Subsidy Given by Australia by Imran Hossain

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ROLE AND IMPACT OF SUBSIDY ON TRADE AND TRADE POLICY OF AUSTRALIA

PART - 1


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1.1Introduction:

Subsidy is the oldest policy given by the government of a country for the economic development.It is a policy which is adopted by the government of the country to flow the important sectors growth.The study on The role of subsidy and its impact on trade and trade policy in Australia is assigned by

Saud Ahmed, lecturer of dpt. of finance. Here we have focused on the role of subsidy given byAustralian government and its impact o trade policy.Specifically, the study examines the impact of subsidy on domestic and foreign trade policy of Australia.We have collected data regarding the study then analyzed the related field of this.

1.2 Literature view of the study:

The report is assigned by our course teacher Saud Ahmed as a part of ourInternational Tradecourse. The topic of the study is The role of subsidy and its impact on trade and trade policy in

Australia. By conducting this study we can enhance our knowledge and skill to apply various researchmethods in professional life. By completing this report we can boost our applicability in job market anddevelop our real life knowledge.

To understand the impact of subsidy on trade policy, one should examine the interdependent amongpolicy and target variables (means different types of subsidies). Two strands of literature are relevant.First, the literature that discusses the relationship among different kinds of subsidies. Second the literaturethat deals with the impact of foreign and domestic trade. In our study we tried to find out those sectors onwhich the impact of subsidy is much more. We take FY2010 as our assessment year, and try to find outthat what will happen at FY2011 because of imposing subsidy by Australian government.

The recipient of the subsidy may need to be distinguished from the beneficiary of the subsidy, and thisanalysis will depend on elasticity of supply and demand as well as other factors. For example, a subsidyfor consumption of milk by consumers may appear to benefit consumers (or some may benefit and theconsumer may derive no gain, as the higher prices for milk offset the subsidy). The net effect andidentification of winners and losers is rarely straightforward, but subsidies generally result in a transfer ofwealth from one group to another (or transfer between sub-groups).

Subsidy may also be used to refer to government actions which limit competition or raise the prices atwhich producers could sell their products, for example, by means of tariff protection. Althougheconomics generally holds that subsidies may distort the market and produce inefficiencies, there are a

number of recognized cases where subsidies may be the most efficient solution.

In many instances, economics may (somewhat counter-intuitively) suggest that direct subsidies arepreferable to other forms of support, such as hidden subsidies or trade barriers; although subsidies may beinefficient, they are often less inefficient than other policy tools used to benefit certain groups. Directsubsidies may also be more transparent, which may allow the political process more opportunity toeliminate wasteful hidden subsidies. This problemthat hidden subsidy are more inefficient, but oftenfavored precisely because they are non-transparentis central to the political-economy of subsidies.


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1.3 Objectives of the study:

Primary objective:

To prepare a term paper on International Trade.

Secondary objective:

To determine the role of subsidy in the economy of Australia.

To identify the sectors where subsidies are given.

To estimate the impact of subsidy on trade and trade policy.

To forecast the future trend of subsidy.

1.4 Scope:

There were huge scopes to work in the arena of the report. The study The role of subsidy and itsimpact on trade and trade policy in Australia has covered overall impact of subsidy in differentsector like as Fossil & Fuel, Energy, Electricity, Road Transport, Internet facility for students etc. . Ourreport showed all the impact on different sector completely. By preparing this report it becomes moreunderstandable about the impact of subsidy on the economy as well as trade policy, and the subsidy given

by the Australian government.

1.5 Methodology:

Methodology used in this investigation was an observational study of subsidy. The study showedthe contrived observation technique which is a unique means of observing work performance under realcondition. We divided our group into two parts, one group worked for data collection and another is foranalysis.

1.6 Sources of data:

We have collected data from several sources. All of them are secondary. The sources of ourcollected data are followings:


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1.6.1 Secondary sources:

Secondary sources for data collection are given below:

Web site of Australia government.

Journal published in the website.

Newspaper.

Annual report.

1.7 Limitations of the study:

In this short time, we have tried to give our maximum effort to provide the information about the roleof subsidy and its impact on trade policy. To prepare this report we face some limitations,

Unavailable data.

