International Trade Theory and Policy
by Steven M. Suranovic

Trade 10-5

Export Subsidies

Export subsidies are payments made by the government to encourage the export of specified products. As with taxes, 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 farmers. 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.

International Trade Theory and Policy - Chapter 10-5: Last Updated on 8/14/03

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