Distortion of international trade by export subsidies and countervailing duties

Export subsidies to domestic producers may be either generally or selectively applied, covering all commodity exports, or specific products only. General export subsidies are used by government to increase employment or to improve the balance of payments. Subsidized producers are able to undercut foreign competitors by offering their output at less than its real social cost and are thereby able to increase their share of world markets. Although general export subsidies may be effective in correcting a payments imbalance, they cause a misallocation of world resources. The subsidy encourages producers to expand export production to levels at which the marginal social costs in the subsidizing country exceed the free international prices of export goods. This leads to a decline in potential real income in the world economy. Selective subsidies are also sometimes employed to improve the balance of payments, but most often they are expected to provide special economic assistance to particular industries. They also bring about an inefficient allocation of world resources. Countervailing duties are imposed by some countries in the case of imported products for which domestic producers receive an export subsidy.