THE WELFARE EFFECTS OF TARGETED EXPORT SUBSIDIES - A GENERAL EQUILIBRIUM APPROACH

A three-country model of export subsidies is developed with an exporter, an importer, and a neutral country which can act on either side of the market. When the neutral country is an exporter, the country offering a targeted export subsidy always suffers a welfare loss. However, when the neutral country is an importer, the possibility of a paradoxical result-that the subsidizing country can gain and the subsidized country can lose-is shown to exist, and the conditions under which this result occurs are derived. The model fails to provide justification (on national welfare grounds) for widespread use of targeted export subsidies such as the export enhancement program.