Inadequate knowledge about trade policy.

Privacy of the country.

Limited analytical power as we are novice.


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PART -2


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2.1 Subsidy:

Subsidies, loosely speaking, are government policies in aid of one or more industries, usually carrying afinancial benefit to the industry. At the most conventional level, subsidies are government financialtransfers to an industry, through payments to workers or to firms. Probably nobody would deny that thegovernment is subsidizing the industry if it is paying part of the wages of workers in the industry or it isgranting firms in the industry funds to make capital purchases. This is the narrowest definition of asubsidy.

A subsidy (also known as a subvention) is a form of financial assistance paid to a business or economicsector. Most subsidies are made by the government to producers or distributors in an industry to preventthe decline of that industry (e.g., as a result of continuous unprofitable operations) or an increase in the

prices of its products or simply to encourage it to hire more labor(as in the case of a wage subsidy).

Examples are subsidies to encourage the sale ofexports; subsidies on some foods to keep down the costof living, especially in urban areas; and subsidies to encourage the expansion offarm production andachieve self-reliance in food production.

Subsidies can be regarded as a form ofprotectionism ortrade barrierby making domestic goods andservices artificially competitive against imports. Subsidies may distort markets, and can impose largeeconomic costs. Financial assistance in the form of a subsidy may come from one's government, but thetermsubsidy may also refer to assistance granted by others, such as individuals or non-governmentalinstitutions
http://en.wikipedia.org/wiki/Industryhttp://en.wikipedia.org/wiki/Wage_labourhttp://en.wikipedia.org/wiki/Wagehttp://en.wikipedia.org/wiki/Exporthttp://en.wikipedia.org/wiki/Foodhttp://en.wikipedia.org/wiki/Urban_areahttp://en.wikipedia.org/wiki/Farmhttp://en.wikipedia.org/wiki/Protectionismhttp://en.wikipedia.org/wiki/Trade_barrierhttp://en.wikipedia.org/wiki/Wage_labourhttp://en.wikipedia.org/wiki/Wagehttp://en.wikipedia.org/wiki/Exporthttp://en.wikipedia.org/wiki/Foodhttp://en.wikipedia.org/wiki/Urban_areahttp://en.wikipedia.org/wiki/Farmhttp://en.wikipedia.org/wiki/Protectionismhttp://en.wikipedia.org/wiki/Trade_barrierhttp://en.wikipedia.org/wiki/Industry


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2.2 Objectives of subsidy:

Subsidy aims to provide financial assistance to individual as well as firms. A subsidy is money

given by a government to help support a business or person the market does not support. In standard

supply and demand curve diagrams, a subsidy will shift either the demand curve up or the supply curvedown. A subsidy that increases the production will tend to result in a lower price, while a subsidy that

increases demand will tend to result in an increase in price. Both cases result in a new economic

equilibrium. Therefore it is essential to considerelasticity when estimating the total costs of a planned

subsidy: it equals the subsidy per unit (difference between market price and subsidized price) times the

new equilibrium quantity.

To achieve the industrialization growth.

To help firms and general people.

To promote and maintain a high level of production and economic growth. To promote growth and development of the country's productive resources in the best national

interest.

2.3 Economic Justification of nature of subsidy:

When economists justify subsidies, they usually do so in one of three ways. First, there is the "infantindustry" argument. An industry, for instance, may be dominated by foreigners and for reasons of social

policy; the government may want to develop an indigenous industry. Insufficient private capital may beavailable to permit the private sector, on its own, to accumulate sufficient capital to make the indigenousindustry commercially competitive. The government then could subsidize the industry through grants,loans, equity infusions, tariff protection or tax incentives. When the industry has been built up to the pointwhere it is self-sufficient, the subsidies would be removed. The ultimate result can be that the industry,originally stimulated by the subsidy, comes to depend upon the subsidy and fails to improve its

productivity along with the rest of the world. The subsidy then becomes permanent until the governmentfinally decides that it can no longer maintain the industry and the industry is shut down with all the

economic and social dislocation that entails. Alternatively, the subsidy may be introduced to help theinfant industry, the industry may then become self-sustaining, but it may be difficult to wean the industryoff the subsidy.

