Export Subsidies Research Articles

Industrial Economy: How Africa Should Industrializee

Continual Africa reliance to allegedly “good” policies to industrial growth from the Developed countries and the international development policy establishment (IDPE) such as the IMF, World Bank, World Trade Organization (WTO) and donor governments such as (DFID and IFC) may further capacitate Africa’s failure to industrialize. Allegedly “good” policies have not been able to generate the PROMISED growth dynamism in the Developing countries growth during the decades of its implementation. When Africa emerged from its long economic hibernation around the turn of the 21st century, African industry was no longer competing with the high-wage industrial “North,” as it had in the 1960s and 1970s. From the historical facts about the developmental experience of the Developed countries (official history of capitalism), it is evident that “it is when a country has gotten out of protection all that it can offer, it too will adopt free trade”. African countries are not already on the frontier of technological development, as such, protective duties and restrictions are inevitable if Africa is to turn the corner in its current industrial development QUEST, contrary to intentionally misguided belief of free trade. Export subsidies, tariff rebates on inputs used for exports, conferring of monopoly rights, cartel arrangements, directed credits, investment planning, manpower planning, R&D support and promotion of institutions for public-private co-operation are additional tools suggested in the article in regards to Africa’s industrial and development success.

Trade, Reform, and Structural Transformation in South Korea

We develop a two-country, three-sector model to quantify the effects of Korean trade policies for structural change from 1963 through 2000. The model features non-homothetic preferences, Armington trade, proportional import tariffs and export subsidies, and is calibrated to match sectoral value added data on Korean production and trade. Korea’s tariff liberalization increased imports and trade, especially agricultural imports, accelerating de-agriculturalization and intensifying industrialization. Korean subsidy liberalization lowered exports and trade, especially industrial exports, attenuating industrialization. Thus, while individually powerful agents for structural change, Korea’s tariff and subsidy reforms offset each other. Subsidy reform dominated quantitatively; lower trade, higher agricultural and lower industrial employment shares, and slower industrialization were observed than in a counterfactual economy with no post-1963 policy reform.

Strategic trade policy with bargaining over managerial contracts

This paper re‐examines the well‐known activist regime's inefficiency (governments set export subsidies) in a sales–delegation game with owner–manager bargaining over contracts. Contrary to the received literature, this bargaining process may (a) induce governments to set a tax if products are not too substitute or complements and (b) lead to an efficient (inefficient) equilibrium provided that products are sufficiently differentiated (not too complements). Therefore, unilateral public intervention can be optimal: in case of rival governments' retaliation, under appropriate product competition degrees, welfares are larger than under free trade even for small managers' power. Thus, managerial delegation practices are crucial also for international trade issues.

A re-analysis of the trade and welfare effects of export subsidies

ABSTRACTThis article proposes a new analysis of the market and welfare effects of export subsidies. Current analysis uses a default assumption of imports being prohibited by the exporting country. We contend that this assumption fails on several fronts: it is not consistent with the ceteris paribus assumption used in economic analysis; it is unrealistic in a world of fast-dropping transportation costs and free trade; and it hides the true effect of an export subsidy which is to create inefficient intra-industry trade. Correcting the analysis is important as, even with a proliferation of treaties, governments continue to enact policies to promote trade that may have similar effects to an export subsidy. Proceeding at a basic level, this article presents graphical analysis of export subsidies to replace the content in current undergraduate textbooks, in order to train the next generation of economists to think clearly about the effects of this policy.

The superiority among specific, demand ad valorem and cost ad valorem subsidy regimes

We analyze the superiority of the specific, demand and cost ad valorem subsidies in industrial and export policies. The criterion employed to measure the ranking of the superiority of the subsidy policies in this paper is that, given an identical total output, the smaller the amount of the subsidy, the superior the subsidy policy. We show that the demand ad valorem subsidy is the least efficient policy, regardless of whether it is measured in regard to the industrial or export subsidy policies. The superiority related to the specific and cost ad valorem subsidies hinges upon the production technology. We can thus provide a theoretical explanation to the real world phenomenon as to why governments usually offer a specific or cost ad valorem subsidy policy to agricultural products and exports.

