - ePub

  Handbook of International Food and Agricultural Policies

  (In 3 Volumes)Volume 1: Policies for Agricultural Markets and Rural Economic ActivityVolume 2: Policies for Food Safety and Quality, Improved Nutrition, and Food SecurityVolume 3: International Trade Rules for Food and Agricultural Products

  • William H Meyers, Thomas Johnson, Donna H Roberts, Karl Meilke(Authors)
  • 2017(Publication Date)
  • WSPC

    (Publisher)

  While conceptually an export tax is simply a negative subsidy, the disciplines that the WTO applies with respect to these two trade policy instruments are quite different. WTO Members place a high priority on containing and eliminating the use of export subsidies. In contrast, WTO rules do not discipline its Members’ application of export taxes even though this is the instrument that relates directly to the exercise of market power in export markets (Lloyd, 2005). In fact, about one-third of WTO Members impose export duties (Piermartini, 2004).

  Export subsidies and taxes are both border measures that are conditional upon the product being exported and the agent exporting the product either being subsidized or taxed. Traditionally, more policy and academic attention has been paid to export subsidies than to export taxes. However, Croser and Anderson (2011) show that, for the period 2000–2004, export taxes and subsidies contributed almost equally to global agricultural trade distortions. Furthermore, over the 1981–1984 period, Croser and Anderson (2011) demonstrated that on a global basis export taxes were seven times more trade-distorting than export subsidies. The reliance on export taxes was reflective of inward looking development policies where developing countries taxed agriculture to promote industrial development (Anderson, 2017). Moreover, a series of commodity price surges beginning in 2007/2008 re-focused concerns about the role that export restrictions played in exacerbating price surges.

  The WTO takes a broad view of the definition of a subsidy as “a financial contribution by a government or any public body within the territory of a Member that confers a benefit” (WTO, 1999). Given this very broad definition, an Export Subsidy can include direct payments, the granting of tax relief, the granting of low-interest loans, disposal of government stocks at below-market prices, subsidies financed by producers or processors as a result of government actions, marketing subsidies, transportation and freight subsidies, and subsidies for commodities contingent on their incorporation in exported products (ERS, 2003). Despite a WTO prohibition on subsidies that are contingent on export performance (WTO, 1994a, Article 3), these subsidies until very recently persisted in markets for agricultural products and capital goods. Agricultural export subsidies got special attention in the WTO because until now there was no outright prohibition on these subsidies although the Agreement on Agriculture put limits on existing export subsidies and prohibited the use of new export subsidies.

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  WTO Disciplines on Subsidies and Countervailing Measures

  Balancing Policy Space and Legal Constraints

  • Dominic Coppens(Author)
  • 2014(Publication Date)
  • Cambridge University Press

    (Publisher)

  Thus export subsidies are seen as more distortive than domestic subsidies, both from the perspective of the subsidiz- ing country (as they also negatively affect domestic consumers) as well as 7 Welfare is commonly defined as the sum of consumer surplus (i.e., the difference between the price consumers have to pay and are willing to pay or their ‘marginal benefit’), producer surplus (i.e., the difference between the price at which producers sell and are willing to sell or their ‘marginal cost’) and government revenue. 8 Terms of trade is defined as the ratio of export prices to import prices. 9 Any displacement of foreign producers in volume terms is also considered too marginal to be noticeable. 10 This is illustrated below in figure 5.2 (Chapter 5, section 5.1.3.2.2), which illustrates the welfare effects of the US production subsidies for cotton that were challenged in the US – Upland Cotton case. A welfare maximizing large country is rather advised to tax exports. A production subsidy to its import-competing industry could, in theory, be welfare- improving for the subsidizing country, but an optimal tariff would be a more direct, and thus efficient, instrument to exploit its terms of trade to maximize its welfare. Y.-H. Yeh, ‘On Subsidies vs. Tariffs’, 38 Southern Economic Journal (1971), 89–92. 11 The are displaced by subsidized exports and have to accept the depressed world price for their remaining sales. rationales for offering subsidies 7 from the perspective of net exporting countries (as they have a more direct effect on the terms of trade). 12 Hence, to understand why countries offer subsidies, the complete and perfectly competitive markets assumption has to be relaxed or subsidi- zation has to be explained by reasons other than maximizing welfare. For the purpose of the present study, four explanations for subsidization are distinguished in which these assumptions are relaxed.