The second argument in favor of subsidization is that a large, important, firm may run into serioustemporary difficulties and be in danger of ceasing operations. The government, in such a situation, wouldhave at least three options: it can play no role and let the full market effects be felt; or it can directlysubsidize the endangered firm with cash or equity infusions, loans or loan guarantees; or it can let thefirm go bankrupt but intervene through the monetary system to prevent the bankruptcy of the firm fromaffecting others, healthy, firms.

The third argument in favor of subsidization is tied to current interests in environmental protection.Subsidies can be used to encourage firms and industries to behave in environmentally friendly ways.
http://en.wikipedia.org/wiki/Supply_and_demandhttp://en.wikipedia.org/wiki/Economic_equilibriumhttp://en.wikipedia.org/wiki/Economic_equilibriumhttp://en.wikipedia.org/wiki/Elasticity_(economics)http://en.wikipedia.org/wiki/Market_pricehttp://en.wikipedia.org/wiki/Supply_and_demandhttp://en.wikipedia.org/wiki/Economic_equilibriumhttp://en.wikipedia.org/wiki/Economic_equilibriumhttp://en.wikipedia.org/wiki/Elasticity_(economics)http://en.wikipedia.org/wiki/Market_price


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Fishing vessel and license buyback programmes fall into this category. As we shall see, while someeconomists favour such subsidy programmes others believe that effective fishery management and market

based solutions would be more effective than subsidy programmes.

In economics, the termsubsidy may or may not have a negative connotation: that is, the use of the termmay beprescriptive but descriptive. In economics, a subsidy may nonetheless be characterized asinefficient relative to no subsidies; inefficient relative to other means of producing the same results;"second-best", implying an inefficient but feasible solution (contrasted with an efficient but not feasibleideal), among other possible terminology. In other cases, a subsidy may be an efficient means ofcorrecting a market failure.

PART -3
http://en.wikipedia.org/wiki/Prescriptivehttp://en.wikipedia.org/wiki/Descriptivehttp://en.wikipedia.org/wiki/Market_failurehttp://en.wikipedia.org/wiki/Prescriptivehttp://en.wikipedia.org/wiki/Descriptivehttp://en.wikipedia.org/wiki/Market_failure


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A. Types of subsidies:

There are many different ways to classify subsidies, such as the reason behind them, the recipientsof the subsidy, the source of the funds (government, consumer, general tax revenues, etc.). In economics,one of the primary ways to classify subsidies is the means of distributing the subsidy.

3.1 Indirect subsidies

Indirect subsidy is a term sufficiently broad that it may cover most other forms of subsidies. The termwould cover any form of subsidy that does not involve a direct transfer.

3.2 Labor subsidies

A labor subsidy is any form of subsidy where the recipients receive subsidies to pay for labor costs.Examples may include labor subsidies for workers in certain industries, such as the film and/or televisionindustries.

3.3 Infrastructure subsidies


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Subsidy or Incentive Annual Value

($ millions)

Comments

Greenhouse Gas AbatementProgram(GGAP)

81.1 GGAP is a competitive fundingmechanism that provides $400

million over 4 years forgreenhouse gas abatement. Thesubsidy estimate comprisesRound 1 funding to projects thatsupport coal, natural gas or

petroleum use.

Tax benefits for salarypackaging motor vehicles

750 Subsidy could be as high as $1.2 billion depending on theassumptions made.

Reduced import duty for 4WDs 513

Automotive industry support 400

Inappropriate company taxconcessions

186 Actual subsidy is probably higherdue to implementation of new taxconcessions since the estimatewas made and lack of data formany of the concessions.

Road and car parking subsidies 2,000 This is likely to under-estimatethe real subsidy

Electricity supply subsidies toaluminum industry

.

410 This does not include one-offsubsidies of between $577

million and $953 million provided to the aluminumindustry

State energy supply subsidies 228

Direct subsidies to Stuart OilShale Project

Up to 36 This does not include one-offsubsidies of about $18 million.

Total 4.6061 billion

2. Subsidy on fertilizer:Financial year Total subsidy

2010 - 2011 17.25 billion3. Subsidy on Road Transportation:

Subsidy or Incentive Annual Value

($ billions)

Comments

Capital return on roadinfrastructure(bridges and pavement)

.

