Export Subsidies Essay ⋆ Business Essay Examples ⋆ EssayEmpire

Export subsidies are attempts by a government to interfere with the free flow of exports. They are payments to a firm or individual for shipping a good abroad. Similar to taxes, export subsidies can be specific (a fixed sum per unit) or ad valorem (a proportion of the value exported). Around the world, the export industry most frequently subsidized is agriculture.

The stated reasoning for export subsidies varies depending upon the product and industry, but proponents frequently invoke the notion of self-sufficiency or national security concerns. When effective, export subsidies reduce the price of goods for foreign importers and cause domestic consumers to pay relatively higher prices. They thus distort the pattern of trade away from production based on comparative advantage and, like tariffs and quotas, disrupt equilibrium trade flows and reduce world economic welfare.

In 2007, for example, the second-largest exporter of sugar was the European Union (EU), in large part because of EU sugar subsidies. Conversely, Mozambique sugar farmers have a difficult time competing in world sugar markets despite their lower production costs because the EU subsidies artificially lower the world price of sugar. In this way, export subsidies often disrupt and impede economic development in less developed countries. In addition, export subsidies can often lead individuals and countries to engage in legislative actions in order to mitigate the impact of export subsidies on them. These activities can include anti-dumping legislation, retaliatory tariffs, and non-tariff barriers to entry. While these activities can sometimes mitigate the negative impact of a subsidy on a particular group of individuals, the expenditure of resources in response to a previous intervention generally does not increase overall economic welfare as the resources employed to mitigate the subsidy’s effect could have been used elsewhere in the economy.

Export subsidies have been a subject of discussion and controversy in recent years. The United States and European Community, for example, have had a number of disagreements and failed negotiations revolving around the issue of agricultural export subsidies. Europe’s Common Agricultural Policy (CAP) has evolved into a large export subsidy program that harms most European consumers and taxpayers. In 2002, subsidies to European Union farmers were 36 percent of total farm output and twice as high as American farm subsidies. Together with nongovernmental organizations such as Oxfam, the United States has pushed for European agricultural reform in the interests of helping those harmed by the subsidies, but each step is met with threats of retaliatory protectionism by Europe. In addition to constant agricultural challenges, U.S. textile manufacturers often claim that export subsidies on east Asian textiles place them at an “unfair” disadvantage.

Like Europe and east Asia, the United States has used export subsidies to the advantage of some industries. For example, every U.S. citizen pays approximately $13 per year to support cotton production in the United States. These subsidies to cotton producers encourage additional production beyond the scale of the original market for cotton, thereby creating surpluses. To eliminate the surpluses, the government then subsidizes agribusiness and manufacturers who buy cotton from the United States. In many cases, therefore, the final result of export subsidies are large-scale interventions into an industry, where producers of both raw materials and final consumer goods are being supported. Examples similar to the U.S. cotton industry can be found in nearly every country around the world.

While export subsidies remain a controversial and unresolved issue of international trade, there have been recent calls for the elimination of subsidies. Article XVI of the General Agreement on Tariffs and Treaties (GATT), for example, states,

If any contracting party grants or maintains any subsidy, including any form of income or price support … it shall notify the contracting parties in writing of the extent and nature of the subsidization, of the estimated effect of the subsidization on the quantity of the affected product or products imported into or exported from its territory and of the circumstances making subsidization necessary.

More recently, the Doha Round of World Trade Organization (WTO) negotiations discussed the possibility of eliminating agricultural subsidies altogether, and, at the Hong Kong Meeting in December 2005, member countries agreed to abolish all agricultural export subsidies by 2013.

While there is momentum building for reductions in export subsidies and greater integration, strong political opposition to reform remains the biggest roadblock. Farming lobbies around the world remain well organized and powerful, and politicians face strong disincentives to engage in agricultural reform. As a result, export subsidies will continue to be a challenging issue in future trade deals.

Bibliography:

Adachi and N. Suzuki, “Measuring the Export Subsidy Equivalents in Food Exporting Countries,” Science Bulletin-Faculty of Agriculture Kyushu University (v.61, 2006);
Feenstra and A. Taylor, International Economics (Worth, 2008);
Frith, “Bitter Harvest: How EU Sugar Subsidies Devastate Africa, The Independent (June 22, 2005);
Helling, S. Beaulier, and J. Hall, “High Cotton: Why the United States Should No Longer Provide Agricultural Subsidies to Cotton Farmers,” Economic Affairs (2008);
Kikuchi and J. Lee, “Export Subsidy Revisited: Implication for Strategic Trade Policy,” Kobe University Economic Review (v.52, 2006);
Krugman and M. Obstfeld, International Economics: Theory and Policy (AddisonWesley, 2006);
T. Wang, “Product Differentiation and the Export Subsidy Dispute,” Applied Economics Letters (v.13/14, 2006).

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