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DOMESTIC SUBSIDIES AND EXPORT SUBSIDIES (EXPORT SUBSIDIES (REASONS…
DOMESTIC SUBSIDIES AND EXPORT SUBSIDIES
EXPORT SUBSIDIES
CONDITIONAL upon product receiving subsidy being exported
NEED export license
WTO prohibits export subsidies for industrial products
REASONS
DISPOSE surplus from domestic programs
INCREASE producer price
MOTIVATE protectionist
Produce more, consume less --> increase volume of trade
GAIN in PS - more product in world market
LOSS in CS - higher domestic price
GOV expenditure - captured by importers
DOMESTIC SUBSIDIES
any subsidy that isn't export subsidy
LIMITS use and provide reduction commitments
If affects trade, importing country can apply COUNTERVAILING DUTIES
Small country domestic subsidies --> DON'T DISTORT world price
CONFLICTING EFFECTS
some act as BRAKE on production --> reduce export --> support world price
Some act like deficiency payment --> distort trade
DEFICIENCY PAYMENTS
GAIN in PS - direct transfer from gov to producers
GAIN in CS - direct transfer from gov to consumers
HIGH gov expenditure
NET LOSS - importer picking this up
PRODUCTION CONTROL
Kink at maximum production
LOWER volume of trade
GAIN in PS (exporter)
LOSS in CS (exporter)
NET LOSS --> DWL
GOV paying producers not to produce
COUNTERVAILING DUTY
IMPORT duty imposed on a commodity to off-set a reduction in its price as a result of subsidy in country of origin
INVESTIGATION
DETERMINE if subsidy EXISTS and size
DETERMINE if import competing industry is INJURED
CAUSAL relationship between subsidy and injury
EFFECTS on Production, Trade flows and Industry welfare
INJURY - loss in PS
CVD overcompensates for the distortion --> further distorts world market
3 kinds of trade- distortions
DOMESTIC SUBSIDIES enhance export performance
DIRECT EXPORT SUBSIDIES
DOMESTIC SUBSIDIES reduce substitution of imported goods for domestic