Economic Report of the President

While all countries, in attempting to balance long-term gainsagainst short-term pressures, may find the need for trade-restrictiveactions compelling from time to time, the risks are that such policieswill be resorted to excessively. These risks become considerablylarger to the extent that other countries aggressively use subsidies topromote exports. The following section takes up this issue.EXPORT SUBSIDIESCountries subsidize exports directly or indirectly for a variety ofreasons. Faster export growth is seen as a way of overcoming the balanceof payments deficits that higher oil bills have caused for manycountries. Subsidies may form part of an industrial strategy to promotethe growth of key sectors and to exploit economies of scalewhen they dictate a global marketing approach. Subsidies may alsobe a counterpart to other policies, for instance, policies to limitexcess capacity and job losses in declining sectors by selling abroad.Subsidies to exports can also arise indirectly—for instance, from domesticpolicies that keep the price of energy, and hence the cost ofproduction in energy-intensive sectors, artificially low. Or they canarise when investment incentives to particular regions or industriesreduce the cost of capital to firms that produce certain goods.The Subsidies Code that was negotiated in the Multilateral TradeNegotiations places certain restrictions on the use of subsidies andpermits the adoption of countervailing duties in cases where subsidiescan be shown to cause injury to trading partners. However,given the various and often complex forms that subsidies can take,and the fact that subsidies of exports may often arise as by-productsof policies directed at domestic goals, the Code by itself is unlikelyfully to resolve the problems that subsidies sometimes create. Selfrestraintamong countries in the use of subsidies is therefore necessary.Two considerations are of critical importance in this regard.First, subsidies often end up losing their effectiveness in promotingexports. Initially, profits and employment in a subsidized activity willincrease and a competitive advantage will emerge. Gradually, however,the extra profits that are created by the subsidy may be diluted byhigher wages for the workers in that activity, or—if the activity is alarge user of scarce resources—in higher prices for those resources.A familiar example is the bidding up of the price of farm land suitablefor a particular crop when the price of that crop is supported bythe government at higher levels. The bidding up of costs of productionin this way ultimately tends to eliminate the competitive advantagethat the subsidy provides, thus increasing pressures for yet furthersubsidization to restore the advantage and making removal ofthe subsidy increasingly difficult.211