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Economics

Study Notes

Protectionism - Export Subsidies

Level:
AS, A Level, IB
Board:
AQA, Edexcel, OCR, IB, Eduqas, WJEC

Export subsidies are a form of protectionism

Revision Video: Ten Examples of Non-Tariff Barriers (including domestic subsidies)

Ten examples of non-tariff barriers - revision video

Domestic subsidies

What is a domestic subsidy?

  • A domestic subsidy is any form of government financial help to domestic businesses
  • The subsidy helps firms to lower their costs and thus become more competitive in home and overseas markets

Impact of domestic subsidies

Domestic producers

  • Domestic producers gain from the subsidy – they get the world price + a subsidy
  • Higher revenues will lift profits and might therefore lead to a higher share price. Increased output creates the possibility of economies of scale
  • Evaluation: Risk of a dependency culture emerging – i.e. businesses relying on the subsidies rather than taking their own steps to become more competitive by increasing productivity, eliminating inefficiency and accelerating the pace of process/product innovation

Consumers

  • Assuming that the subsidy is not large enough to change the world price, not direct effect on the prices that consumers pay for their products
  • They may face higher taxes if expensive subsidies take up a high percentage of government spending

Government

  • Subsidy can be an effective non-tariff barrier to reduce the volume of imports by encouraging domestic production
  • Unlike a tariff, a subsidy does not generate tax revenues directly.
  • Increased spending on subsidies may cause a growing budget deficit

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