<4.2.4 EXPORT SUBSIDY>

EXPORT SUBSIDIES are PAYMENTS GRANTED BY THE GOVERNMENT PER UNIT OF OUTPUT EXPORTED which in effect allows domestic exporting firms TO SELL MORE EXPORTS to FOREIGNERS at the world price WP*, (thanks to the subsidy), whilst charging, DOMESTIC CONSUMERS A HIGHER PRICE (As they don't benefit from the subsidy).

Exports sold in this manner on the INTERNATIONAL MARKET are referred to as 'DUMPED', while the process is referred to as 'DUMPING'.

If proven, these types of subsidies are deemed ILLEGAL UNDER WTO REGULATIONS as they are considered ANTI-COMPETITIVE and go against the WTO's objective of full 'Trade-liberalisation' based on the theory of comparative advantage.

* We assume they are small-scale exporters, as such the increase in exports is not large enough to impact world supply and lower the world price.

Almost all the cases of dumping that make the headlines involve export subsidies given to exporters that already have significant market shares such as China and the solar panel market, therefore the additional exports they produce thanks to the subsidies actually impact world supply enough to actually lower it, which makes the dumped price even lower, threatening domestic producers further. 

Can you sketch a 2 country diagram to model this?

Using an international trade diagram, explain the likely impact of the removal of import quotas on North Macedonia’s production of wine.

Using an international trade diagram, explain how a subsidy could help Tanzanian dairy farmers compete against imported dairy products.

Using an international trade diagram for the US market, explain how the imposition of a 15 % tariff on imported garments from Bangladesh would affect the revenue earned by Bangladeshi producers.

Using an international trade diagram, explain the effect on consumers in Uruguay if a quota is imposed on cheese imports from the EU.

Using an international trade diagram, explain the effect on domestic chicken producers revenues in Singapore if a production subsidy is removed.

Go to the WTO website HERE and find a dispute.

Now look for an article related to this dispute.

Now you have 

Before any government intervention, we can see that the country is an EXPORTER, producing Q3 output at the world price (WP), of which Q2 is consumed domestically, whilst the rest (Q2 to Q3) is exported.

When offered an EXPORT SUBSIDY, they are willing and able to produce Q4 output, as they can receive a higher price of Ps. of which Q1 is consumed domestically, whilst the rest (Q1 to Q4) is exported.

MORE EXPORTS are now SOLD at WP, thanks to the subsidy, however, DOMESTIC CONSUMERS PAY A HIGHER PRICE (Dom. price a/f sub), and subsequently consume less (Only Q1), hence this is an example of DUMPING.

1) After the government intervention, we initially see that 

• • PS rises by (a + b + c).

  • CS falls by - (a + b).

  • Thefore the PS gains of (a + b) are canceled out by the losses of CS.

  • Leaving an initial net gain in TSS of + c.

2) When the cost of the subsidy is deducted - (b + c + d).

• • The TSS gain of + c is canceled out.

  • The PS benefit of (a + b) has already been canceled so the subsidy costs of - (b + d) are not cancelled out.

  • Hence areas  b + d are the DWLs.

This country was an importer, but when it receives the PRODUCTION SUBSIDY it not only pushes out imports and satisfies all domestic demand it has a surplus if it were to export, would constitute an EXPORT SUBSIDY, which is ILLEGAL.