Export Policies in Resource-Based and High-Technology Industries

EXPORT POLICIES IN RESOURCE-BASED AND
HIGH-TECHNOLOGY INDUSTRIES
Chapter 10
Sub·si·dy
government incentive in the form of financial aid or support
extended to an economic sector generally with the aim of
promoting economic and social policy
Rare Natural Resources
“stocks of materials that exist in the natural environment that
are both scarce and economically useful in production or
consumption,
either in their raw state or after a minimal amount of
processing” (WTO)
High-tech Industries
industries having high concentrations of

workers in STEM (Science, Technology,
Engineering, and Mathematics occupations
(Bureau of Labor Statistics)
LEARNING OBJECTIVES
03
LO 03
To examine how 02
To explain
governments canthe
Toeffect ofuse
strategically
explain two
the 01
export subsidies
other
impact ofexport
to bolster high-
policies: export
agricultural
technology
tariffs and
subsidies
companies onand
export
prices andquotas.
industries. the
welfare of
different groups.
A government policy to encourage export of goods and
Export discourage sale of goods on the domestic market.
Subsidy
Production A production subsidy encourages suppliers to increase the

subsidy output of a particular product by partially offsetting the
production costs or losses
Export Tariff a tax placed on a good that is exported from a country
KEY CONCEPTS
Export Quota
restriction on the value or volume of exports of a specified
good imposed by government of the exporting country
EXPORT SUBSIDIES IN A SMALL HOME
COUNTRY
Export subsidies in a small country result in a

deadweight loss in welfare
Home Market
200
180
160
Autarky price = $60
140
World Price = $100
a c Subsidies = $40
120
b d
100
Exports = 40 – 20 = 20
80
Exports after subsidies = 50 – 10 = 40
60
40 Change in CS = -(400 + 200) = -600

20 Change in CS = (400 + 200 + 1200) = 1800
0
Change in the Gov. Rev. = -(200 + 1200 + 200) = -1600
0 5 10 15 20 25 30 35 40 45 50 55 60 65
Deadweight loss = -(200+200) = -400
EXAMPLE
EXPORT SUBSIDIES IN A LARGE HOME
COUNTRY
Export subsidies in a large country result in a

deadweight loss in welfare
Targeting Principle:
The deadweight loss is lower for the production subsidy makes it a better policy than the
export subsidy to increase Home supply. This finding is an example of the targeting
principle: to achieve some objective, it is best to use the policy instrument that achieves
the objective most directly.
There are many examples of using a targeting principle in economics:
 Taxes on cigarettes and gasoline.
 To use an example from the textbook, it is better to provide trade adjustment
assistance directly to those affected than to impose a tariff or quota.
EFFECT OF A PRODUCTION SUBSIDY

IN A SMALL HOME COUNTRY
Export and production subsidies are not the only policies that
countries use to influence trade in certain products. Some
countries apply export tariffs, which are taxes applied by the
exporting country when a good leaves the country.
We will look at how export tariffs affect the overall welfare of
the exporting country, taking into account the effects on
consumers, producers, and government revenue.
EXPORT TARIFFS We start with the case of a small exporting country facing fixed
world prices.
Following that, we look at how the outcome differs when the
country is large enough to affect world prices.
There is one other export policy that also benefits the large
country applying it: an export quota, which is a limit on the
amount that firms are allowed to export.
EXPORT QUOTAS
 Home consumers gain the same amount of consumer surplus a due to lower domestic
prices.
 If producers earned the lower price of P2 on all their quantity sold, as with the export
tariff, then they would lose (a + b + c + d) in producer surplus.
 Under the export quota, they also earn rents of (c + e) on exports, which offsets the
loss in producer surplus. These rents equal the difference in prices, P *2 − P2, times the
amount exported .
 The overall effect of the export quota on the Home welfare is the same as the export
tariff, with a net effect on welfare of e − (b + d).
THE WELFARE EFFECTS OF THE

EXPORT QUOTA VS. EXPORT TARIFF
 The losses arising from an export subsidy, for either a small or a large country, are less severe
for a production subsidy.
 A production subsidy provides an extra payment for every unit produced, regardless of whether
it is sold at home or abroad. So consumer prices do not change from their world level.
 The losses experienced by an exporting country due to subsidies are reversed when countries
instead use export tariffs. With export tariffs in a large country, the exporter obtains a terms-of-
trade gain through restricting supply of its exports and driving up the world price. This is at the
expense of its trade partners, a “beggar thy neighbor” policy.
 In high-technology industries, it is possible for an export subsidy to lead to gain for the
exporting country by increasing profits.
CONCLUSIONS
1. An export subsidy leads to a fall in welfare for a small exporting
country facing a fixed world price. The drop in welfare is a
deadweight loss and is composed of a consumption and
production loss, similar to an import tariff for a small country.
KEY POINTS
2. In the large-country case, an export subsidy lowers the price of
that product in the rest of the world. The decrease in the export
price is a terms-of-trade loss for the exporting country.
Therefore, the welfare of the exporters decreases because of
both the deadweight loss of the subsidy and the terms-of-trade
loss. This is in contrast to the effects of an import tariff in the
large-country case, which generates a terms-of-trade gain for the
importing country.
KEY POINTS (PART 2)

Export Policies in Resource-Based and High-Technology Industries

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Export Policies in Resource-Based and High-Technology Industries

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EXPORT POLICIES IN RESOURCE-BASED AND

industries having high concentrations of

Production A production subsidy encourages suppliers to increase the

Export Tariff a tax placed on a good that is exported from a country

Export subsidies in a small country result in a

40 Change in CS = -(400 + 200) = -600

Export subsidies in a large country result in a

EFFECT OF A PRODUCTION SUBSIDY

THE WELFARE EFFECTS OF THE

KEY POINTS (PART 2)

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