Answer to Question #192605 in Economics of Enterprise for Naukalemo

Question

Country A is contemplating on imposing an export subsidy to encourage its businesses to export more. Discuss the effect of such an export subsidy.

Answer 1

Subsidizing national producers selling their products in foreign markets artificially increases the level of their competitiveness in comparison with local suppliers. Subsidies restrict trade flows in three main ways.

1. Subsidizing the export of country A to country B damages the national producers of state B, which gives the latter the right to claim compensation for damage through the introduction of countervailing duties.

2. Country A subsidizes the national production of goods intended for domestic marketing, which negatively affects the level of competitiveness of goods of country B imported into the market of country A. Accordingly, country B can file a complaint with the WTO or impose reciprocal duties.

3. Country A subsidizes the export of goods to country C, which affects the level of competitiveness of the goods of country B, also sold in market C. However, response measures from C are unlikely.