Export subsidy

Export subsidy

Export subsidy is a government policy to encourage export of goods and discourage sale of goods on the domestic market through low-cost loans or tax relief for exporters, or government financed international advertising or R&D. An export subsidy reduces the price paid by foreign importers, which means domestic consumers pay more than foreign consumers. The WTO prohibits most subsidies directly linked to the volume of exports.

Export Subsidies are also generated when internal price supports as in a guaranteed minimum price for a commodity creates more production than can be consumed internally in the country. That is without undermining the guaranteed minimum price. These price supports are often coupled with import tarrifs. Instead of letting the commodity rot or destroying it the government exports it. Saudi Arabia is a net exporter of wheat, Japan often is a net exporter of rice.

Export subsidies can also be a perpetual inflation machine: the government subsidises the industry based on costs, but an increase in the subsidy is directly spent on wage hikes demanded by employees. Now the wages in the subsidised industry are relatively higher than elsewhere, which causes the other employees demand higher wages, which are then reflected in prices, resulting in inflation everywhere in the economy.

Export subsidies are payments made by the government to encourage the export of specified products. As with taxes, subsidies can be levied on a specific or ad valorem basis. The most common product groups where export subsidies are applied are agricultural and dairy products.

Most countries have income support programs for their nation's farmers. These are often motivated by national security or self-sufficiency considerations. Farmers' incomes are maintained by restricting domestic supply, raising domestic demand, or a combination of the two. One common method is the imposition of price floors on specified commodities. When there is excess supply at the floor price, however, the government must stand ready to purchase the excess. These purchases are often stored for future distribution when there is a shortfall of supply at the floor price. Sometimes the amount the government must purchase exceeds the available storage capacity. In this case, the government must either build more storage facilities, at some cost, or devise an alternative method to dispose of the surplus inventory. It is in these situations, or to avoid these situations, that export subsidies are sometimes used. By encouraging exports, the government will reduce the domestic supply and eliminate the need for the government to purchase the excess.

One of the main export subsidy programs in the US is called the Export Enhancement Program (EEP). Its stated purpose is to help US farmers compete with farm products from other subsidizing countries, especially the European Union, in targeted countries. The EEP's major objectives are to challenge unfair trade practices, to expand U.S. agricultural exports, and to encourage other countries exporting agricultural commodities to undertake serious negotiations on agricultural trade problems. As a result of Uruguay round commitments, the US has established annual export subsidy quantity ceilings by commodity and maximum budgetary expenditures. Commodities eligible under EEP initiatives are wheat, wheat flour, semolina, rice, frozen poultry, frozen pork, barley, barley malt, table eggs, and vegetable oil.

In recent years the US government has made annual outlays of over $1 billion in its agricultural Export Enhancement Program (EEP) and its Dairy Export Incentive Program (DEIP). The EU has spent over $4 billion annually to encourage exports of its agricultural and dairy products.

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