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  Spending to Win

  Political Institutions, Economic Geography, and Government Subsidies

  • Stephanie J. Rickard, Stephanie J. Rickard(Authors)
  • 2018(Publication Date)
  • Cambridge University Press

    (Publisher)

  For example, the Japanese government promised to increase subsidies to pig farmers in order to offset the reduction in pork tariffs agreed as part of the Trans-Pacific Partnership (TPP) multilateral free trade agreement. 11 As this example illustrates, governments may provide subsidies as a substitute for tariffs (Rickard 2012b). Subsidies are, in fact, one of the few tools policy-makers have remaining at their disposal to assist domestic industries. World Trade Organization (WTO) commitments restrict the use of tariffs and capital markets restrict exchange rate manipulation (Blomström, Kokko, and Mucchielli 2003, Thomas 2007). Given these international restrictions, subsidies may become the universal mode of state intervention in industry (Verdier 1995). 12 Subsidies reveal valuable information about governments’ spending priorities. Subsidies typically benefit a minority group (i.e. an industry or sector) at the expense of a majority of citizens (taxpayers). In other words, subsidies tend to provide concentrated benefits with diffuse costs. Subsidies to the US sugar industry, for example, uphold a domestic sugar 9 Down from 3 percent in 1995 and 4 percent in 1990. 10 This estimate includes budgetary and off-budgetary subsidies and those relating to consumption and production and comes from the National Institution for Transforming India, a Government of India policy think-tank. Times, May 7, 2017, “Scrap all production subsidies” http://economictimes.indiatimes.com/news/ economy/policy/scrap-all-production-su bsidies-niti-aayogs-bibek-debroy/articleshow/58560312.cms. 11 The Japan News, May 21, 2014, S Edition, Business Section, p. 8 (accessed via Lexis Nexis). 12 Some international restraints exist on subsides. However, theses “are either volun- tary or do not bind in a significant way” (Rodrik, 2004: 32). 68 Explaining Government Spending price two to three times higher than the world’s market price (Mortensen and Pissarides 2001).

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  The Law and Policy of the World Trade Organization

  Text, Cases, and Materials

  • Peter Van den Bossche, Werner Zdouc(Authors)
  • 2021(Publication Date)
  • Cambridge University Press

    (Publisher)

  840 Subsidies 12 1 INTRODUCTION In addition to rules on dumping and anti-dumping measures, WTO law also includes rules on another practice that may or may not be considered unfair, namely, subsidisation. Subsidies are a very sensitive matter in international trade relations. On the one hand, subsidies are evidently used by governments to pursue and promote important and fully legitimate objectives of economic and social policy. On the other hand, subsidies may have adverse effects on the interests of trading partners whose industry may suffer, in its domestic or export markets, from unfair competition with subsidised products. Disputes about subsidies, and in particular subsidies to ‘strategic economic sectors’, have been prominent on the GATT/WTO agenda. Most noteworthy are the long-run- ning disputes initiated by the European Union (EU) and the United States (US) in respect of subsidies to their respective civil aircraft industry. 1 Agricultural subsidies promoting production and export of commodities such as cotton 2 or sugar 3 have also triggered much WTO litigation. As mentioned in Chapter 1, subsidies are subject to an intricate set of rules. Some subsidies, such as export and import substitution subsidies, are, as a rule, prohibited, while other subsidies are not prohibited but are ‘actionable’ (i.e. chal- lengeable) and must be withdrawn (or their adverse effects removed) when they cause adverse effects to the interests of other Members. Furthermore, if a sub- sidy causes or threatens to cause material injury to the domestic industry of a Member, that Member is authorised to impose countervailing duties on the 1 More specifically, the original disputes in EC and certain member States – Large Civil Aircraft (2011) and US – Large Civil Aircraft (2nd complaint) (2012); and the compliance disputes in EC and certain member States – Large Civil Aircraft (Article 21.5 – US) and US – Large Civil Aircraft (2nd complaint) (Article 21.5 – European Union).