(Korea's Multilateral Trade Polices in the Changing Global Trade Landscape)

Korean Abstract: 세계적으로 반무역자유화 정서가 확산되는 가운데 국제무역이 구조적으로 감소하고 있고 선진국을 중심으로 하는 복수국간협상이 확산되고 있다. 또한 파리기후변화협약의 이행으로 무역과 환경이 조화를 이루어야 하는 시대가 도래하였다. 본 보고서는 이러한 글로벌 통상환경에서 나타난 주요한 변화를 고려하여 나이로비 각료회의 이후 우리나라가 취해야 할 다자통상정책의 방향을 단기 DDA 협상대책과 중장기 정책방향으로 나누어 제시하였다. English Abstract: The WTO's Tenth Ministerial Conference, held in on December 2015, concluded with the adoption of the Nairobi Package, several ministerial decisions on agriculture, cotton and least-developed countries. The Package includes a historic decision to eliminate agricultural export subsidies, the most important reform of international trade rules in agriculture since the WTO was founded. The biggest disagreement among WTO members, however, goes beyond specific substantive issues: it is about the future of the Doha agenda and the WTO's negotiating function itself. While developing countries wished to continue with negotiations, industrialized nations, chief among them the United States, called for an end to the Doha Round. The Ministerial Declaration also acknowledges that WTO members different views on the future of the Doha Round negotiations but notes the strong commitment of all members to advance negotiations on the remaining Doha issues. In this situation, there have been significant changes in international trade since recent decades. First, trade growth has been anaemic since 2010. Already before the 2008 Global Crisis hit, the rate of growth of the ratio of global trade to GDP had slowed considerably. Most recent data show trade values declining. Second, plurilateral negotiations are rapidly widespread in the WTO. In particular, developed members have pushed for more sectoral deals like the ITA-II. Currently, a similar deal on tariff reductions for environmental goods is being negotiated. More sectoral tariff liberalization of this sort might be a good area to pursue. Along the same lines, the trade in services talks going on in Geneva could be brought formally into the WTO framework. Third, at the Paris climate conference (COP21) in December 2015, 195 countries adopted the first-ever universal, legally binding global climate deal, which is expected to affect a significant impact on global trade. At the heart of the Paris climate agreement are national-level plans, called Intended Nationally Determined Contributions (INDCs), to reduce greenhouse gas (GHG) emissions. Although these INDCs are voluntary, they are considered a critical first step for an agreement designed to progressively ratchet up national commitments to collectively limit a global temperature rise to 1.5 degrees Celsius above pre-industrial age levels. It is now time that we have to design a harmonization between trade and environments.

Interdependence of Trade Policies in General Equilibrium

We characterize the optimal trade tax/subsidy schedule in generalequilibrium multiple-sector gravity models and find that: ( i ) The optimal tariffs are uniform across sectors, despite sectoral variations in trade elasticities, transport costs and demand characteristics; ( ii ) The optimal export subsidy for a sector is increasing in that sector’s trade elasticity. Moreover, trade policies are interdependent: ( iii ) Import tariffs across sectors are complementary and ( iv ) Import policy is only an imperfect substitute for export policy. These policy interdependencies play an important role in the optimal design of trade agreements and provide a novel perspective on the WTO’s ban on export subsidies. Fitting our model to trade data, we show that these policy interdependencies are also quantitatively significant. Finally, ( v ) non-revenue trade barriers (such as import bans) could be optimal in a subset of sectors.

Cutting export subsidies, cropping domestic production: input-output analysis of the Swiss dairy sector after abolishment of the ‘Chocolate law’ subsidies

The `Chocolate law’ in Switzerland enables subsidies for dairy and wheat farmers, bound to the condition that their products are exported after processing (Swiss Federation, 2011). Though the Ministerial Conference of the World Trade Organization has decided in December 2015 that this law has to be abolished by 2021 [WTO, 2015]. Cutting subsidies might lead to a demand shock and consequently a cropped domestic production (Miller and Blair, 1985). We analysed in this study the interdependence of the agro-food sectors by a Leontief input-output model and their linkages to other sectors (Chereny and Watanabe, 1958, Leontief 1986) and additionally, the amount, direction and dispersion of the possible demand shock. Hence, non-meat food processors and dairy processing were determined as key sectors as they have strong linkage effects and are rather concentrated to few sectors. Both sectors rely strongly on the output of the raw milk producers and have few sectors to sell their products. Outside of the cut sectors, these sectors will be challenged the most from this new policy.

