Why it is that most of these industries do not generate the overseas revenue and domestic profits and employment

Home, - How an export subsidy is theoretically meant to work

Question a. Explain how an export subsidy is theoretically meant to work. Think of the application to "infant industry".

Export subsidy help in decreasing the prices which are paid by foreign importers which also implies that consumer at domestic level paying more than what foreign consumer is paying. Export subsidies are called as an effective non-tariff barrier which decrease the importsof the country and encourage more business to come up with the new concepts and do more domestic production. Infant industries are like new born babies which is experiencing dynamic learning effects which are under external factors. However, foreign industry is competitive, matured and produce goods which does not have perfect substitute (Melitz, 2005, pg.1(1)). Infant industries are the industries which are new to any industry and any foreign investment at early stage can impact the business at initial level and any export subsidy will detract import from foreign and thus lessening the injection of foreign goods in the country and consequently protecting the infant companies to negatively exposed and not get promoted further in the industry.

b. Why it is that most of these industries do not generate the overseas revenue and domestic profits and employment that were promised?

Infant industries generally need huge protection from international trade. Infant industries take the baby steps in initial growth cycle and exposed to high possibility of attack. It has been observed that the cumulative net benefit from protection does not exceed the cost of production of infant industries. There are loose regulations of tariff quotas which distort consumption which does not help in raising revenue of business. Additionally, there are so many government regulations, distortions and fiscal constraints which do not lead the industry grow (Melitz, 2005, pg.1 (2)). Infant industries do adjustment in costs and face uncertainties from the external market conditions. Due to slow speed of revenue, infant companies also fail to hire skilled employees which reduce the production capacity and not even help business to reach breakeven point. Infant industry also does not get the comparative advantage from the foreign players due to limited resources. Government also failed to hold strong trade policies by doing a proper welfare analysis and thus quota system or export subsidy does not effective works.

There is less domestic demand of goods of infant industry which is also a major reason of pitfall of revenue and decrease in marginal utility. Thus, government is also need to promote the consumption of domestic goods instead of foreign goods.

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