4 8% real rate of return oninfrastructure value of$50 billion (at the end of 1994)from ABS national accounts


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Capital return on value of landunder the road network

8 8% real rate of return on landvalue of $100 billion. Land valueestimated as 25% of the value ofadjacent properties, taken fromCommonwealth GrantsCommission data

Road maintenance costs 2.5 NIEIR estimate

Total Cost 14.5

Total Revenue 13.3 Fuel taxes and other quasi-usercharges

Net Financial Subsidy 1.2

4. Other subsidies:

Sector Subsidy (In billions)Electricity 1.29

Energy sector 1.479

Indirect subsidy 4.0

Environmental subsidy 4.076

Forestry 3.5

Fisheries 1.0

Agriculture 126

Water 19

PART -4


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TRADE POLICY OF AUSTRALIA:

Australia and the WTO

Australia has been a long-time advocate of an open, transparent and rules-based globaltrading system. Bringing the Doha Round to a successful conclusion and maintaining astrong multilateral trading system is Australias highest trade priority. A foundingmember of the General Agreement on Tariffs and Trade (GATT) in 1947 and the WTO in1995, and Chair of the Cairns Group of agricultural exporters, Australia has a longstandingcommitment to multilateral trade reform. Australias Objectives for the Doha RoundAustralia strongly supported the launch of the Doha Round in 2001. Australias keyobjectives were to achieve a more open global trading environment, primarily by

expanding market access and creating new trade flows in agriculture, industrial products


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proposals on prohibited export subsidies and their enforcement. Similarly, Australia hasbeen an advocate of specific and strengthened disciplines for fisheries subsidies.

Australia continues to play an active role in the WTO negotiations on regional tradeagreements (RTAs). Australia has made a number of submissions aimed at strengtheningWTO disciplines on RTAs through the development of a rigorous definition of

"substantially all trade", with the aim of encouraging WTO members to negotiatecomprehensive, high-quality RTAs which complement rather than detract from themultilateral system. Australia has also played an active role in negotiations on atransparency mechanism, which would substantially improve the procedures for thenotification and examination of RTAs.

Trade Facilitation

Australia supports the negotiation of transparent and consistent rules to reduce red tapeand expedite the clearance of goods, which would deliver significant benefits to exporters.Australias approach to the negotiations is to support concrete proposals that are likely to

result in workable commitments of practical value to business. Australia makes asignificant contribution to capacity-building in this area, including through its work inAPEC and its aid program.

Trade and Development

Australia believes an ambitious Doha outcome is the most effective way to enhance theopportunities for developing countries from world trade. The World Bank estimates thatfreeing all merchandise trade and eliminating subsidies could lift 32 million people out of

poverty by 2015 and boost global welfare by up to US$290 billion. Almost 45 per cent ofthese gains would flow to developing countries. It is clear that the key development

benefits from the Doha Round will come from reform of the core negotiating areas,particularly agriculture. Agriculture is not only the most distorted sector in world trade,but also the sector from which the majority of developing country populations derive theirlivelihood.

Australia fully supports the development mandate of the Doha Round, including in relationto trade-related technical assistance (TRTA) and capacity building. Australia has a longhistory of supporting developing countries, particularly LDCs, to engage in internationaltrade and participate in the WTO. Australias current TRTA commitments are valued atover A$90 million, with most activities focussed on South-East Asia and the South Pacific.Australia also supports the development of trade-related infrastructure in the Asia-Pacificregion, and in financial year 2004-05, the aid program provided over A$41 million on suchactivities.

Australia has been a long-term provider of preferential market access for developingcountries and LDCs. Since July 2003, Australia has provided comprehensive quota freeduty free market access for all LDCs on all products with no phase-in periods orexceptions.

Dispute Settlement

Australia is a firm advocate of binding dispute settlement as a fundamental underpinning

of the rules-based multilateral trading regime. An active participant in WTO disputesettlement, Australia has been involved in a number of disputes as a complainant,


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respondent and third party. It views the system as an important mechanism for promotingand defending Australias trade interests. To mark the tenth anniversary of the WTOdispute settlement system, a collection of Australian perspectives on the system is due to

be published in late 2006.