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  Trade Regime and Economic Growth

  • Charles L Chanthunya, Victor Murinde(Authors)
  • 2019(Publication Date)
  • Taylor & Francis

    (Publisher)

  A production subsidy or tax should be used to deal with a production distortion and a consumption subsidy or tax with a consumption distortion, and so on. However, outward-orientation argues for export subsidies and against any subsidies for production or consumption in the domestic market. Presumably this is to compensate for what one perceives as existing distortions due to import-substitution measures so as to move relative prices nearer to “free trade” ones in order that exports can be promoted without any hindrance of distortion elements in the home market. Indeed, outward orientation argues that export subsidies are welfare-increasing rather than welfare-worsening if properly designed, in contradiction to the prediction of neoclassical trade theory. In the economic literature, export subsidies such as export drawbacks have indeed been criticised on the grounds that they generate distortions in the input markets. As the exporter has access to foreign inputs which are exempted from tariffs, the domestic producer o f inputs may be importing his own inputs, further back in the chain of production. As he is not an exporter, the duties paid on those inputs raise his costs, reducing his chances o f competing with the inputs imported directly by the final exporter. Consequently, simple export drawbacks are biased against “indirect exporters”, i.e., the domestic producers of inputs for final exporters. This bias persists even if the input is not internationally tradeable, as the tariff paid by indirect exporters raises the cost and price of the domestically produced input. The result is that simple export 44 drawbacks can promote excessive reliance on foreign inputs and the development of an export sector detached from the domestic economy. Alternatively, simple export drawbacks can promote unnecessary vertical integration between final and indirect exporters.

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  Exploration in Development Issues

  Selected Articles of Nurul Islam

  • Nurul Islam(Author)
  • 2017(Publication Date)
  • Routledge

    (Publisher)

  Lastly, there are considerable differences in costs and efficiency between the individual firms in an industry, so that for the more efficient intra-marginal firms the difference between the world price and costs is more than met by the magnitude of the Export Subsidy. These firms are able to forego some profits without making losses. It is usually the more efficient and the larger firms which engage in the export trade. An important feature of the export policy has been a considerable fluctuation over time in the magnitude of Export Subsidy. The two most important components of the export policy, i.e., the export bonus scheme and export performance licensing, have been frequently changed in terms of their coverage, percentage of import entitlements and in terms of the permissible list of imports. The fluctuations in the magnitude and pattern of Export Subsidy, originating from export bonus and performance licensing, are given in Table 24.4. Export Incentive and Effective Subsidy in Pakistan: An Evaluation 439 Table 24.4 Export Subsidy as percentage of f.o.b. exports Rates of subsidy Percentage distribution of industries 1963-64 1965-66 1967-68 0-24 1.78 1.61 3.23 25-50 5.36 62.91 62.90 51-75 58.93 35.48 33.87 76-100 5.36 --101-125 28.57 -— 126-150 --— 151-200 --— 200 and above — _ _ As has been indicated earlier, by 1965-66 there was a decline in the effective Export Subsidy but no decline in effective protection, judging from the differentials between domestic and foreign prices of imported goods and tariff rates (Alamgir, op. cit.); the result was a diminution in the attraction for exporting as against import substituting. Assuming that the rates of effective protection of 1965-66 were the same as in 1963-64, and comparing them with the effective rates of subsidy, one finds that in the majority of the cases the effective protection exceeded effective subsidy; moreover, the magnitude of the difference between the two correspondingly widened.

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  Reclaiming Development in the World Trading System

  • Yong-Shik Lee(Author)
  • 2016(Publication Date)
  • Cambridge University Press

    (Publisher)

  478 The financial incentives provided to domestic steel consumers will also be prohibited as import-substitution subsidies. If the government of country A guaranteed the loan and offered tax reductions contingent on export performance, these measures would also be prohibited as export subsidies. Today’s regulatory framework for international trade does not allow developing countries to adopt effective development policies that were previously used by today’s developed countries. 479 477 See the relevant discussion in Section 1.4, supra. 478 As discussed earlier, the domestic industry of the importing country needs to sustain material injury for the application of a CVD action, but the threshold for material injury is not considered high. See supra note 454. 479 Supra note 398. tariffs and subsidies 99 This illustration suggests that the current subsidy rules have made “a significant dent in the abilities of developing countries to employ intelligently-designed industrial policies” 480 and that the present ban on export subsidies and import-substitution subsidies under Article 3.1 of the SCM Agreement should be lifted in favor of developing coun- tries in consideration of the importance of subsidies to development. In addition, the application of CVD actions against the trade of develop- ing countries should be limited. This limitation would enable developing countries to provide their domestic industries with trade-related subsidies and to facilitate development without the threat of retaliatory measures on their exports. In limiting CVD actions, differences in the development status and income levels existing among developing countries should be considered.

