school of international trade and economics, guangdong university of foreign studies

School of International Trade and Economics, Guangdong University of Foreign Studies

广东省精品课程《国际贸易》

CH11 Export Promotion and other Economic Policies

刘芹

Chapter 11Export Promotion

and other Economic Policies

After studying this chapter, you should be able to:

(1)Know some measures to encourage export

(2)Understand the types and effects of subsidies(补贴 ) on a nation’s economy

(3)Understand why some subsidies are workable and others are prohibited by WTO

§1 Subsidies1.1 Agreement on Subsidies and

Countervailing Measures Subsidy is a financial contribution by a

government or any public body. It includes: a direct transfer of funds, potential direct transfers of funds or liabilities; government revenue that is otherwise due is foregone or not collected; a government provides goods or services other than general infrastructure, or purchases goods; a government makes payments to a funding mechanism, or entrusts or directs a private body to carry out one or more of the type of functions illustrated in the above which would normally be vested in the government and the practice, in no real sense, differs from practices normally followed by governments; or: there is any form of income or price support.

Types of Subsidies

Prohibited Subsidies(禁止性补贴 ): Except as provided in the Agreement on Agriculture, the following subsidies, shall be prohibited: (a) subsidies contingent, in law or in fact , whether solely or as one of several other conditions, upon export performance; (b) subsidies contingent, whether solely or as one of several other conditions, upon the use of domestic over imported goods.

Actionable Subsides(可诉的补贴 ): No Member should cause, through the use of any subsidy, adverse effects to the interests of other Members.

Non-actionable Subsidies(不可诉的补贴 ): (a) subsidies which are not specific; (b) subsidies which are specific but which meet all of the following conditions, such as assistance for research activities conducted by firms or by higher education or research establishments on a contract basis with firms assistance for research activities conducted by firms or by higher education or research establishments on a contract basis with firms; assistance to disadvantaged regions.

1.2 Export Subsidies

• Export subsidies are direct payments (or the granting of tax relief(关税优惠 ) and subsidized loans) to the nation's exporters or potential exporters and/or low-interest loans to foreign buyers to stimulate the nation's exports. As such, export subsidies can be regarded as a form of dumping.

For example, all major industrial nations give foreign buyers the nation’s exports low-interest loans to finance the purchase through agencies such as the U.S. Export-Import Bank.

Another example is provided by the U.S. Foreign Sales Corporations provisions of the U.S. tax code.

Effects of an Export Subsidy: Small Nation

At the free-trade price of Px=$3.50, small Nation 2 produces 35X(A’C’), consumes 20X(A’B’), and exports 15X(B’C’). With a subsidy of $0.50 on each unit of commodity X exported, Px rises to $4.00 for domestic producers and consumers.

At Px=$4, Nation 2 produces 40X(G’J’), consumes 10X(G’H’), and exports 30X(H’J’). Domestic consumers lose $7.50(area a’+b’), domestic producers gain $18.75(area a’+b’+c’), and the government subsidy is $15(b’+c’+d’). The protection cost or deadweight loss of Nation 2 is $3.75(the sum of triangles B’H’N’=b’=$2.50 and C’J’M’=d’=$1.25).

Effects of an Export Subsidy: Large Nation

15 20 35 38 Q

P

3.73.53.2

S=0.5

All conditions are the same as those in the previous case except that Nation 2 is large. With a subsidy of $0.5 on each unit of commodity X exported, Px rises to $3.2 for domestic producers and $3.7 for domestic consumers.

At Px=$3.7, Nation 2 produces 38X(G’J’), consumes 15X(G’H’), and exports 23X(H’J’). Domestic consumers lose $3.5(a+b), domestic producers gain $7.3(a+b+c), and the government subsidy is $11.5(b+c+d+shadow). The net loss is shown by (b+d+shadow)=$7.7.

So, the loss is more in a large nation than in a small nation, among which the shadow area results from the deterioration in terms of trade.

Particularly troublesome are the very high support prices provided by EU to maintain its farmers’ income under its common agricultural policy (CAP共同农业政策). These high farm subsidies lead to huge agricultural surpluses and subsidized exports, which take export markets away from U.S. and other countries, and are responsible for some of the sharpest trade controversies between U.S. and EU. CASE STUDY 6-3

In addition, serious controversies also arise from the subsidies that the EU provides to its aircraft (Airbus) industry and Japan’s Ministry of International Trade and Industry (MITI) to its computer and other high-tech industries.

1.3 Industrial Policy(产业政策 ) --- Production Subsidy

Industrial policy is an activist policy by the government to stimulate the development and growth of some industry (usually a high-tech industry) in an industrial nation.

A production subsidy is a direct form of aid that is easy to remove. Its losses were less than export subsidies. However, the subsidy is undertaken completely by government.

Suppose: government gives subsidies of $0.5 on one unit.

International price-- Domestic price-- supply↑ Demand-- export ↑

Before subsidy 3.5 3.5 35 20 15

After subsidy 4 3.5 40 20 20

Change in welfare consumer0 ； producer(a+b+c) ； subsidies(-a-b-c-d) ； social welfare-d

4 0.5 3.5

S

a b c d

D

20 35 40

15Q

P

20

S’

Production Subsidies: Small Nation

Subsidy to import-substituted industries

International price-- Domestic price-- supply↑ Demand-- import ↓

Before subsidy Pw Pw Q1 Q2 Q1Q2

After subsidy Pw Pw Q3 Q2 Q3Q2

Change in welfare consumer0 ； producer+a ； subsidies(-a-b) ； social welfare-b

Thank you!