Export subsidy
Encyclopedia
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
, create 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 tariffs. 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 higher than elsewhere, which causes the other employees demand higher wage
s, 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 tax
es, 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 farmer
s. 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.
Market
A market is one of many varieties of systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange. While parties may exchange goods and services by barter, most markets rely on sellers offering their goods or services in exchange for money from buyers...
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
Domestic market
A domestic market is a financial market. Its trades are aimed toward a single market. A domestic market is also referred to as domestic trading...
consumers pay more than foreign consumers. The WTO
World Trade Organization
The World Trade Organization is an organization that intends to supervise and liberalize international trade. The organization officially commenced on January 1, 1995 under the Marrakech Agreement, replacing the General Agreement on Tariffs and Trade , which commenced in 1948...
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
Commodity
In economics, a commodity is the generic term for any marketable item produced to satisfy wants or needs. Economic commodities comprise goods and services....
, create more production than can be consumed internally in the country. That is without undermining the guaranteed minimum price. These price
Price
-Definition:In ordinary usage, price is the quantity of payment or compensation given by one party to another in return for goods or services.In modern economies, prices are generally expressed in units of some form of currency...
supports are often coupled with import tariffs. Instead of letting the commodity rot or destroying it the government exports it. Saudi Arabia
Saudi Arabia
The Kingdom of Saudi Arabia , commonly known in British English as Saudi Arabia and in Arabic as as-Sa‘ūdiyyah , is the largest state in Western Asia by land area, constituting the bulk of the Arabian Peninsula, and the second-largest in the Arab World...
is a net exporter of wheat
Wheat
Wheat is a cereal grain, originally from the Levant region of the Near East, but now cultivated worldwide. In 2007 world production of wheat was 607 million tons, making it the third most-produced cereal after maize and rice...
, Japan
Japan
Japan is an island nation in East Asia. Located in the Pacific Ocean, it lies to the east of the Sea of Japan, China, North Korea, South Korea and Russia, stretching from the Sea of Okhotsk in the north to the East China Sea and Taiwan in the south...
often is a net exporter of rice
Rice
Rice is the seed of the monocot plants Oryza sativa or Oryza glaberrima . As a cereal grain, it is the most important staple food for a large part of the world's human population, especially in East Asia, Southeast Asia, South Asia, the Middle East, and the West Indies...
.
Export subsidies can also be a perpetual inflation
Inflation
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...
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
Industry
Industry refers to the production of an economic good or service within an economy.-Industrial sectors:There are four key industrial economic sectors: the primary sector, largely raw material extraction industries such as mining and farming; the secondary sector, involving refining, construction,...
are higher than elsewhere, which causes the other employees demand higher wage
Wage
A wage is a compensation, usually financial, received by workers in exchange for their labor.Compensation in terms of wages is given to workers and compensation in terms of salary is given to employees...
s, which are then reflected in prices, resulting in inflation everywhere in the economy
Economy
An economy consists of the economic system of a country or other area; the labor, capital and land resources; and the manufacturing, trade, distribution, and consumption of goods and services of that area...
.
Export subsidies are payments made by the government to encourage the export of specified products. As with tax
Tax
To tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...
es, 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
Dairy
A dairy is a business enterprise established for the harvesting of animal milk—mostly from cows or goats, but also from buffalo, sheep, horses or camels —for human consumption. A dairy is typically located on a dedicated dairy farm or section of a multi-purpose farm that is concerned...
products.
Most countries have income support programs for their nation's farmer
Farmer
A farmer is a person engaged in agriculture, who raises living organisms for food or raw materials, generally including livestock husbandry and growing crops, such as produce and grain...
s. These are often motivated by national security
National security
National security is the requirement to maintain the survival of the state through the use of economic, diplomacy, power projection and political power. The concept developed mostly in the United States of America after World War II...
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
European Union
The European Union is an economic and political union of 27 independent member states which are located primarily in Europe. The EU traces its origins from the European Coal and Steel Community and the European Economic Community , formed by six countries in 1958...
, 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
Uruguay Round
The Uruguay Round was the 8th round of Multilateral trade negotiations conducted within the framework of the General Agreement on Tariffs and Trade , spanning from 1986-1994 and embracing 123 countries as “contracting parties”. The Round transformed the GATT into the World Trade Organization...
commitments, the US has established annual export subsidy quantity ceilings by commodity and maximum budgetary expenditures. Commodities eligible under EEP initiatives are wheat
Wheat
Wheat is a cereal grain, originally from the Levant region of the Near East, but now cultivated worldwide. In 2007 world production of wheat was 607 million tons, making it the third most-produced cereal after maize and rice...
, wheat flour
Wheat flour
Wheat flour is a powder made from the grinding of wheat used for human consumption. More wheat flour is produced than any other flour. Wheat varieties are called "clean," "white," or "brown" if they have high gluten content, and they are called "soft" or "weak" flour if gluten content is low...
, semolina
Semolina
Semolina is the coarse, purified wheat middlings of durum wheat used in making pasta, and also used for breakfast cereals and puddings. Semolina is also used to designate coarse middlings from other varieties of wheat, and from other grains such as rice and corn.-Name:The term semolina derives from...
, rice
Rice
Rice is the seed of the monocot plants Oryza sativa or Oryza glaberrima . As a cereal grain, it is the most important staple food for a large part of the world's human population, especially in East Asia, Southeast Asia, South Asia, the Middle East, and the West Indies...
, frozen poultry
Poultry
Poultry are domesticated birds kept by humans for the purpose of producing eggs, meat, and/or feathers. These most typically are members of the superorder Galloanserae , especially the order Galliformes and the family Anatidae , commonly known as "waterfowl"...
, frozen pork
Pork
Pork is the culinary name for meat from the domestic pig , which is eaten in many countries. It is one of the most commonly consumed meats worldwide, with evidence of pig husbandry dating back to 5000 BC....
, barley
Barley
Barley is a major cereal grain, a member of the grass family. It serves as a major animal fodder, as a base malt for beer and certain distilled beverages, and as a component of various health foods...
, barley malt
Malt
Malt is germinated cereal grains that have been dried in a process known as "malting". The grains are made to germinate by soaking in water, and are then halted from germinating further by drying with hot air...
, table eggs
Egg (food)
Eggs are laid by females of many different species, including birds, reptiles, amphibians, and fish, and have probably been eaten by mankind for millennia. Bird and reptile eggs consist of a protective eggshell, albumen , and vitellus , contained within various thin membranes...
, 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.