The equivalence of export subsidies and import tariff reductions in a macroeconomic model

A general equilibrium macroeconomic model is used to study the equivalence of export subsidies and import tariff reductions in increasing export output. It is shown that the qualitative effects of both policies are the same; an import tariff reduction is an equally viable alternative for expanding exports. It is also seen that in a typical developing economy with a large nontradable goods sector, the import tariff reduction may well be a better choice in this regard. Hence, when striving for export expansion, developing countries and emerging market nations cannot afford to be lackadaisical in liberalizing imports. This observation may be also related to the argument that it is not possible to nurture a small pocket of advanced export industry in an economy shaded from competition and characterized by inefficiency and low productivity.

Региональные и мегарегиональные торговые соглашения: торговля сельскохозяйственной продукцией в Транстихоокеанском партнерстве

Mega-regional trade agreements (MRTAs) have appeared in response to the prolonged stagnation of the multilateral trading system ruled by the World Trade Organization (WTO). Although this issue has stimulated research in international integration, the specifics of MRTAs have not yet been sufficiently investigated. This article therefore assesses the multilateralization potential of regional commitments using the example of the Trans-Pacific Partnership (TPP). It includes commitments in market access liberalization made in regional trade agreements (RTAs) and in intraregional agricultural trade liberalization under the TPP.The central research problem is to identify the regional liberalization commitments that might be promoted to the level of the WTO. The authors use the methodology devised by the Organisation for Economic Co-operation and Development for assessing the potential multilateralization. RTA and MRTA commitments are grouped in two policy areas: WTO-plus (going beyond the normal provisions of the WTO) and WTO-beyond (dealing with issues going beyond the WTO). The TTP is scrutinized in the context of intraregional agricultural trade liberalization.MRTAs can raise regional commitments to the global level because of their large membership, regulatory transparency and high levels of implementation. The multilateralization of regional agreements is expected in services and investments as well as in various aspects of technical regulation. The key features of implementing RTA’s WTO-plus and WTO-beyond commitments in intraregional agricultural trade are discussed. Most RTAs have liberalized tariffs beyond the WTO Agreement on Agriculture (WTO-plus), but only a few have strengthened disciplines in non-tariff barriers and implemented WTO-beyond commitments for export restrictions and export subsidies. The TPP parties are a diverse group in terms of involvement in global agricultural trade and applied tariffs on agriculture and food. The TPP provides the record in eliminating tariffs for agricultural products while keeping a number of exceptions for sensitive products and long implementation periods. Agricultural market liberalization under the TPP is achieved mostly through eliminating tariffs than by renewing non-tariff barriers. The TPP parties share the objective of implementing WTO commitments by supporting the global agricultural trade reform on export subsidies and export bans, and agree to incorporate WTO-plus and WTO-beyond obligations.

Estimating the Effects of Non-Discriminatory Trade Policies within Structural Gravity Models

We propose a simple method to identify the effects of unilateral and non-discriminatory trade policies on bilateral trade within a theoretically-consistent empirical gravity model. Specifically, we argue that structural gravity estimations should be performed with data that include not only international trade flows but also intra-national trade flows. The use of intra-national sales allows identification of the effects of non-discriminatory trade policies on the importer side (e.g. most favored nation tariffs) and on the exporter side (e.g. export subsidies), even in the presence of exporter and importer fixed effects. An important byproduct of our approach is that it can be used to recover estimates of the export-supply elasticity and of the import-demand elasticity. We demonstrate the effectiveness of our techniques in the case of MFN tariffs and Time to Export as representative determinants of trade on the importer and on the exporter side, respectively. Our methods can be extended to quantify the impact on trade of any country-specific characteristics as well as any non-trade policies.

