Multicommodity Export Subsidies

Recently there has been renewed attention to the welfare-enhancing effects of export subsidies, in particular targeted export subsidies. This report extends that analysis to the case where cross price effects are significant to trade. In the context of two exportables, a subsidy on one of the goods can be welfare enhancing if a combination of conditions hold. First, the export level of the subsidized good should be low. Second, the rest-of-world (ROW) own price substitution elasticity for the subsidized good should be large, and the two exportables should be complementary or only weakly substitutable in ROW. Third, the two exportables should be strongly substitutable in the subsidizing country. Optimal subsidies that incorporate cross effects and targeting can be derived from the spatial equilibrium framework. An example based on USDA's trade liberalization model shows that there are small gains from a targeted U.S. subsidy program for wheat and corn. Sensitivity analysis shows that cross price effects can be important when determining the amount of the subsidies and when evaluating their benefit to the subsidizing country.