PubPol/Econ 541. Subsidies and Countervailing Duties. by Alan V. Deardorff University of Michigan 2018

Transcription

1 ubol/econ 541 Subsidies and Countervailing Duties by Alan V. Deardorff University of Michigan 2018

2 Subsidies and Countervailing Duties Subsidies are assistance provided by government to firms or industries Here they will take the simple form of a fixed payment per unit of output or of export Countervailing duties (CVDs) are permitted by the GATT/WTO under specified circumstances 2

3 Outline Unjustified Subsidies Effects of subsidies Export roduction by Small Country roduction in 2-country world Effects of CVDs Justified Subsidies 3

4 Categories of Subsidies There are several ways of categorizing subsidies Export versus domestic (production) Direct versus indirect Trade distorting versus not Justified versus unjustified I ll use the latter term: Justified means being used appropriately to correct a distortion Unjustified is any other 4

5 Outline Unjustified Subsidies Effects of subsidies Export roduction by Small Country roduction in 2-country world Effects of CVDs Justified Subsidies Subsidies with Imperfect Competition 5

6 Export Subsidy X X 1 X 0 M 1 a f b c e d s S X The export subsidy, s per unit of the good exported, gives exporters price 1X which is larger than what foreign importers pay, 1M, by the amount s. Home price (inc. subsidy) rises Foreign price falls Exports rise 0X 1 X D X X Welfare effects Dom. private gains +(a+b) Dom. govt loses (a+b+c+d+e+f) Dom. cty loses (c+d+e+f) For. private gains +(d+e+f) World loses c Dead Weight Loss = 6

7 Outline Unjustified Subsidies Effects of subsidies Export roduction by Small Country roduction in 2-country world Effects of CVDs Justified Subsidies Subsidies with Imperfect Competition 7

8 roduction Subsidy, Small b Country Importer W +s W a S 0 S s b M 1 M 0 S 1 D 0 =D 1 D X The production subsidy, s per unit, gives suppliers s in addition to the world price, W. Demanders can still buy at W. Output rises Imports fall Welfare effects Suppliers gain +a Demanders 0 Govt loses (a+b) Cty loses b Dead Weight Loss = 8

9 roduction Subsidy, Small b Country Exporter W +s W D a b X 1 X 0 D 0 =D 1 S 0 c S 1 S s X The production subsidy, s per unit, gives suppliers s in addition to the world price, W. Demanders can still buy at W. Output rises Exports rise Welfare effects Suppliers gain +(a+b) Demanders 0 Govt loses (a+b+c) Cty loses c Dead Weight Loss = 9

10 Outline Unjustified Subsidies Effects of subsidies Export roduction by Small Country roduction in 2-country world Effects of CVDs Justified Subsidies Subsidies with Imperfect Competition 10

11 roduction Subsidy, Large Country Importer A Dom Mkt Trade A XS B s B Dom Mkt D B S B S A S A D A 1 MD A MD A The subsidy, s, is here most simply thought of as reducing the cost of suppliers in A and thus shifting its supply curve down by the amount s This causes A s import demand curve to shift to the left. The world price falls from 0 to 1. 1 D B 11

12 roduction Subsidy, Large Country Importer A Dom Mkt Trade A XS B s B Dom Mkt D B S B S A D A S A Results: A: Supply and demand both rise B: Demand rises; supply falls MD A uantity traded export and import falls 1 1 D B 12

13 roduction Subsidy, Large Country Importer A Dom Mkt Trade A XS B s B Dom Mkt D B S B S A S A 1 D A MD A 1 D B Welfare of Country B: Demanders gain Suppliers lose So country B loses Note that B s loss also appears in A as 13

14 Dead Weight Loss = roduction Subsidy, Large Country Importer A Dom Mkt Trade A XS B s B Dom Mkt D B S B S A D A 1 S A Welfare of Country A: Suppliers gain Demanders gain Government loses So country A gains but loses MD A 1 D B Deducting the loss for Country B World loses 14

15 Outline Unjustified Subsidies Effects of subsidies Export roduction by Small Country roduction in 2-country world Effects of CVDs Justified Subsidies Subsidies with Imperfect Competition 15

