Article | Journal of International Economics | March 2008

Market Reactions to Export Subsidies

by M. A. Desai and 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, which happened in 2004. The share price declines were largest for exporters with high profit margins and those whose tax situations made the threatened export subsidy particularly valuable. This evidence suggests that export subsidies do not merely benefit foreign consumers, but also improve the profitability of exporters, particularly those earning rents in imperfectly competitive markets.

Keywords: Economic Systems; Trade; Development Economics; Financial Markets; Profit; Taxation; Volume; Value Creation; Market Design; Business Subsidiaries; Utilities Industry; Financial Services Industry; Europe; North and Central America;

Citation:

Desai, M. A., and James R. Hines Jr. "Market Reactions to Export Subsidies." Journal of International Economics 74, no. 2 (March 2008).