Introduction
In the pursuit of export oriented industrialization, different countries’ governments aim to speed up the industrialization process thorough exportation of goods produced by sectors where the country has a comparative advantage.
Export subsidies or trade promotion is one of the ways thorough which governments implement various tax and other measures primarily aimed at promoting exports by the favored industries. More often than not, export oriented industries receive fair treatment under the tax system through government payouts that reduce the cost of production and effectively the price of the goods produced.
Methods of subsidization that governments extend to exporters include cash subsidies, import replenishments and supply of indigenous materials at international prices (Bianchi and Labory 135). Others include reduced tariff barriers and a floating exchange rate that facilitate devaluation of the national currency to facilitate exports. Many of the measures above have been in use in a number of Asian countries including Hong Kong, South Korea, Taiwan, China and Singapore.
Benefits
Given the fact that oftenly governments divert the economy’s resources to implement export oriented industries, limitations on the success of the approach are likely. However, there is consensus that the successes of the approach have a positive ripple effect on the economy in the long-run.
In the long-run, export subsidies will enable growth of the export industries which will in turn boost job creation and ultimately growth of the gross domestic product (GDP) (Trofimenko et al. 82). This essay will focus on the three positives mentioned above to highlight importance of export subsidies.
The measures taken by governments to spur growth of export industries help in reducing the cost of production of goods. For instance, the US consistently maintains that the Chinese government deliberately undervalues its currency to increase competitiveness of Chinese exports.
While the above assertion may hold some truth, China has also extended numerous other subsidies to its export industries effectively creating an export oriented economy. Competitively priced Chinese products have garnered huge markets worldwide enabling growth of the export industries in the country. The Chinese situation is the likely scenario in countries pursuing export subsidies.
Job growth is the one of the most likely positive effect that a country will realize from expanding export industries thanks to subsidies. Increased demand for the lowly priced products will push the industries to hire more people thus creating jobs, a critical component in economic growth.
It is important to note that the subsidy measures will target large-scale hiring in the long-term. Increased hiring will significantly reduce unemployment, also, a key ingredient in economic growth. China for instance records high employment rates every month thanks to the performance of its export oriented economy. In a nut shell, it is fair to conclude that extension of subsidies to the export industry spurs job growth.
The above two factors combined play a big role in economic growth. The increased demand for the country’s products will boost exports effectively improving balance of payments. A positive balance of payment is crucial in accumulation of foreign currency reserves and also in bridging the trade deficit.
For instance, China currently holds in excess of three trillion dollars in foreign currency reserves besides maintaining a positive trade deficit with many of the countries it trades with, including the US. The result is a consistently high GDP expansion that has in return built a firm base for the long-term survival of the of the export industries.
It is important to note that under the export subsidization policies, it is possible to extend the benefits to foreign firms that are willing to invest in the country. These firms take advantage of the export subsidies to set up manufacturing industries in the country further strengthening the economy in the three fronts discussed above. In China such subsidies coupled with low labour costs have been crucial in attracting numerous investors who have further bolstered the export-led Chinese economy.
Conclusion
It is important to note that while boosting export oriented industries through subsidies, other sectors are not neglected. Rather, they will be left to grow at their own pace to reach their potential. The main idea behind extension of subsidies is to capitalize on the available local skills likely to grow and support a large section of the economy.
In essence the authorities will be creating artificial advantages for the local strong industries to act as the engine to the rest of the economy. Eventually, all industries including those that are not under the subsidy program will have to adapt to the trend to become export oriented. Furthermore, the authorities may eventually use resources obtained from the successful export oriented industries to support the rest of the industries through subsidies.
Diversion of resources to spur the growth of export oriented industries will therefore have long-lasting positive impacts on the economy of the countries pursuing them. Besides, demerits of keeping an import oriented economy don’t augur well in the current world economic order where job creation and pursuance of positive balance of payments is the top priority of many governments.
Works Cited
Bianchi, Patrizio and Labory, Sandrine. International handbook on industrial policy. London: Newman & willis, 2006. Print.
Trofimenko, Natalia, et al. Essays in international trade. Syracuse: Syracuse University Graduate School, 2007. Print.