,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 A 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 exportvalue or quantum. (ii) Payment for the difference between the domestic price and the international market price of an export . Income subsidy: Payment for export losses.,1 Export Subsidy and Production Subsidy,Indirect subsidy is intended to encourage a nations exports by reducing the price paid by foreigners. Special tax exemptions such as export tax rebate and the provision of capital at favored rates, etc. Since 1985, China has adopted tax rebates for exporting enterprises. The central government pays back a certain proportion of the consumption taxes and value added tax (VAT) to the enterprises after they pay taxes for exported goods In 1994, China established the Export-Import Bank of China (China Eximbank) to provide export sellers credit (to Chinese exporters) and export buyers credit (to foreign importers) at rates lower than commercial rates.,(2) The effects of an export subsidy,Figure 7-1 Effects of an export subsidy in a small country,0 D2 D1 S1 S2 Q,X2 S a b c d X1 D,P Pw+s Pw,S,With a subsidy being in place in a small country, world price is not impacted. The domestic supplier has an incentive to export. They will not sell to the home market unless the home price equals Pw+ s.,0 D2 D1 S1 S2,P PW+s PW PW,S,D,a b c d h e f g,Figure 7-2 Effects of an export subsidy in a large country,With a subsidy being in place in a large country, world price drops to PW. The domestic supplier has an incentive to export. They will not sell to the home market unless the home price equals Pw+ s.,s,x2,x1,2. 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 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 is reduced by (a+b), producer surplus is increased by (a+b+c+d) and government subsidy is (e+c+d). The whole welfare effect is a deadweight loss of (e+d).,2 Other Export Promotion Policies,Devaluation of home currency An official lowering of the value of a countrys currency. e.g. From USD100 = RMB680 to 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: sells a temporary surplus of its production to whatever price it is able to get (i.e. possibly below the production cost). Predatory dumping: 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.,A domestic monopolist sells in foreign markets that are highly competitive. The home demand is less elastic than the foreign demand. It would benefit from international price discrimination, charging a higher price at home, where competition is weak and demand is less elastic, and a lower price for the same product in foreign markets to meet competition.,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 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 and special economic areas ) An area where foreign goods may be held or processed and then re-exported without incurring duties. The international firm can therefore import merchandise; store it in the special trade zone; and process, alter, test, or demonstrate it without paying duties. Advantages: quite useful to the international firm. For example, in particular country, the benefits derived from lower