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

Abstract

This 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.

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