ECON3510 Week 9 - instruments of trade policy - export subsidies

What does a duopoly mean in relation to game theory?

a firm cant set their price without considering how their price choice will be taken by the competing firm in the market

Multifibre Arrangement

allowed industrial countries to restrict imports of textile and apparel products from developing countries, importing countries that joined the MFA could arrange quotas bilaterally (after negotiating with exporters) or unilaterally (on their own)

an export subsidy can..

also be specific or ad valorem

why does a subsidy raise more profits than the amount of the subsidy itself?

because of the deterrent effect on foreign competition

Which countries will gain when export subsidies on agricultural goods are eliminated?

current agricultural exporters will gain from the rise in world prices as agricultural subsidies by the industrialised countries - especially Europe and the US - are eliminated

What is the direct cost of the CAP to EU tax payers?

$50 billion

Government procurement

Government agencies are obligated to purchase from domestic suppliers, even when they charge higher prices (or have inferior quality) compared to foreign suppliers

Which country has the highest producer support as a % of gross farm receipts?

Norway

what are some other trade policies?

export credit subsidies, government procurement, bureaucratic regulation

quota rents

extra revenue from selling imports at higher prices that goes to quota licence holders (either domestic firms or foreign governments)

Which countries will lose when export subsidies on agricultural goods are eliminated?

food-importing countries, typically the poorer non-food-producing countries (confirmed in empirical data)

in addition to the spillover argument, what else do governments and industries also argue that export subsidies do ?

give a strategic advantage to export firms that are competing with a small number of rivals in international markets

what has the government done in terms of import tariffs in conjunction with export subsidies?

imposed ban on import tariffs in conjunction with export subsidies to deter consumers re-importing your export (and subsidised) good because the price is too high

what does an export subsidy do?

it decreases domestic consumer surplus and increases producer surplus and decreases government revenue, produces a negative effect on national welfare

what is a criticism of the high-tech export subsidies strategy?

practical use of strategic trade policy requires more information about firms than is likely available, predictions may not be exactly correct which may alter the outcome of the game

What does the data show about the MFA?

prices of goods constrained by the MFA typically fell by more than the average change in export prices after the MFA's expiry. This is exactly in line with theory: the removal of quotas lowers import prices for consumers

how does a production subsidy compare to an export subsidy?

production subsidy will boost industry better than export subsidy

Local content requirement

requires a specific fraction of a final good to be produced domestically, provides no government revenue or quota rents, difference between prices of domestic goods and imports is averaged into the price of the final good and is passed on to consumers

import quota

restriction on the quantity that a good can be imported, pushes up the price as quantity demanded exceeds quantity supplied

Bureaucratic Regulations

safety, health, quality or customs regulations can act as a form of protection and trade restriction

what can the government do for revenue in regards to import quotas?

sell shares of the total quota to highest bidder

The EU Common Agricultural Policy

sets high prices for agricultural products and subsidised exports to dispose of excess production

What is the effect of EU CAP?

subsidised exports reduced world prices of agricultural products

Export credit subsidies

subsidised loan to exporters

Production subsidy

subsidy of s dollars for every unit that a home firm produces

why do governments subsidise high-technology industries?

they may create benefits that spill over to other industries, produces a positive externality, similar reasoning to the infant industry argument

What can export subsidies do in terms of strategic advantage (in relation to game theory)?

usually if firm one produces first then it is no longer profitable for firm two to produce but if firm two has an export subsidy it may be profitable for it to produce regardless of the firm ones action, this will usually deter firm one from the market

what is the difference in government revenue between tariffs and import quotas?

with import quotas, the government receives no revenue

Voluntary export restraint

works like import quota except it is imposed by exporting country rather than importing country, these restraints are usually requested by the importing country, profits or rents are earned by foreign governments or foreign producers

whats happens to the world price level if you are a small country?

you can sell as much as you want without affecting the world price level