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  Stuck in the Middle

  Is Fiscal Policy Failing the Middle Class?

  • Antonio Estache, Danny Leipziger, Antonio Estache, Danny Leipziger(Authors)
  • 2009(Publication Date)
  • Brookings Institution Press

    (Publisher)

  However, the bad reputation of subsidies is hard to reconcile with the long-lasting effective support they enjoy from politicians that perpetuates their existence. The perva-siveness of this instrument is an indication of its broad support beyond politi-cians. But this support for an apparently ineffective and possibly regressive instrument is puzzling. Why Do Many Economists Still Support Subsidies? The tendency in public discourse and the press is to think of subsidies as pay-ments to producers. However, as some of the examples above show, subsidies apply to producers and consumers. Simply put, the definition of a subsidy is when the price (or what would be the market-determined price) is lower than the cost, and the government provides the funds to fill this gap. Clearly this can lead to confusion in the appreciation of what is a subsidy and how effective it is. The core source of this confusion stems once more from the competing rationales used to justify subsidies. Consider the case of primary health care. One often hears a wide range of arguments as to why governments should subsidize it. One group argues that primary health care is a basic right, so access to it must be an equity issue. The hard-headed economist says no, lack of access to primary health care is a market failure due to incomplete information on the part of the clients, or maybe a discount rate issue leading to an underinvestment in preventive health. The not-so-hard-headed economist says no, access to primary health care is an externality—healthier people will be better able to participate in society—a concept that people do not take into account when making individual, private health care choices. All of these arguments might be valid reasons for a subsidy. However, they can have different implications as to whom the government subsidizes, how much of a subsidy is offered, how the subsidy is offered, and the like.

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  Positive and Normative Analysis in International Economics

  Essays in Honour of Hiroshi Ohta

  • Hironobu Nakagawa, Tatsuya Uchida, M. Kemp(Authors)
  • 2011(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  The laissez-faire equilibrium is given by the intersection between ADD 1 B and JK, the point Z and the equilibrium output of firm H is exactly equal to k. An Export Subsidy affects the ADD 1 B curve by shifting its AD and D 1 B sections rightwards but its DD 1 section verti- cally upwards (to avoid complications, these changes are not shown in the figure). From Figure 7.1, we can see that if the magnitude of the Export Subsidy is small, the new reaction curve should still intersect the JK line at Z and the market equilibrium is unchanged. However, if the magnitude is large, the market equilibrium will move downwards along the ZK line, leading to a rise in firm H’s output and a fall in firm F’s. Therefore, the impacts of a change in the Export Subsidy on q and q * with a capacity constraint are crucially dependent upon the magnitude of the change in the Export Subsidy. When the magnitude is (4.1) (4.2) (4.3) Hong Hwang, Chao-Cheng Mai, and Ya-Po Yang 121 small, the equilibrium outputs q and q * are independent of the change in the Export Subsidy; if the magnitude is high enough, an increase in the subsidy leads to a rise in q and a reduction in q * . 7.3.2 Optimal trade policy of the domestic country The strategic trade theory literature has shown that an Export Subsidy is called for when firms compete in quantities (or they are strategic 0 k H k L q q ∗ A 1 B A B 1 C 1 H W 0 L J K k W 3 C 2 D C 0 W 1 W 2 N Z D 1 M 0 M 1 M 2 R 0 S 0 R 1 S 1 R 2 S 2 T 0 U 0 T 1 U 1 T 2 U 2 Z M k 0 k 2 G 1 Figure 7.1 Capacity constraint and market equilibrium 122 Part II: The Theory of International Trade substitutes à la Bulow et al. (1985)). Moreover, by acting first, the gov- ernment can adopt an Export Subsidy to move the domestic firm to what would be the Stackelberg leader position in the output space in the absence of a subsidy. Thus, the domestic government will provide a subsidy such that the domestic iso-welfare curve is tangential to the foreign firm’s reaction function.

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