Regional Initiatives

Asia-Pacific Economic Cooperation (APEC)

Australia has a strong commitment to APEC as the principal vehicle for the promotion ofopen markets and economic cooperation in the Asia-Pacific region. For Australia,APECs work on trade liberalisation, business facilitation and economic reform support itsopen market objectives and sustained economic growth in regional economies. Another key

pillar of APEC is its economic and technical cooperation work. Australia provides strongpolicy and financial support for this work, particularly where it enhances developingeconomies capacity to participate in trade negotiations.

As host of APEC in 2007, Australia will continue to emphasise the primacy of a strongmultilateral trading system for global economic growth and the alleviation of poverty. Wewill also play an active role in APECs work on regional economic integration, including

by emphasising the benefits of a comprehensive approach and by promoting greaterconsistency and coherence in FTAs/RTAs in the region. Australia has contributed toAPECs work on trade facilitation, including in the area of customs barriers, standards,

business mobility and e-commerce, which has reduced transaction costs by five percentsince 2001 and aims to reduce them by a further five percent by 2010. Australia will alsolook to boost APECs work on economic reform and behind the border impediments totrade during 2007, recognising that this has the potential to boost competitiveness and

trade and investment in the region.

Bilateral Initiatives

AustraliaUS Free Trade Agreement

The AustraliaUnited States Free Trade Agreement (AUSFTA) entered into force on1 January 2005. AUSFTA provides a comprehensive and ambitious framework foreconomic and trade policy engagement between Australia and the United States. Its 23chapters set out a broad range of provisions for liberalising bilateral trade and for the legal

protections investors and service providers will receive. AUSFTA contains

comprehensive provisions on government procurement which have been extended to alltrading partners. The Agreement also makes substantial commitments to liberaliseservices and investment. AUSFTA established a Working Group on ProfessionalServices, which aims to facilitate increased trade in professional services through mutualrecognition arrangements. A Financial Services Committee was also set up to exploreways to further integrate the Australian and US financial markets.

SingaporeAustralia Free Trade Agreement

The SingaporeAustralia Free Trade Agreement (SAFTA) entered into force on 28 July2003. SAFTA is a comprehensive agreement, making substantial commitments in goods,services and investment between Australia and Singapore. In addition to complete tariffelimination, SAFTA guarantees liberal conditions of access for many service suppliers,


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and provides a more open and predictable business environment. SAFTA includes amechanism that provides for ministerial-level review of the agreement. The first SAFTAreview was held in July 2004. Subsequent reviews are scheduled to take place every twoyears, or as deemed necessary by Ministers.

ThailandAustralia Free Trade Agreement

The ThailandAustralia Free Trade Agreement (TAFTA) entered into force on1 January 2005. TAFTA is a major market opening agreement, eliminating more than halfof Thailands tariffs and 83 per cent of Australias tariffs on entry into force. UnderTAFTAs tariff elimination schedules, around 95 per cent of all tariffs will be at zero by2010. TAFTA liberalises bilateral trade in services in that it accords GATS-plus marketaccess and national treatment in the sectors set out in the agreement. TAFTA shoulddeliver a more open, predictable and transparent business environment. It also mandatesfurther negotiations on trade in services within three years of entry into force, with the aimof enhancing the commitments given by both Parties. The Agreement also provides forfurther negotiations on government procurement, business mobility, investment andcompetition policy.

Australias Tariff Regime

More than 86 per cent of Australias tariff lines are applied at an MFN rate of 5 per cent orless, with over 47 per cent duty free. The average applied tariff rate is 3.5 per cent. Since1 July 2003, Australia has provided duty-free and quota-free access to the Australianmarket for all goods originating from LDCs, with no exceptions and no phasing. TheGovernment is committed to a forward program of further tariff reductions. Tariffs in the

passenger motor vehicle sector are legislated to fall to 5 per cent in 2010. A review of

passenger motor vehicle tariffs is scheduled to be held in 2008. Tariffs in the textiles,clothing and footwear (TCF) sector are legislated for reduction to no more than 10 per centin 2010 for clothing and certain finished textile articles, with tariffs on other TCF goods

being no higher than 5 per cent. By 2015 all tariffs on TCF products will be no higherthan 5 per cent. Australia applies only one tariff quota, on cheese.

