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10 Export Subsidies in Agriculture and High-Technology
Industries
Notes to Instructor
Chapter Summary
The trade policies we examine in this chapter are those that promote exports, often at the
expense of consumers and import nations dependent on the product. Export subsidies are
used by many countries, developed and developing, to increase the competitive
advantage of domestic producers. One of the goals in this chapter, is to discuss the impact
of various types of export subsidies in the agricultural and high-tech industries on
domestic and world welfare. Generally, for a small country, the use of agricultural export
We will also take a look at production subsidies that receive support for each unit
produced regardless of the market they are sold in. Production subsidies are unique in
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that they do not specifically target exports and thus excess supply indirectly spills over
into the export markets, resulting in less severe losses for the exporting country.
One of the lessons we will learn is that the overall welfare effect of the export quota is the
same as the export tariff, with the possibility of welfare gains if the terms-of-trade gain is
greater than the loss of some of the producer’s surplus. The effects of the quota on Home
firms and the government differ from those of an export tariff. Under the export tariff we
will learn that the Home government earns revenue, while under the export quota this
Comments
In presenting export subsidies, this chapter covers a number of topics, including the
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World Trade Organization (WTO) and game theory. Therefore, it may be worthwhile to
present an overview of the topic so that students understand the main theme. Namely,
start by discussing the agreements proposed during the Geneva and Hong Kong meetings
Lecture Notes
Introduction
Reminiscent of earlier meetings, the Geneva gathering of the 152 members of the WTO
in July 2008 was met with protests. The root of the recent objections was due to
proposals to eliminate agricultural subsidies used in many countries such as South Korea,
Japan, Europe, and the United States, which inflates the price of their crops while
depressing the world prices. Proponents of the removal of the agricultural support
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Export tariffs and quotas are also used by governments to increase government revenue,
thereby acting much like a tax on goods exported or, in the case of the quota, benefiting
1 WTO Goals on Agricultural Export Subsidies
Table 10-1 presents a summary of tentative agreements discussed during the Hong Kong
meeting of the WTO held in December 2005. An agreement was reached and only a few
of the goals were implemented during the Nairobi, Kenya, and WTO 2015 meeting, as
discussed in “Headlines: WTO Leaders Agree to End Farm Subsidies as Doha
Unresolved.”
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Agricultural Export Subsidies
The first on the list deals with agricultural export subsidy, which is a governmental
support made available to farmers to boost output. Building on discussions initiated in
previous WTO meetings, the member countries agreed in Hong Kong to abolish the
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H E A D L I N E S
WTO Leaders Agree to End Farm Subsidies as Doha Unresolved
In spite of the failure to commit to the broader development goals of the Doha Round,
important agreements were reached at the WTO meeting in Nairobi, Kenya, in 2015.
Specifically, agreement was reached to eliminate export subsidies immediately for
developed nations, while giving developing nations to the end of 2018 to comply and
providing safeguard mechanisms that give developing nations rights to counteract should
Indirect Subsidies As part of the Hong Kong agreement, the member countries also
approved the elimination of indirect subsidies to agriculture. Food aid to poor countries
is a form of indirect subsidy practiced by the United States. In contrast, Europe assists
poor countries through cash aid.
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Agricultural Policy (CAP) valued at five times that of the world market price. As a
result of the subsidy, Europe is the leading world supplier of sugar despite a lack of
natural comparative advantage relative to countries in more temperate climates.
Domestic farm supports were also included in the Hong Kong agreement discussions.
Farm supports can result in a lower cost to farmers, giving these farmers unfair
Cotton Subsidies Of all the agricultural products, the WTO members focused on cotton
because many low–income African countries export this crop. This industry has been
highly subsidized by the United States and a WTO case has been brought against it. At
the 2015 Nairobi meeting, it was finally agreed that cotton subsidies would cease
immediately in the developed world and end by 2017 in developing countries.
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Other Matters Addressed at the Hong Kong WTO Meeting
In addition to proposing the removal of export subsidies, the 2005 Hong Kong meeting
Tariffs in Agriculture Special safeguard mechanisms were finally imposed at the 2015
Nairobi meeting, 10 years after the 2005 Hong Kong discussions, allowing developing
Issues Involving Trade in Industrial Goods and Services A number of other issues
were discussed in Hong Kong, as identified in Table 10-1. For instance, it was agreed that
Finally, a new goal of allowing 97% of the least developed countries (LDCs) to enter
WTO markets as tariff– and duty-free was included in the Hong Kong discussions. From
this new goal, the United States sought to exclude textiles imported to the States in an
effort to protect the textile industry from the LDCs’ low-priced textile products.
