Why then does it make sense to subsidize exports? That’s the core of the question I’m trying to answer. Because paying money to subsidize exports costs a government money, which puts upward pressure on domestic real interest rates.
Because we don’t only care about the net effect of trade policy, we also care about other factors like the distribution of benefits and the unemployment rate. Especially during a recession or periods of high joblessness and income inequality, subsidizing exports may be necessary to stimulate economic activity among a particular demographic or in a specific region. And during economic downturns, a stronger domestic currency is not always a good thing. I’ll just quote Mankiw here, discussing export subsidies during a depression:
A weaker dollar means that our goods are cheaper relative to foreign goods. That stimulates our exports and reduces our imports. Higher net exports raise domestic production and employment. Foreign goods are more expensive, but more Americans are working. Given the desperate need for jobs, on net we are almost surely better off with a weaker dollar for a while.
Why then does it make sense to subsidize exports? That’s the core of the question I’m trying to answer. Because paying money to subsidize exports costs a government money, which puts upward pressure on domestic real interest rates.
Because we don’t only care about the net effect of trade policy, we also care about other factors like the distribution of benefits and the unemployment rate. Especially during a recession or periods of high joblessness and income inequality, subsidizing exports may be necessary to stimulate economic activity among a particular demographic or in a specific region. And during economic downturns, a stronger domestic currency is not always a good thing. I’ll just quote Mankiw here, discussing export subsidies during a depression: