Question

Tutorial 8 Question 6.

Suppose Brazil - the largest producer of sugar – provides 20 percent export subsidy to sugar companies. By what extent would the domestic prices and the terms of trade be affected in Brazil? If the export subsidy of Brazil hampers the sugar manufacturers of importing countries, what countervailing action would you suggest to protect the domestic industries and prices of the latters?

Answer 1

Export subsidy is a government policy to encourage exports of goods and discourage the sale of goods in the domestic market. The provision of 20% of export subsidy is a really huge amount that will bring so many changes in the Brazilian economy.

The export subsidy of 20% will let the sugar manufacturers of Brazil earn a lot more amount than on domestic sales which will lead influence the producers to export their produce rather to circulate it in the domestic market this situation will affect two big portions first the domestic consumers of Brazil and second the domestic producers of importing countries.

The domestic consumers of Brazil will face higher prices of sugar because the supply of sugar will be decreased in the domestic market of Brazil, which will increase the equilibrium price.

The importing countries will be incredibly with the supply of sugar this will lead to decrease in price of sugar in that market, this will be a suffering for the domestic producers of that country.

The corrective action for that country could be a reduction in import of sugar to save the domestic producers of sugar.

To stop or to reduce the import of sugar country can throw some direct or indirect barriers like restrictions on Quantity of commodities to be imported, imposing more duties on imports, price ceiling and many other special trade enhancement tools.