1. EXPORT SUBSIDIES IN AGRICULTURE AND HIGH-TECHNOLOGY INDUSTRIES10 1
WTO Goals 2
Agricultural Export
Subsidies in Small Country 3
Subsidies
in Large Country 4
EXPORT SUBSIDIES IN AGRICULTURE AND HIGH-TECHNOLOGY INDUSTRIES

2. © 2008 Worth Publishers ▪ International Trade ▪ Feenstra/Taylor
Introduction
A number of countries subsidize various industries, in particular agriculture but also high tech industries
Objective of agricultural subsidies is frequently to raise income levels, and a side effect is to disrupt orderly world trade in agricultural goods and turn the laws of nature upside down
Actual protectionist measures are the result of a complex political process (e.g. the CAP in the EU)
WTO have been unable to make much headway towards freer trade in agriculture, but Member countries of the WTO agreed to abolish all export subsidies by the end of 2013.
© 2008 Worth Publishers ▪ International Trade ▪ Feenstra/Taylor

3. Agricultural Export Subsidies in a Small Home Country
We now want to look at the effects of export subsidies on a country.
We start with a small Home country.
Faces a fixed world price for its export.
Country will export sugar.
No trade equilibrium is shown in figure 10.1 at point A.
World price of PW, Home quantity supplied at S1, quantity demanded at D1, and exports X1=S1-D1.
Quantity of exports is point B in panel b at free trade price of PW and export supply curve, X.
© 2008 Worth Publishers ▪ International Trade ▪ Feenstra/Taylor

4. Agricultural Export Subsidies in a Small Home Country
Figure 10.1
(without subsidy)
The free trade equilibrium at world price PW, gives exports of X1 and a horizontal Foreign import demand. Equilibrium is at B.
Home Price
World Price
Home export supply X D S B PW
Foreign import demand A D1 S1
Quantity X1
Exports X1
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5. Agricultural Export Subsidies in a Small Home Country
Figure 10.1
(with subsidy)
The Home export supply curve shifts down by exactly the amount of the subsidy. MC of production falls by exactly s.
This decreases demand to D2, increases supply to S2, and increases exports to X2. Equilibrium is at C.
With the subsidy, the Home price rises to PW+s
Home Price
World Price X D S
X–s C'
PW+s C s D2 X2 S2 B PW s
Figure 10.1 Export Subsidy for a Small Country Applying a subsidy of s dollars per unit exported will increase the price that Home exporters receive from PW to PW + s. As a result, the domestic price of the similar good will also rise by that amount. This price rise leads to an increase in Home quantity supplied from S1 to S2 and a decrease in Home quantity demanded from D1 to D2, in panel (a). Exports rise as a result of the subsidy, from X1 to X2 in panel (b). The Home export supply curve shifts down by exactly the amount of the subsidy since the marginal cost of a unit of exports decreases by exactly s. A D1 X1 S1
Quantity X1
Exports X2
© 2008 Worth Publishers ▪ International Trade ▪ Feenstra/Taylor

6. Agricultural Export Subsidies in a Small Home Country
Figure 10.1
(with welfare effects)
The increased price decreases consumer surplus by (a+b)
Producer surplus increases by (a+b+c)
The subsidy costs the government the amount –(b+c+d)
This leaves us with a deadweight loss of (b+d) as before.
Home Price
World Price
Total deadweight loss, b+d X D S
X–s C' b d
PW+s C s D2 X2 S2 a c B PW s
Figure 10.1 Export Subsidy for a Small Country Applying a subsidy of s dollars per unit exported will increase the price that Home exporters receive from PW to PW + s. As a result, the domestic price of the similar good will also rise by that amount. This price rise leads to an increase in Home quantity supplied from S1 to S2 and a decrease in Home quantity demanded from D1 to D2, in panel (a). Exports rise as a result of the subsidy, from X1 to X2 in panel (b). The Home export supply curve shifts down by exactly the amount of the subsidy since the marginal cost of a unit of exports decreases by exactly s. As in the case of a tariff, the deadweight loss as a result of the subsidy is the triangle (b + d), the sum of consumer loss b and producer loss d. A X2
Quantity D1 S1 X1
Exports
© 2008 Worth Publishers ▪ International Trade ▪ Feenstra/Taylor

