<4.2.4 EXPORT SUBSIDY>

--THINK AHEAD--

"What do Lance Armstrong, Ben Johnson, and Manchester City all have in common?", "They have all faced allegations of what type of behaviour?", "Why was it frowned upon?"

"Scroll down for the answer!"

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"That's right, they all engaged in some form of cheating (steroids and 'creative accounting') that went against the idea of 'fairness' and the underlying principle that success should be based on genuine talent, skill, effort, and performance."

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"With this in mind, what do you think the tweet and headline below imply?" "How can a country 'cheat & steal' on trade?" "What idea of 'fairness' is international trade built upon?"

--TASK--

"Now go to the WTO site to look at the 'Disputes by members', and find a country acting as either 'the accused' ('as respondent') or 'the accuser' ('as complainant') of using an export subsidy. Investigate some of the details and post in the RWE padlet below. I have made an example.

20180306_atc_tradecheat2.mp3

--DEFINITION--

EXPORT SUBSIDIES are PAYMENTS GRANTED BY THE GOVERNMENT PER UNIT OF OUTPUT EXPORTED which in effect allows domestic exporting firms TO SELL MORE EXPORTS to FOREIGNERS at the world price WP, (thanks to the subsidy), whilst charging, DOMESTIC CONSUMERS A HIGHER PRICE (As they don't benefit from the subsidy).

--IS THIS LEGAL?--

No! Exports sold in this manner on the INTERNATIONAL MARKET are referred to as 'DUMPED', while the process is referred to as 'DUMPING'.
If proven, these types of subsidies are deemed ILLEGAL UNDER WTO REGULATIONS as they are considered ANTI-COMPETITIVE and go against the WTO's objective of full 'Trade-liberalisation' based on the theory of comparative advantage.

--MARKET EFFECTS--

--WELFARE EFFECTS--

--PAST PAPER 3 TASK--

The subsidy allows the firm to receive PW + ES, and sell the surplus at PW

--WINNERS & LOSERS--

--TASK--

Almost all the cases of dumping that make the headlines involve export subsidies given to exporters that already have significant market shares such as China and the solar panel market, therefore the additional exports they produce thanks to the subsidies actually impact world supply enough to actually lower it, which makes the dumped price even lower, threatening domestic producers further.
Can you sketch a 2 country diagram to model this?

--MARKET EFFECTS--

Before any government intervention, we can see that the country is an EXPORTER, producing Q3 output at the world price (WP), of which Q2 is consumed domestically, whilst the rest (Q2 to Q3) is exported.
When offered an EXPORT SUBSIDY, they are willing and able to produce Q4 output, as they can receive a higher price of Ps. of which Q1 is consumed domestically, whilst the rest (Q1 to Q4) is exported.
MORE EXPORTS are now SOLD at WP, thanks to the subsidy, however, DOMESTIC CONSUMERS PAY A HIGHER PRICE (Dom. price a/f sub), and subsequently consume less (Only Q1), hence this is an example of DUMPING.

--WELFARE EFFECTS--

1) After the government intervention, we initially see that
- - PS rises by (a + b + c).
  - CS falls by - (a + b).
  - Thefore the PS gains of (a + b) are canceled out by the losses of CS.
  - Leaving an initial net gain in TSS of + c.
2) When the cost of the subsidy is deducted - (b + c + d).
- - The TSS gain of + c is canceled out.
  - The PS benefit of (a + b) has already been canceled so the subsidy costs of - (b + d) are not cancelled out.
  - Hence areas b + d are the DWLs.

--MARKET EFFECTS--

--FROM IMPORTER TO EXPORTER--

This country was an importer, but when it receives the PRODUCTION SUBSIDY it not only pushes out imports and satisfies all domestic demand it has a surplus if it were to export, would constitute an EXPORT SUBSIDY, which is ILLEGAL.

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