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(共21张PPT)
CHAPTER 7 EXPORT PROMOTION AND OTHER POLICIES
Export Subsidy and Production Subsidy
Other Export Promotion Policies
Export Restrictions and Import Promotion
Policies
Trade Sanctions
1. Export subsidy and its effects
Payment by the government to encourage the export of specified products.
(1) Direct export subsidy and indirct export subsidy
Direct export subsidy: price subsidy and income subsidy
Price subsidy: (i) Payment made against the export value or volume.
(ii) Payment for the difference between the domestic
price and the world price of an export .
Income subsidy: Payment for export losses.
§1 Export Subsidy and Production Subsidy
Indirect subsidy: reduce export cost or foreign importer’s
payment. Usual practice
Export tax refund (rebate): The government pays back
full or part of the domestic consumption taxes and value
added tax (VAT) imposed on the goods.
Requirements:
Export transaction
Physically left the country
Foreign exchange verification procedure
Export credit: preferential loan to exporters or importers by the
banks in the exporting country.
Export seller’s credit: To home exporters to facilitate their exporting
products.
Export buyer's credit: To foreign buyers to facilitate their purchase of
exporting country’s products (‘at sight payment’ contract)
In 1994, China established the Export-Import Bank of China (China
Eximbank)
(2) The effects of an export subsidy
Welfare Consumer: -a-b；Producer: a+b+c；Subsidy: -b-c-d；Whole:-b-d
0 D2 D1 S1 S2 Q
X2 S
a b c d
X1
D
P
Pw+s
Pw
s
Firms receive a S payment
per unit if they export.
Domestic suppliers have an
incentive to export.
Figure 7-2 Effects of an export subsidy in a small country
They will sell to the home
market only if the home price
equals Pw+ s.
RESULT: reduces the quantity sold in domestic market home, increases domestic
market price to Pw+ s, increases producer’s supply, leading to increased
exports X2.
0 D2 D1 S1 S2
S
D
a b c d
h e f g
Figure 7-2 Effects of an export subsidy in a large country
s
Consumer: -a-b
X2
Whole: -b-e-f-d-g
Producer: a+b+c
Subsidy: -b-c-d-e-f-g
X1
The actual deadweight loss of the large country is greater than that of the small country.
2. Production subsidy and its effect
A payment made by a government to firms in a particular industry based on the output or production.
P
Pw+ s
Pw
0 D1 S1 S2 Q
Figure 7-3 Effects of a production subsidy in
a small country
a b c d
S
D
X2
X1
S’
When a production subsidy
‘s’ is in place in a small
country, the world price is not
impacted.
The consumer surplus does
not change.
The producer surplus is
increased by (a+b+c) and
government subsidy
is (a+b+c+d).
The whole welfare effect
is a deadweight loss of (d).
From the perspective of the whole social welfare, production subsidy is
better than export subsidy (d < b+d ), but more government expenditure.
§2 Other Export Promotion Policies
Devaluation of home currency
An official lowering of the value of a country's currency.
e.g. USD100 = RMB680
USD100 = RMB780
A stronger home currency would make home exports more expensive in other countries, and it would reduce the cost of home imports.
Two conditions:
(1) The goods exported has big export price elasticity;
(2) Trading partners do not retaliate.
2. Commodity dumping
Sporadic dumping: A firm sells a temporary surplus of its production at whatever price it is able to get (i.e. possibly below the production cost).
Predatory dumping: A firm sells at low price in order to eliminate competition and eventually to reap monopolist profits.
(3) Persistent dumping: A firm who enjoys domestic monopolistic power exploits the possibility of price discrimination between domestic and foreign markets in order to maximize profits.
Foreign markets: highly competitive
Home demand: less elastic than foreign demand
Domestic monopolistic: International price discrimination
Higher price at home
Lower price in foreign markets
P
60
18
0 100 Q
MR D
MC=MR=18
The market in Japan
P
25
18
0 150 Q
MR D
MC=MR=18
The market in the USA
Figure 7-4 Persistent dumping
The Japanese producer of telephones is a monopolist who uses price discrimination to maximize profits in the two markets.
3. Bonded (customs) warehouse
The warehouses that are established upon approval of the customs for exclusive keeping of bonded goods and other goods that have not gone through customs clearance.
Advantages: it frees up cash flow for importers.
In China, the goods stored in a bonded warehouse, no substantial processing may go through.
4. Special trade zone
(export processing zones, special economic areas )
An area where imports may be held or processed, and then re-exported without incurring duties.
Advantages: quite useful to the international firms.
Example: China: lower labor cost advantage,
if high duties and tariffs, advantage offset.
Manufacturing may prove uneconomical.
Be useful as transshipment points to reduce logistics cost
(consolidate the alarms from Taiwan with other shipments to Chile)
US company
Miami free trade zone
Taiwanese
manufacturer
Chilean distributor
5. Export promotion programs
Organising trade exhibitions;
Arranging group visits overseas;
Delivering market information to firms;
Providing contact details of potential customers, agents or distributors;
Conducting “how to export” workshop;
Preparing publications on exporting and markets, allocating operatives to assist particular firms develop export plans.
§3 Export Restrictions and Import Promotion Policies
Export restrictions policies
(1) To prevent a shortage of goods in the domestic market because it
is more profitable to export (China Rare Earth Case);
(2) To manage the effect on the importing country's market, which may
otherwise impose antidumping duties on the imported goods;
(3) As part of foreign policy, for example as a measure of trade
sanctions;
(4) To limit or restrict arms or dual-use items that may be used in
nuclear proliferation, terrorism, or nuclear, chemical, or biological
warfare;
(5) To limit or restrict trade to embargoed nations.
(1) The effects of an export tax
0 D1 D2 S2 S1
D
S
P
PW
PW - t
X1
X2
a b c d
Figure 7-5 The effects of an export tax in a small country
With the imposition
of an export tax “t”
dollars, producers in
the exporting
country will get only
(Pw- t) dollars per
unit when he exports
at the world price of
Pw .
Thus he would
prefer to sell in the
home market , which
will lead to an
increase in supply
and a drop in the
home market price.
Consumer surplus: a; Government revenue: c;
Producer surplus: -a-b-c-d; Deadweight loss: -b-d.
(2) The effects of an export quota
0 D1 D2 S2 S1 Q
D
S
P
PW
PW - t
X1
X2
a b c d
Figure 7-5 The effects of an export quota in a small country
With the imposition
of an export quota of
X2, the effects are
similar to those of an
export tax.
The difference is, with
the import quota, no
government revenue
is necessarily collected.
The recipient of the
quota rent is unclear.
Export
quota
2. Import promotion policies
The objectives of import promotion:
(1) For the benefit of home consumers. When domestic supply
is insufficient while the import price is on the high side
and the goods are life necessities like food, meat, salt, etc.;
(2) To protect domestic scarce natural resources, especially those
non-reproductive resources with strategic significances as
petroleum;
(3) To promote the development of particular home industries. For
this purpose, the importation of parts, components and raw
materials which are vital to these industries but not available at
home are encouraged.
§4 Trade Sanctions
Introduction to trade sanctions
Restriction can be on imports and/or exports
An entire ban on trade (trade embargo) or be limited to particular products.
In most cases, embargos are implemented against countries whose conduct has been condemned by the international community.
To isolate the target country, pressure its government and cause it to reverse a specific policy.
Sanctions can be declared either by one country or by a group of countries.
2. Effectiveness of trade sanctions
The number of nations imposing sanctions.
The degree to which the target nation has economic, cultural and political ties to the imposing nation (s).
The extent of political opposition within the target nation.

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