Export subsidies: are they truly useful for a country’s commercial policy?

The subsidies to exportations are a tool of commercial policy adopted by the economic policymakers of a State in order to promote and boost the exports of national goods and services towards foreign countries and economies. The contemporary multilateral commercial system, as evolved within the framework of the GATT (General Agreement on Tariffs and Trade) and, since 1995, within that of the WTO (World Trade Organization), considers subsidies to exports as conflicting with the very principles of free trade and therefore discourages their utilization along with other measures (duties, quotas, voluntary export restrictions) meant to alter the natural interplay of international commerce.

As soon as an exporting country decides to import its commodities in another, this will deeply influence the economic indicators of both, with significant consequences on the level of prices, on the output of enterprises, on the economies of scale, on the aggregate demand, on the balance of trade and mostly on the overall domestic product.

First of all, we must highlight that the export subsidies produce relevant effects on the country that receives the exports, thus being the importing one. These effects can be either positive or negative. Starting with the negative ones, in a perfectly competitive market the amount of the imported goods will affect the level of prices. Indeed, if the price of the imported good is lower than the domestic price for a similar good the enterprises will accordingly have to align their prices to it, however this is often unbearable because of the high production costs especially whether the enterprise uses costly specialized workers or sophisticated technologic equipment. Consequently, the importing of foreign assets can lead to a recession for the domestic and local enterprises that ultimately spawns bigger unemployment. Moreover, a particularly competitive imported good will play a relevant role in making the aggregate demand for akin domestic products fall. The average customer will automatically choose the imported good, although perhaps of lesser quality, instead of the domestic, more expensive, corresponding: either this could drive domestic enterprises to change their production or to diminish the quality of the outcome. Finally, an importing country could become addicted to foreign export and this would lead to a disequilibrium of its balance of trade: if this country would import more than exporting its balance of trade should be in deficit and an everlasting imbalance is to consider an economic disease. If we then contemplate the positive effects, we can acknowledge that importing may easily stimulate the production of economies of scale. For instance, we can speculate that importing parts of a car can encourage the production of the other pieces on a domestic basis and therefore many factories related to the production of means of transportation might benefit of the imports. Another positive aspect could be the expansion of the internal aggregate demand for a good complementary to the one imported: for example, the increased imports of car produces a greater demand for fuel. Furthermore, if the imported good is cheaper its input within the market generates a reduction of the inflation rate.

Now, after considering the effects upon the importer country, let us hence show those upon the exporter. Even here, we can separate the positive from the negative effects. Starting with the former, boosts to exports produce increasing outcomes for each commercial sector thus stimulating factories and enterprises to invest more in those factors involved in the productivity chain. Usually, this leads to larger revenues, to a reduction of the unemployment rate and to an expansion of the level of salaries and wages. In addition, the profits generated by exporting can persuade an enterprise to focus on a specialization of the production, thus reducing costs and better allocating the factors of production. Another positive effect stems from the reception of valuable currency: by buying the imported good, the importing country pays the exporter through its own currency, which can be of greater value, and consequently affecting its overall income and its official reserves. Generally speaking, international trade and export subsidies engender a rise of a country’s GDP: both theoretically and practically, researches have shown that trade liberalization is to prefer to protectionist measures that imply high social costs. Finally, if we consider the balance of trade, exports vouch a surplus if the exporting country exports more than what imports. However, considering the negative effects, a country that encourages exportations needs to keep its currency devalued in order to make sure that the foreign demand will be more interested in purchasing: intuitively, the commercial policy affects also the currency and the exchange rate policies. Likewise, exporting policies often overlook the domestic interests, ignoring the needs of the national demand.

If a State considers as harmful for its interests the excessive intrusion of foreign goods in its market, there are commercial tools (often discouraged or even forbidden by the WTO) that can adopt. The first of these is the duty, which is a toll over importations that can be specific or ad valorem and creates a tax revenue for the State. It does not wholly avoid the purchase of the good, but discourages it by rising its price. The duty alters the spontaneous adjustment of prices in the market of goods, forbidding the finest allocation of resources. There are also the quantitative measures for import restriction like the quotas that, if granted with an administrative license, produce State revenues. Unlike the duty, with the quotas the number of goods that can be legally imported is imperatively set.

Finally, there can also be releases of specific regulations in order to introduce qualitative standards for the imported goods often used by the governments as a mean to daunt the actual importations. Tools for protecting against imports are commonly used in the case of newly born industries and productive sectors that the State consider mandatory to safeguard.

An example of country that uses commercial policies slanted towards export subsidies is China. During the past years, China has oriented its economic policies towards extremely clear and farsighted goals, creating a kind of double track with the United States of America. In fact, Chinese policymakers have decided to keep their currency (the yuan) devalued in order to stimulate exportations (see above). By so doing, countries where Chinese goods were sold, like the US or the European Union, considered much cheaper buying these rather than their own, and thus China managed to store up a copious amount of valued currency, be it the dollar, the pound or the euro.

On the other hand, by accumulating these quantities of capital stocks, China could buy and uphold the public debt of several Western countries, first of all that of the US. By buying portions of the American sovereign debt, China has unavoidably tied to herself, from an economic perspective, the American economy. At the same time, the huge Asian country is closely linked to the US and needs that the American demand for Chinese goods stays high so that it can continue to achieve and gather the dollar. Economists and political scientists often referred to this situation as to the “new equilibrium of terror”, that has superseded the “old” one which consisted in the use of both the USA and the USSR of the nuclear weapon as a means of deterrence and peacemaking. Until China will rely on this kind of economic policy, the enormous macroeconomic imbalances between America and China (think of the surplus/deficit chronical disproportion or the levels of indebtedness) will automatically compensate each other; however, if Beijing’s government will change course, possibly stimulating the domestic demand or valuating the yuan, this hazardous balance will keel over with unthinkable consequences.    

The European Union gives a second interesting example of support to exports. As we know, the EU represents the most sophisticated and rich inner market of the world and the Economic and Monetary Union (EMU) thanks to a common monetary policy, currency and Central Bank (the ECB) epitomizes the most sophisticated form of economic integration, standing just few steps away from being a political confederation. In terms of exportations, the EU pursues comprehensive projects for economic partnership with many outside countries, especially with former colonies of the African, Pacific or Caribbean areas (ACP countries). With some of them, the EU concluded free trade agreements known as EPAs (European Partnership Agreements) that have interlocked their own economies. Through these agreements, the European Union has introduced different of goods within the target countries, but the benefits have not always been clear. For example, some African countries showed a tumble in the domestic production and many private enterprises cracked down, augmenting the unemployment rate and shrinking the incomes one. Other foreign imported products ruthlessly damaged the growth of those African or Caribbean countries who relied on monoculture production (e.g. that of coffee or sugar cane). Still, the EPAs also created new jobs when contributed to export those goods that were not yet finished and that needed to be finished by the local manpower. As far as subsidies on agricultural goods are concerned, a long debate has been taking place during WTO’s multilateral conferences (see the Doha Round, 2001, and the Cancún Round, 2003) but the stalemate of the negotiations does not allow us to further developing the matter.      

To drag to an end, export subsidies are an important tool in the hand of the policymakers. As seen above, they can produce both positive and negative effects. However, in a globalized world like the one we all live in the commercial ties will ever increase along with the economic and financial interdependence and the migratory phenomenon. Whether the model of free market and trade is to prefer to autarchy and protectionism is still difficult to say, but will continue to be a matter of discussion for scholars, politicians and philosophers for the decades to come.