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Market Reactions to Export Subsidies

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

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. The share price declines were largest for exporters whose tax situations made the threatened export subsidy particularly valuable. Share prices of exporters with high profit margins also declined markedly on November 18, 1997, suggesting that the export subsidies were most valuable to firms earning market rents. This last evidence is consistent with strategic trade models in which export subsidies improve the competitive positions of firms in imperfectly competitive markets.

Suggested Citation

  • Mihir A. Desai & James R. Hines Jr., 2004. "Market Reactions to Export Subsidies," NBER Working Papers 10233, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:10233
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    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. Ghosh, Arghya & Saha, Souresh, 2015. "Price competition, technology licensing and strategic trade policy," Economic Modelling, Elsevier, vol. 46(C), pages 91-99.
    4. Benjamin H. Liebman & Kasaundra M. Tomlin, 2008. "Safeguards and Retaliatory Threats," Journal of Law and Economics, University of Chicago Press, vol. 51(2), pages 351-376, May.
    5. Davies, Ronald B., 2013. "The silver lining of red tape," Journal of Public Economics, Elsevier, vol. 101(C), pages 68-76.
    6. Alessandria, George & Choi, Horag, 2014. "Do falling iceberg costs explain recent U.S. export growth?," Journal of International Economics, Elsevier, vol. 94(2), pages 311-325.
    7. Choy, Siu Kai & Lai, Tat-Kei & Ng, Travis, 2017. "Do tax havens create firm value?," Journal of Corporate Finance, Elsevier, vol. 42(C), pages 198-220.
    8. Rossitza B. Wooster & Craig A. Gallet, 2005. "Settling the Smoke: Public Policy and Shareholder Wealth in the Cigarette Industry," Contemporary Economic Policy, Western Economic Association International, vol. 23(2), pages 211-223, April.
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    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

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