Trade and Fiscal Deficits, Tax Reform, and the Dollar: General Equilibrium Impact Estimates

Advocates of using a border tax adjustment (BTA) to shift the corporate profits tax to a destination basis argue that such an arrangement would not be protectionist, because the import tax and export subsidy would be fully offset by an induced appreciation of the dollar. To examine this claim, this study applies an updated and extended general equilibrium model from the author's 2005 book, The United States as a Debtor Nation. Cline finds that across various scenarios, the dollar appreciation typically would be less than half the amount needed to offset fully the BTA. Advocates of the BTA implicitly assume a strong, prompt expectational boost to the dollar upon announcement of the shift. Instead, market practitioners and mainstream macroeconomic models see the interest rate as the main driver of the exchange rate. Although an incipient rise in the trade balance would indeed put upward pressure on the interest rate and thus the exchange rate, it would also result in reduced investment. With the trade deficit equal to investment minus saving (I–S = M–X), reduced investment would tend to set the new equilibrium at a lower trade deficit before the interest rate would rise sufficiently to boost the dollar to a level that would completely offset the BTA.

A Macroeconomic Perspective on Border Taxes

The debate on corporate tax reform in the United States has included arguments for a border-adjustment tax that would effectively raise the tax on imported inputs and provide a subsidy to exports. This policy is equivalent to other uniform border taxes, such as a combined import tariff and export subsidy, and a uniform value-added tax and payroll subsidy. In this paper, I argue that, contrary to popular arguments, such taxes are not neutral in either the short run or the long run, and they have significant consequences for international trade.

The Macroeconomic Effects of Trade Tariffs: Revisiting the Lerner Symmetry Result

We study the robustness of the Lerner symmetry result in an open economy New Keynesian model with price rigidities. While the Lerner symmetry result of no real effects of a combined change in import tariff and export subsidy holds up approximately for a number of alternative assumptions, we obtain quantitatively important long-term deviations under complete international asset markets. Direct pass-through of tariffs and subsidies to prices and slow exchange rate adjustment can also generate significant short-term deviations from Lerner. Deviations from symmetry, however, do not necessarily imply an impact on global output and are often limited to a redistribution of production and consumption across countries. Finally, we quantify the macroeconomic costs of a trade war and find that they can be substantial, with permanently lower income and trade volumes. However, a fully symmetric retaliation to a unilaterally imposed border adjustment tax can prevent any sizable adverse real or nominal effects.

All These Worlds are Yours, Except India: The Effectiveness of Export Subsidies in Nepal

This paper evaluates the effect on firm-level export outcomes of the Cash Incentive Scheme for Exports program provided by the Government of Nepal. The analysis utilizes customs-level data for 2011-14, combined with information on the subsidy payments made to individual firms provided by the Central Bank of Nepal. The Cash Incentive Scheme for Exports cash subsidy is available to firms exporting a select group of products, and requires firms to export to countries other than India. Overall, the subsidy has not produced a significant impact on firm-level export values, prices, quantities, or their growth rates. However, the study finds a small positive effect on the number of eligible products exported to countries other than India and the number of destination markets reached among firms that receive the subsidy. These results are consistent with the fact that the subsidy was granted primarily to large exporters that were already shipping eligible products to countries other than India. The findings suggest that although the cash subsidy has not produced a significant increase in exports, it has achieved a positive impact on export diversification for firms that were already satisfying the scheme’s eligibility criteria.

The Macroeconomic Effects of Trade Tariffs: Revisiting the Lerner Symmetry Result

We study the robustness of the Lerner symmetry result in an open economy New Keynesian model with price rigidities. While the Lerner symmetry result of no real effects of a combined import tariff and export subsidy holds up approximately for a number of alternative assumptions, we obtain quantitatively important long-term deviations under complete international asset markets. Direct pass-through of tariffs and subsidies to prices and slow exchange rate adjustment can also generate significant short-term deviations from Lerner. Finally, we quantify the macroeconomic costs of a trade war and find that they can be substantial, with permanently lower income and trade volumes. However, a fully symmetric retaliation to a unilaterally imposed border adjustment tax can prevent any real or nominal effects.

