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Subsidies with export share requirements in China

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  • Defever, Fabrice
  • Riaño, Alejandro

Abstract

A subsidy is subject to an export share requirement (ESR) when firms must export more than a certain share of their output to receive it. Such incentives are frequently found in free trade zones, export processing regimes and measures targeted at foreign investors, both in China and other developing countries. In this paper we provide the first quantitative assessment of the effect that using subsidies with ESR has on exports, the intensity of competition and welfare, both in the enacting country and its trading partners, using a two-country model of trade with heterogeneous firms. We find that the subsidy with ESR boosts exports more than an equivalent unconditional subsidy available to all exporters. Crucially, the subsidy with ESR provides greater protection to low-profitability firms, while the unconditional subsidy does the opposite. The combination of export promotion and lower intensity of domestic competition generated by the subsidy with ESR can be described as “protectionism through exporting.” The imposition of an ESR, however, greatly exacerbates the welfare loss associated with subsidizing exporters.

Suggested Citation

  • Defever, Fabrice & Riaño, Alejandro, 2017. "Subsidies with export share requirements in China," Journal of Development Economics, Elsevier, vol. 126(C), pages 33-51.
  • Handle: RePEc:eee:deveco:v:126:y:2017:i:c:p:33-51
    DOI: 10.1016/j.jdeveco.2016.12.003
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    6. Jong Hyun Chung, 2020. "Firm heterogeneity, misallocation, and trade," Auburn Economics Working Paper Series auwp2020-01, Department of Economics, Auburn University.
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    13. Fabrice Defever & José-Daniel Reyes & Alejandro Riaño & Gonzalo Varela, 2017. "All These Worlds Are Yours, Except India: The Effectiveness of Export Subsidies in Nepal," CESifo Working Paper Series 6418, CESifo.
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    More about this item

    Keywords

    Export Share Requirements; Export Subsidies; Export Intensity; Free Trade Zones; Export Processing Regimes; China;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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