Export Subsidies Essay

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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.


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

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