16 CVD and Export Subsidy W W 0 W 1 W 2 s=t S X S X s D M D M = 0 The export subsidy, s, shifts the export supply curve down by the amount s This lowers the world price to 1 W and increases quantity traded to 1 The CVD is a tariff, t, equal to the subsidy, which shifts the demand curve for imports down by t uantity traded returns to 0 World price is now below its initial level by t=s. But domestic prices in both countries are returned to 0 W Thus the only effect of the combined s&t is a transfer of s 0 from the exporting government to the importing government 16

17 Outline Unjustified Subsidies Effects of subsidies Export roduction by Small Country roduction in 2-country world Effects of CVDs Justified Subsidies Subsidies with Imperfect Competition 17

18 Justified Subsidies The only example I will consider is a positive external economy, E, per unit of a good produced It is well understood that in a closed economy the optimal policy is a production subsidy s=e The question here will be how this affects an open economy and its trading partners Lecture 1: Overview 18

19 External Economy in Autarky S The externality means that the social cost of this good is less than the private cost by E per unit, so the marginal social cost is shown by S E 1 +s 0 1 a g b c d f e s E S E Therefore the optimal output is 1 A subsidy, s=e, shifts the supply curve down to coincide with S E and raises output to the optimum Welfare Demanders +(e+f+g) 0 1 D X Suppliers +(a+b+c) Gov t (a+b+c+d+e+f+g) Externality +(c+d+e) Country +d 19

20 External Economy & Subsidy in Small Importer S E Subsidy s = E shifts supply down by s to match S-E S E Supply rises 1 = W +s 0 = W a c b s Demanders still face W so demand does not change Imports fall Welfare M 0 M 1 D Demanders 0 Suppliers +a S 0 S 1 D 0 Gov t (a+b) Externality +(b+c) Country +c 20

21 External Economy & Subsidy in Large Importer S E S E The same figure shows what will happen for a given world price for a large country 1 = W +s 0 = W a c b s M 0 M 1 S 0 S 1 D 0 D The decline in imports means that world demand shifts down, reducing world price (not shown) This (also not shown) causes additional gain for the importer and loss to the rest of world 21

22 External Economy & Subsidy in Small Exporter 1 = W +s 0 = W D a b d c S E=s S E The analysis is essentially the same for an exporter, except that now exports rise Welfare Demanders 0 X 0 Suppliers +(a+b) X 1 Gov t (a+b+c) Externality +(c+d) D 0 S 0 S 1 Country +d 22

23 External Economy & Subsidy in Large Exporter 1 = W +s 0 = W D a D 0 b X 0 X 1 S c d S 0 S 1 E=s S E Again, the same figure shows what will happen for a given world price for a large country The rise in exports now means that world supply shifts out, again reducing world price But this causes offsetting loss for the exporter and gain for the rest of world 23

24 Outline Unjustified Subsidies Effects of subsidies Export roduction by Small Country roduction in 2-country world Effects of CVDs Justified Subsidies Subsidies with Imperfect Competition 24

25 Imperfect Competition Strategic Trade olicy: Boeing-Airbus Game =produce, N=not produce No subsidy, Boeing choice: depends on Airbus Boeing N ayoff Matrix Airbus N Equil. If Boeing moves first, since now Airbus will not enter Lecture 4: Modern Theories 25

26 Imperfect Competition Strategic Trade olicy: Boeing-Airbus Game =produce, N=not produce No subsidy, Airbus Subsidy = +10 Airbus Now Airbus choice does not depend on Boeing Boeing N N 5 (+5) (110) Lecture 4: Modern Theories 26

27 Imperfect Competition Strategic Trade olicy: Boeing-Airbus Game =produce, N=not produce No subsidy, Airbus Subsidy = +10 Airbus Equil. with subsidy and exit Boeing N N 5 (+5) (110) Equil. With no subsidy if Boeing moves first Lecture 4: Modern Theories 27

28 Imperfect Competition Boeing-Airbus Game results If Boeing moves first, without subsidy Airbus will not enter Boeing and US gain +100 Airbus and EU gain 0 If EU pays subsidy, Airbus will enter and Boeing will exit Airbus gains 110, EU gains 100 (=100-10) Boeing and US gain 0 Thus EU gains and US loses from EU subsidy Lecture 4: Modern Theories 28

29 Imperfect Competition But note caveats: These arguments are not likely to be usable: Empirical difficulties: Hard to know where to intervene Entry: Benefits will be dissipated by new firms General equilibrium: Help in some sectors hurts others Retaliation: Other countries may react olitical economy: Industries lobby for help Lecture 4: Modern Theories 29