Export Policies in Resource-Based and High-Technology Industries

Chapter 8: Export Policies in Resource-Based and High-Technology Industries

Chapter Objectives

  • Discuss the following components:
    • Agricultural Export Subsidies
    • Advantages and disadvantages of export subsidies
    • Export Subsidies in a Small Home Country
    • Effect of Production Subsidy in a Small Home Country
    • Effect of Subsidy on High-Technology Export Subsidies

Agricultural Export Subsidies

  • Definition: Payments to firms for every unit exported; can be a fixed amount or a fraction of sales price.
  • Purpose: Encourages domestic firms to produce more in selected industries.
  • WTO Goal: Abolish all agricultural export subsidies by end of 2013 — not achieved by deadline.

Domestic Farm Supports

  • Many countries offer subsidies irrespective of whether crops are exported or sold domestically.
  • Example: Common Agricultural Policy (CAP) in Europe helps sugar growers by paying farmers €50 per ton, leading to lower-priced sugar.
  • Result: Europe becomes a leading sugar supplier despite lower-cost producers (Brazil, India) having a comparative advantage.

United States and Japan Examples

  • U.S. Cotton Subsidies: Farmers are paid to grow cotton, subsidizing both production and sales.
  • Japan’s Tariff on Rice: Allows 10% of rice imports duty-free; imposes 500% tariff on excess imports.

Advantages of Export Subsidies

  • Cost Reduction: Lowers production costs, making exports more competitively priced.
  • Competitiveness: Companies can sell goods at reduced prices internationally.

Disadvantages of Export Subsidies

  • High Government Costs: Significant government expenditure required for implementation.
  • Inefficiency Risks: May lead firms to rely on subsidies rather than improve productivity.
  • Fair Allocation Issues: Difficulty in determining which industries receive subsidies.
  • Surplus Production: Can cause oversupply, distorting global market prices.

Export Subsidies in a Small Home Country

  • Scenario: Focus on a small country exporting sugar.
  • Equilibrium: Home's no-trade equilibrium is at point A.
  • World Price: With free trade, Home faces a world price (PW).

Home Supply and Demand Dynamics

  • At price PW, home supply is S1 and demand is D1, resulting in exports of X1 = S1 - D1.
  • With Subsidy: If government provides a subsidy of s dollars, the domestic price rises to PW + s, affecting quantity supplied to S2 and quantity demanded to D2.
  • Resulting exports increase to X2 = S2 - D2.

Impact of Export Subsidy on Welfare

  • Consumer Surplus: Falls by areas (a+b).
  • Producer Surplus: Rises by areas (a+b+c).
  • Government Spending: Cost of subsidies equals the area of (b+c+d), impacting net Home welfare negatively by area (b+d).

Production Subsidy

  • Definition: Payment of s dollars for each unit produced, not just exported.
  • Implementation Methods: Minimum price guarantees, subsidies to increase demand and market prices.

Effects of Production Subsidy

  • Price Increase: Producers receive PW + s, leading to increased supply from S1 to S2 with no change in quantity demanded (D1).
  • Export Changes: Exports increase from X1 = S1 - D1 to X2 = S2 - D1, with smaller increases than an export subsidy.

Home Welfare from Production Subsidy

  • Changes in Surplus: No change in consumer surplus, but a rise in producer surplus by (a+b) and a drop in government revenue (-c).
  • Deadweight Loss: Lower than with export subsidies due to unchanged consumer behavior.

High-Technology Export Subsidies

  • Rationale: Subsidized to encourage growth and benefits that spill over to other sectors of the economy.
  • Strategic Use: May provide competitive advantages in international duopolies (e.g., Boeing and Airbus).

Brander-Spencer Model

  • Assumption: Firms' profits depend on the competing firm's actions, leading to strategic decision-making in production.
  • Example Analysis: A subsidy can alter profitability thresholds, indicating strategic trade policy adoption.

Criticism of Strategic Trade Policies

  • Challenges: Identifying industries for subsidies and potential misallocation of resources.
  • Foreign Retaliation: Can initiate trade wars if competitors respond similarly.
  • Political Manipulation: Subsidies may be exploited by powerful groups.

Pop Quiz Insights

  • The Brander-Spencer model highlights the conditions under which government subsidies can create profit opportunities.
  • Airbus’s success stems from the strategic advantage afforded by subsidies, not only production quality or initial conditions.