Australias Quarantine Regime

Australias quarantine system is designed to preserve its favourable pest and disease statusand its unique and diverse native flora and fauna. Australias quarantine system is basedon an objective, science-based assessment of the risks of pests and diseases consistent with

international obligations, including those under the WTO Agreement on the Application ofSanitary and Phytosanitary Measures.

In October 2006, Australia announced reforms to its import risk analysis (IRA) processwhich will make this process more streamlined, timely and transparent. The keyimprovements are: the setting of maximum timeframes for the completion of IRAs;enhanced transparency of the IRA work program; and strengthened scientific scrutiny ofindividual IRAs. These changes will take effect in early 2007, enhancing the efficiencyand effectiveness of Australias quarantine system.


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4.6 FUTURE DIRECTIONS OF AUSTRALIAN TRADE POLICY

Australia has a major stake in maintaining a healthy and open multilateral trading system.It will continue to work hard for genuine trade liberalization, integrating multilateral

commitments with regional and bilateral initiatives to maximise economic opportunitiesfor Australian businesses.

Australias highest trade priority remains the conclusion of the Doha Round. Anambitious outcome will deliver substantial new trade opportunities for all WTO members.Australia will also continue to participate actively in the work of the WTO not directlyconnected to the Doha negotiations, including the WTOs regular committees and thedispute settlement mechanism.

Australia will continue efforts to deepen its trade and economic engagement with itsregion and other important markets. Australia remains committed to negotiating

comprehensive, WTO consistent FTAs. In the WTO, Australia will continue to press formore effective WTO disciplines on RTAs.

Australia commenced FTA negotiations with ASEAN and New Zealand in 2005. As atDecember 2006, seven negotiating rounds and several inter-seasonal meetings have beenheld. Parties are working to conclude the negotiations in 2007.

Australia and China launched negotiations on an FTA in 2005. The seventh round ofnegotiations will be held in December 2006, when market access negotiations on goodsand services will begin. Both sides are expected to exchange detailed information on tariff

proposals, as well as lists of barriers affecting trade in services and investment that each

expects to be addressed in the negotiations. Australia and Malaysia launched FTAnegotiations in 2005 and are now seriously engaged in the substantive stage ofnegotiations.

Australia and Japan agreed in April 2005 to conduct a joint government study into thefeasibility of a bilateral FTA. In June 2006, Australia initiated a study into the merits andfeasibility of negotiating an FTA with the Gulf Cooperation Council (GCC). TheGovernment plans to release the results of the study and to announce proposed next stepsin December 2006. In December 2006, Australia announced that it had agreed in principleto commence FTA negotiations with Chile and that it would commence consultations inearly 2007.


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PART - 5


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5.1 Reasons for giving conventional subsidies:

Subsidies are introduced to achieve specific policy goals, which for instance can be motivated byeconomic, cultural, and social considerations. Some of the policy aims can be to stimulate economic

growth in a sector, develop infant industries, protect employment and investment, reduce externaldependency by safeguarding domestic supply, support low-income groups and provide access to basicliving conditions.Conventional subsidies have different policy goals in different sectors. Also, the subsidies used indeveloping countries differ from the ones that are most commonly used in developed countries. Thereason for this is that the aim of the subsidies differs in the different countries. In developing countries themajority of the subsidies are consumer subsidies (to secure food supply), whereas in developedCountries, producer subsidies (to maintain farm income) are most prevalent (Van Beers & de Moor).Table gives an overview of the main policy goals of subsidies in different sectors in both developing anddeveloped countries. It is clear that many subsidies are given on equity grounds, meaning that thesubsidies are aimed at improving the conditions for specific, vulnerable groups in society.

