Export Subsidy

A payment made by the government to a domestic firm for exporting its goods or services.

For example, the Korean car maker Hyundai receives a payment from the Korean government for all the cars it exports. This induces Hyundai makers to increase the amount they export, thereby increasing the supply of the car in the global market. Because global supply increases the global market price declines. The price that residents say in the U.S. must pay for imports of Hyundai declines as well. As the domestic prices of Hyundai falls, the quantity demanded by domestic consumers for cars rises.

Such an export subsidy however hurts American car makers such as Ford. Because the export subsidy causes the domestic prices of cars to fall, domestic manufactures such as Ford will also have to lower their price in order to be able to compete with Hyundai and this reduces their surplus.