Optimal Trade Policy, Equilibrium Unemployment and Labor Market Inefficiency

Why do politicians advocate trade protections to save domestic jobs when neoclassical trade models suggest that small open economies should implement free trade? The novel insight of this paper is that trade protections can be rationalized as a second-best policy that improves the domestic welfare when the equilibrium unemployment is different from the constrain-efficient unemployment. To understand the puzzle, we incorporate a Diamond-Mortensen-Pissarides frictional labor market into the standard Heckscher-Ohlin model of international trade. The model offers various findings. First, when the relative price of the labor (capital)-intensive good increases, equilibrium unemployment decreases (increases). Second, the labor market in a competitive equilibrium is constrained-efficient when the Hosios condition is satisfied. Third, a capital-abundant country with inefficiently high unemployment may experience welfare losses from trade. Conditional on having the same observed trade share, a labor-abundant country with inefficiently high unemployment have an extra welfare gain from international trade that is not present in traditional models without equilibrium unemployment. Finally, when the la- bor market in a small open economy generates inefficiently high equilibrium unemployment, the optimal trade policy is to raise the domestic price of its labor-intensive goods (an import tariff in a capital-abundant country and an export subsidy in a labor-abundant country). Free trade is optimal only when a labor market is initially efficient. The model predictions are sup- ported by patterns of tariffs in WTO member countries.

Cournot-Bertrand competition: a revisit of strategic trade policy in the third-market model

Purpose – The purpose of this paper is to discuss the optimal policy settings of the home government for any combination of strategic variables adopted by home and foreign firms under Brander and Spencer’s third-market model framework. Design/methodology/approach – This paper follows all the assumptions of Brander and Spencer with only two modifications: firms produce differentiated products, and firms choose different strategic variables. A two-stage game is set and the subgame-perfect Nash equilibrium is deduced following backward induction. Findings – The authors arrive at a general, simple rule to determine the optimal policy of the home government for any combination of strategic variables: regardless of the strategic variable of the domestic firm, the optimal policy of the home country is an export subsidy (tax) as long as the foreign firm’s strategic variable is output (price). The optimal subsidy or tax of the home country is shown to move the equilibrium to the Stackelberg equilibrium where the domestic firm behaves as the leader while the foreign firm behaves as a follower under free trade. With appropriate interpretations and a suitable caveat, the above results still hold in the case with multiple foreign firms which may choose different strategic variables. Originality/value – This paper fills the gap in the literature, and provides some more general results not easily detected in the original model of Brander and Spencer or Eaton and Grossman.

Technological Progress in Croatian Non-Perennial Agriculture

Croatian agriculture stagnates over the last quarter of the century. Although it is heavily subsidized and the investment in mechanization was high, Croatian agriculture did not improve its production level, not even after the accession to the European Union. The project of green and blue Croatia, which aim is to connect agricultural production and tourism, did not show significant results import substitution. In this paper non-perennial crops agriculture is analyzed since it forms more than 40% of total agricultural production in Croatia. In order to distinguish the contribution of capital, labour and total factor productivity, a Cobb-Douglas production function is estimated on a panel data set for Croatian non-perennial agriculture in the period of 2008 – 2014. It was discovered that production elasticities do not correspond to the shares of expenditures on labour and capital which is a common production function assumption. Also, it is shown that total factor productivity declines over time, a disinvestment and labour decline caused stagnation of this sector of Croatian economy. A further analysis is made to determine the impact of subsidies and export orientation on TFP and it is found that Croatian agricultural production is affected by export orientation and subsidies, but their impact is almost irrelevant.

Trade, Reform, and Structural Transformation in South Korea

A two country, three sector hybrid model of structural change with distortionary government policies is used to quantify the impact of international trade and trade reform for industrialization. The model features Armington motivated trade in agriculture and industry, and a novel representation of trade reform as a time sequence of import tariffs, export subsidies and lump sum government transfers of net tariff revenue. We calibrate our economy to data on South Korea and the OECD, inputting time series of country and sector specific labor productivity, tariffs and export subsidies which determine evolution of the effective pattern of comparative advantage. The model’s predicted reallocations of Korean labor from agriculture into industry and services from 1963 through 2000 are quantitatively similar to those in the data. Incorporating trade and measured Korean trade reform are both important for the accuracy of this predicted structural change, although international real income differences under non-homothetic preferences primarily determine trade and specialization patterns rather than comparative advantage. Counterfactually eliminating a) international trade b) international labor productivity differentials c) post 1967 Korean tariff reform and d) post 1967 industrial export subsidy reform increase the model’s SSE by 91 percent, 56 percent, 27 percent, and 62 percent respectively.