7. Agricultural Export Subsidies in a Small Home Country
Impact of the Subsidy on Home Welfare
The rise in price lowers consumer surplus by (a+b).
The rise in price raises producer surplus by (a+b+c).
The export subsidy costs the government the amount of the subsidy, s, times the amount of exports, X2 shown by (b+c+d).
Adding up this impact, we are left with a net effect on Home welfare of –(b+d).
© 2008 Worth Publishers ▪ International Trade ▪ Feenstra/Taylor

8. Agricultural Export Subsidies in a Large Home Country
Now suppose Home is large enough that its subsidy affects the world price of sugar.
Figure 10.2 shows the effects of the subsidy.
The Foreign export demand curve, M*, is downward sloping since changes in the amount exported will affect world price.
As before, in free trade, Home and world price is PW, Home exports X1=D1-S1.
The world export market is in equilibrium where Home export supply, X, and foreign import demand curve, M*, cross.
© 2008 Worth Publishers ▪ International Trade ▪ Feenstra/Taylor

9. Agricultural Export Subsidies in a Large Home Country
Figure 10.2
(with subsidy)
We begin in free trade equilibrium
Home applies a subsidy, shifting the export supply curve right by the amount of the subsidy, s
Home demand decreases and home supply increases leading to increased exports, X2
The new world price is at new equilibrium, P*. New Home price is P*+s
(a) Home Market
(b) World Market
Home Price
World Price
Home exports supply, X D S X2
X–s s s
P*+s S2 D2 S1 D1 PW X1
Figure 10.2 Export Subsidy for a Large Country Panel (a) shows the effects of the subsidy at Home. The Home price increases from PW to P* + s, Home quantity demanded decreases from D1 to D2, and Home quantity supplied increases from S1 to S2. The deadweight loss for Home is the area of triangle (b + d), but Home also has a terms-of-trade loss of area e. In the world market, the Home subsidy shifts out the export supply curve from X to X − s in panel (b). As in the small-country case, the export supply curve shifts down by the amount of the subsidy, reflecting the lower marginal cost of exports. As a result, the world price falls from PW to P*. The Foreign country gains the consumer surplus area e ’, so the world deadweight loss due to the subsidy is the area (b + d + f ). The extra deadweight loss f arises because only a portion of the Home terms-of-trade loss is a Foreign gain. P*
Foreign import demand, M*
Quantity
Exports
© 2008 Worth Publishers ▪ International Trade ▪ Feenstra/Taylor

10. Agricultural Export Subsidies in a Large Home Country
Figure 10.2
(with subsidy)
Consumer surplus falls by -(a+b).
Producer surplus increases by +(a+b+c).
Home Welfare
The subsidy costs the government -(b+c+d+e): subsidy times exports.
Home Price D S
This leaves a net dead weight loss of (b+d+e), greater than in a small country. a b d e
P*+s c s PW
Figure 10.2 Export Subsidy for a Large Country Panel (a) shows the effects of the subsidy at Home. The Home price increases from PW to P* + s, Home quantity demanded decreases from D1 to D2, and Home quantity supplied increases from S1 to S2. The deadweight loss for Home is the area of triangle (b + d), but Home also has a terms-of-trade loss of area e. P* D2 D1 S1 S2
Quantity
© 2008 Worth Publishers ▪ International Trade ▪ Feenstra/Taylor

11. Agricultural Export Subsidies in a Large Home Country
Figure 10.2
(without subsidy)
World Consumer surplus rises by -(e’) which is a terms of trade gain
With Home welfare loss of (b+d+e) and Foreign terms of trade gain (e’), there is an overall deadweight loss for the world of (b+d+f) in panel b
f is an additional World loss due to decrease in Home’s terms of trade not completely offset by increases in World’s terms of trade
(a) Home Market
(b) World Market
Home Price
World Price
Home exports supply, X D S
b+d f a b d e
P*+s c s
X–s s PW e' P*
Foreign import demand, M* D2 D1 S1 S2
Quantity X1 X2
Exports
© 2008 Worth Publishers ▪ International Trade ▪ Feenstra/Taylor