In a recent Purdue survey, a substantial number of Indiana farmers responded that they did not quite know what to think about export subsidies*. That is not surprising as export subsidies come in many forms and produce diverse impacts on U.S. agriculture depending on the type of program. Over the past decade export subsidies have been extensively studied and this article summarizes what has been learned.

What Are Export Subsidies?

From the technical viewpoint of an economist almost any program of state or federal financial assistance that aids producers can be interpreted as an export subsidy. This includes extension and research expenditures, government support for improvements in transportation, commodity programs, food aid, and direct payments for exporting. Actually, countries have agreed not to count as subsidies certain programs with limited impacts on trade and prices. These exemptions include research and extension programs, rural and structural development, and food aid. Indeed many of the recently completed trade negotiations focused on which programs to include and which to exclude. How-ever, many grey areas remain to be resolved as the trade agreement is implemented.

What are the Impacts of Export Subsidies?

The impacts of a subsidy depend on the type of program and the interaction of the subsidized commodity with other commodities. The direction of the effects may be deter-mined by the way the program is designed; so confusion by the public is understandable.

Several types of subsidies will be discussed including: cash subsidies on a commodity; a payment in-kind subsidy; targeted subsidies; and subsidizing either the raw commodity or the processed product from that commodity.

A cash subsidy paid on all U.S. exports of a commodity expands our exports by lowering prices paid by foreign buyers. The diversion of supplies from our domestic market to the export market makes domestic prices rise. The price differences are paid for by U.S. taxpayers. Producers in the United States and consumers overseas benefit from the program, while U.S. consumers and foreign producers are harmed.

When the export subsidy is paid in-kind and/or is targeted to selected buyers, as was the case in the early years of the Export Enhancement Program (EEP), the situation becomes much more complicated. In the case of a targeted subsidy some countries are prohibited from buying at the subsidized price.

This type of program is a form of price discrimination and aims to expand exports in three ways. First, prices for importers obtaining the subsidy are reduced which expands their total purchases. Second, rival suppliers are displaced in the con-tested market and are forced to redirect their exports to markets which they can less efficiently supply. Finally, lower world market prices force rival exporters to cut their total exports.

The success of a targeted pro-gram depends on two factors. The markets receiving a subsidy must not be able to redirect trade flows. This means that the targeted country can not buy at the subsidized price and then resell the goods to other countries at a profit. Such arbitrage undermines the program. Also, the ability to effectively use targeted subsidies depends on whether a close substitute is offered by competing exporters. The most effective pro-gram is when the targeted market views the commodities as very similar to one another, but nations excluded from the program do not see the goods as very similar. These conditions however, are hard for most agricultural commodities to satisfy.

In-kind subsidies are those where the subsidy payment provides access to additional quantities. Since more of the commodity is marketed world prices fall. The question of who benefits is determined by where in the marketing channel the additional quantities are introduced. If the in-kind subsidy is given to farmers, prices may be lower but the farmer has more to sell. If the increased quantity sold by the farmer exceeds the price decrease, then the farmer’s income is higher. Additionally, if a farmer participates in a commodity program that supports farm prices or income, like a target price, there is a clear income gain.

If the in-kind subsidy is given to an exporting firm, that firm benefits as it has more to sell. Farmers, in the absence of a commodity pro-gram, may or may not benefit because domestic farm prices can rise or fall. World market prices fall with the added supply on the market, but the demand expansion can be large enough to raise domes-tic farm prices. But if the demand expansion is not large, domestic farm prices can fall and reduce farm income. The existence of a commodity program affects these results as they can insulate the farmer from any price decline. However, if domes-tic prices do not rise above the target price, then the government may save deficiency payments, but participating farmers will not see an income gain.

 In recent years there has been interest in subsidizing value-added or processed commodities. Observers note that the share of U.S. agricultural exports that are processed products is lower than the share of processed goods in world trade. Raising U.S. processed agricultural products is seen as a way to stimulate employment and income. In this case the interaction between the bulk commodity as an input and the processed good as an output is critical.