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2 Export Subsidies in a Small Home Country
Now that we have a better understanding of the issues surrounding agricultural subsidies
that have been discussed at the WTO, we turn to analyzing the effect of export subsidies
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3 Agricultural Export Subsidies in a Large Home Country
We will now turn to the case in which the Home country is a large supplier of sugar,
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Effect of the Subsidy
With the allocation of an export subsidy in the amount of s dollars per ton, the price
received by the sugar increases, which leads to an increase in the quantity supplied. The
additional output coupled with the decrease in the quantity demanded increases the
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Home Welfare We can analyze the effect of the export subsidy on Home welfare using
the representative areas pictured in panel (a). Similar to the small-country situation, the
loss in consumer surplus due to the increase in the Home price from PW to P* + s is the
area (a + b). Once again, the increase in producer surplus is given by the amount (a + b +
Therefore, relative to a small country, an export subsidy has a greater negative effect on a
large exporter. Aside from the deadweight loss denoted by the triangle (b + d), the
additional supply encouraged by the subsidy depresses the world price so that the large
Foreign and World Welfare Overall, world welfare decreases due to the export subsidy
because the losses of the Home country (b + d + e) are not offset by the gains of the
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Foreign country (e
′
). The world deadweight loss measured by the area (b + d + f) is
shown in panel (b).
APPLICATION
Who Gains and Who Loses?
The agreement to eliminate export subsidies in 2015 during the WTO Nairobi talks
allows us to now predict the winners and losers.
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Losses By contrast, the higher agricultural prices would hurt food-importing countries,
many of whom are poor nations. Empirical studies show that the current system of
agricultural supports lifts the per–capita income of over 50 of the 77 developing nations.
Food Aid Unlike the elimination of export subsidies, the removal of indirect subsidies
such as supplying food aid would help developing countries. Championed by European
countries, which substitute food aid for cash, the understanding is that when the United
4 Production Subsidies
The Hong Kong meeting of the WTO focused primarily on export subsidies in agriculture
because these government supports have a greater impact on the world markets than other
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Article XVI of the General Agreement on Tariffs and Trade (GATT) requires that trading
partners maintain transparency regarding such subsidies and should limit the use of them.
Effect of a Production Subsidy in a Small Home Country To understand why there are
less harmful effects of production subsidies as compared with direct export subsidies, we
will examine the effect of the former, beginning with a small country.
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Home Welfare Adding up the impact of the production subsidy on consumers,
producers, and the government gives us the overall effect on Home’s welfare. It is clear
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Change in consumer surplus: none
Rise in producer surplus: +(a + b)
Targeting Principle This informs us that since the deadweight loss from production
subsidies is lower, it is a better policy instrument to achieve increases in Home supply.
The use of the production subsidy is an example of the targeting principle stated as
follows:
Effect of the Production Subsidy in a Large Home Country
We will now extend our analysis of the production subsidy to the case of a large Home
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Summary These policies have a lower effect on world prices than export subsidies, and
as such, production subsidy is of less concern to the WTO than other forms of domestic
agricultural support.
5 Export Tariffs
Export tariffs are taxes applied by an exporting country as the good leaves the country.
These tariffs are another example of policies used to influence trade in specific goods.
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Impact of an Export Tariff in a Small Country With a tariff of C pesos against
soybean exports, producers will receive − for their exports, while the government
At − , Home supply falls to 2 with consumers demanding 2, as shown in panel (a)
where exports fall to 2 = 2− 2. In panel (b), we measure the world price on the
Impact of an Export Tariff on the Welfare of a Small Country The rise in consumer
surplus is shown by area a and is due to the falling price of the export tariff. Producers,
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. The area is (a + b + c + d). Finally, we must add the increase in government revenue,
which is the tariff () times the amount exported (2) or area (c). Ultimately, we have a
deadweight loss for a small country of −(b + d). We summarize below:
Now the value to the economy of the extra units produced is, again, , but the
marginal costs of producing these extra units vary between and ‒ t. So the value