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[1].

1. Export Subsidies are generated when internal price supports, as in a guaranteed

minimum price for a commodity.

2. They create more production than can be consumed internally in the country..

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 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.
suppose there are only two trading countries, one importing and one exporting country. The
supply and demand curves for the two countries are shown in the adjoining diagram. PFT is the
free trade equilibrium price. At that price, the excess demand by the importing country equals
excess supply by the exporter.

The quantity of imports and exports is shown as the blue line segment on each country's
graph. (That's the horizontal distance between the supply and demand curves at the free
trade price) When a large exporting country implements an export subsidy it will cause an
increase in the price of the good on the domestic market and a decrease in the price in the
rest of the world (RoW). Suppose after the subsidy the price in the importing country falls to

and the price in the exporting country rises to . If the subsidy is a specific subsidy

then the subsidy rate would be , equal to the length of the green line
segment in the diagram.
. Three types of export subsidies
1. taxpayer financed export subsidies
Taxpayer financed export subsidies are well known, involving direct export payments by
governments and accounting for over 90% of the notified export subsidies in 1997 (WTO
notifications). The European Union and the United States employ taxpayer financed
export
subsidies for dairy
2. consumer only financed export subsidy
A consumer only financed export subsidy involves transfers to producers directly from
consumer prod A producer financed export subsidy is contingent on
exports and can only co-exist with a taxpayer and/or a consumer only financed export
subsidy.
3. producer financed export subsidy
However, the effects of a producer financed export subsidy differ, depending on the
initial export
subsidy scheme. Introducing a producer levy with a taxpayer financed export subsidy
already in
place increases the price to both farmers and consumers.