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Market reactions to export subsidies

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  • Desai, Mihir A.
  • Hines Jr., James R.

Abstract

This paper analyzes the economic impact of export subsidies by investigating stock price reactions to a critical event in 1997. On November 18, 1997, the European Union announced its intention to file a complaint before the World Trade Organization (WTO), arguing that the United States provided American exporters illegal subsidies by permitting them to use Foreign Sales Corporations to exempt a fraction of export profits from taxation. Share prices of American exporters fell sharply on this news, and its implication that the WTO might force the United States to eliminate the subsidy, which happened in 2004. The share price declines were largest for exporters with high profit margins and those whose tax situations made the threatened export subsidy particularly valuable. This evidence suggests that export subsidies do not merely benefit foreign consumers, but also improve the profitability of exporters, particularly those earning rents in imperfectly competitive markets.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 74 (2008)
Issue (Month): 2 (March)
Pages: 459-474

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Handle: RePEc:eee:inecon:v:74:y:2008:i:2:p:459-474

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Web page: http://www.elsevier.com/locate/inca/505552

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References

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Citations

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Cited by:
  1. Ronald B Davies, 2010. "The Silver Lining of Red Tape," Working Papers 201018, School Of Economics, University College Dublin.
  2. Desai, Mihir A. & Hines Jr., James R., 2008. "Market reactions to export subsidies," Journal of International Economics, Elsevier, vol. 74(2), pages 459-474, March.
  3. Federico Etro, 2008. "Endogenous Market Structures and Strategic Trade Policy," Working Papers 149, University of Milano-Bicocca, Department of Economics, revised Dec 2008.
  4. Mark Gersovitz, 2006. "The Size Distribution of Firms, Cournot, and Optimal Taxation," IMF Working Papers 06/271, International Monetary Fund.

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