1. Export Subsidy: Two Countries Udayan Roy http://myweb.liu.edu/~uroy/eco41 September 2006

2. Price (in Europe) A B C E D F G H I J Europe Japan Quantity Japan implements an export subsidy This causes its supply to, in a sense, fall by the extent of the subsidy. The price for Japan’s producers increases, but by less than the subsidy. The price in Europe falls. Exports Imports Net Trade

3. Export Subsidy: Two Countries Case EuropeJapan BeforeAfterBeforeAfter Consumer Surplus AABCFFHI Producer Surplus BDDHJEFHJ Subsidy-- -EFGHI Total SurplusABDABCDFHJFHJ-G

4. Export Subsidies Create Fake Trade Subsidies are the opposite of a tax; they reward rather than punish Export subsidies reward domestic producers for the goods that they export This artificially boosts the nation’s levels of trade The country may export its entire output of a commodity and then import back the same commodity for its own use!

5. Fake Trade is Bad The fake trade induced by export subsidies reduces the nation’s welfare (by G) and … … may even leave it worse off under trade than in autarky

6. Gains and Losses When a country imposes an export subsidy, it is affected as follows: –Producers gain (EF) –Consumers gain (HI) –The country as a whole loses (G), because the cost of the subsidy (EFGHI) are not worth the benefits (EFHI)

7. Gains and Losses When a country imposes an export subsidy, the other country is affected as follows: –The price of its imported good decreases. As a result, –Consumers gain (BC) –Producers lose (B) –The country as a whole is better off (C)

8. Export Subsidy and Welfare When one country implements an export subsidy, that country is worse off (G) The other country is better off (C) The losses of the worse-off country (G) are larger than the gains of the better-off country (C). So, the world as a whole is worse off.

9. Textbook For more on this topic, see “Export Subsidies: Theory” in Chapter 8, pages 197-199.