Question

Explain the key differences between import subsidy and export subsidy, and arguments behind such policies. Support your response with examples

Answer 1

Export subsidy is a government policy to encourage export of goods and discourage sale of goods on the domestic market through direct payments, low-cost loans, tax relief for exporters, or government-financed international advertising. An export subsidy reduces the price paid by foreign importers, which means domestic consumers pay more than foreign consumers. The World Trade Organization (WTO) prohibits most subsidies directly linked to the volume of exports, except for LDCs. Incentives are given by the government of a country to exporters to encourage export of goods.

Import subsidies consist of subsidies on goods and services that become payable to resident producers when the goods cross the frontier of the economic territory or when the services are delivered to resident institutional units.

Imagine Bhutan wants to start its own computer industry, but it has no computer firms that can produce at a low enough price and high enough quality to compete in world markets. However, Bhutanese politicians, business leaders, and workers hope that if the local industry had a chance to get established, before it needed to face international competition, then a domestic company or group of companies could develop the skills, management, technology, and economies of scale that it needs to become a successful profit-earning domestic industry. Thus, the infant industry argument for protectionism is to block imports for a limited time, to give the infant industry time to mature, before it starts competing on equal terms in the global economy.

Dumping refers to selling goods below their cost of production. Anti-dumping laws block imports that are sold below the cost of production by imposing tariffs that increase the price of these imports to reflect their cost of production. Since dumping is not allowed under the rules of the World Trade Organization (WTO), nations that believe they are on the receiving end of dumped goods can file a complaint with the WTO.

State aid to home producers will shift the domestic supply curve downwards by the extent of the per unit subsidy, thereby allowing firms to lower cost and price and perhaps undercut foreign competition, e.g. UK aid to British banks 2008. These incur an opportunity cost for the domestic government and are difficult for the WTO to tackle because they are not a form of overt (open) protectionism.

The EU ended agricultural export subsidies in 2013. The EU ended export agricultural subsidies in 2013

An example of an export subsidy is the one offered by the Indian government.

India, the world's second biggest sugar producer, announced in 2015 that it would introduce a subsidy for raw sugar exports

This involves offering export incentives for 1.4 million tonnes of raw sugar as mills start sales of surplus sugar overseas to pay cane farmers.