Table: Producer and consumer subsidies in developed and developing countries


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And their policy goals in different sectors

Developed Countries Developing Countries

Consumer

Subsidies

Producer

Subsidies

Consumer

Subsidies

Producer

Subsidies

Agriculture Maintain farmincomeMaintaindomesticsupply

Support low-incomegroupsSafeguard foodsecurity

Water Increase farmproduction

Access todrinkingwater

Increase farmproduction

Forestry Sector development

Sectordevelopment

Fisheries Maintainfisheriesincome

Support low-incomegroupsSafeguard foodsecurity

Energy Support lowincome groups

Safeguarddomesticsupply

Support low-incomegroups

Stimulateeconomicgrowth

Road transport Stimulateemployment

Sectordevelopment

Access forlow-incomegroups

5.2 Positive effect of subsidy:

Increase revenue:Subsidies are in general granted to output from production. One type of support here is market pricesupport21. Market price support is often used either to maintain income levels as is the case in theagricultural sector or ensure a desired level of employment in the subsidized sector, such as with coalmining (OECD 1998b). This type of subsidy allows producers to increase their income by increasing thelevel of profitable production. For producers to sell more they will need to produce more, and in order to

produce more, a higher input level is required. The quantity of extra inputs required depends on themarginal productivity of the inputs. The marginal productivity of inputs often decreases as outputexpands, leading to increased input requirements per unit of output. This means that some of the subsidyis spent on inputs, leaking away to the input suppliers rather than staying within the recipient sector.

Lower the cost of production:


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Subsidizing inputs in the production is one way to lower the producers average costs. When consideringsupports to inputs, the relative elasticity of supply and demand for the subsidized input will determinehow much of the subsidy that is leaked to the input supplier and how much goes to the producer, who isthe intended recipient. If the producer has a low elasticity of demand, meaning that he will not change thequantity of input used in the production process in response to change in the input price, the inputsupplier (upstream market22) can raise the input prices and thereby capture a larger proportion of thesubsidy. The larger the elasticity for supply and demand of input (the more responsive supply anddemand are to changes in the price of the input), the larger quantity of input used for a given level ofsupport, and therefore the associated environmental damage from use of the input will also be increased.

Increase GDP (gross domestic product):The sector where subsidy is given, it is estimated that the GDP or gross domestic production would beincreased. The governments of a country gives subsidy on different sector only help the sector to expand.Government discourages others to import the product rather to produce from home country. Such as,government gives subsidy to agriculture so that the production of agricultural product could increase. Sosubsidy on different sector given by government helps to increase the overall production and GDP.

Increase the value of money:When subsidy is given to any sector the production of that sector is increased. And as a result the GDP ofthe country is also increases. When GDP increases that makes the countrys currency stronger. As a resultthe value of money increases and the foreign exchange rate is decreases. It is very much important for acountry. Because when foreign exchange rate decreases that means the home country should pay a loweramount of money in return of the product of foreign country. So subsidy is crucial for a developing orunder-developed country.

5.3 Adverse effects from conventional subsidies:

As mentioned above, subsidies in general are often given with the purpose of achieving particulareconomic/policy goals. Some of these subsidies can have adverse effects on the environment and/or theeconomy15. These two types of adverse effects and how they are connected with subsidies aredescribed in the following.

Adverse environmental effects:


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Adverse environmental effects are the negative consequences for the environment from using subsidies.As described earlier, these consequences are often characterized as being negative externalities. To beseen as relevant consequences, these must have a value to society whether monetarised or not.

The main reason why a subsidy can be environmentally harmful is given by OECD There is a primafacie case for supposing that subsidies which encourage more production will be environmentallyharmful. It is thus assumed that the production (or activity) is connected with some kind ofenvironmental harm (emissions or resource use) and that increased production leads to increasedemissions or resource use. Thus, when describing production (or activities) in what follows, it is limitedto production that leads to some kind of environmental harm. Changes in production/activity will result inlower or higher levels of potential emissions or resource use, but there is no straightforward link betweensizes or type of subsidies and environmental damage, and the links can be complex (OECD 1998a).Based on OECD work, the linkages are described shortly in the following and are shown in figure.

Linkage 1 Linkage 2 Linkage 3

Figure: Linkage between Subsidies and Environment

A subsidy implies a transfer from one or more sectors of society to others. There are three main linkagesbetween this transfer (subsidy) and its environmental effects:

Can lead to changes in the volume and composition of different activities/ productions, which isdescribed by linkage 1. Production (or output) consists of consumer goods as well as theintermediary products that serve as inputs in the different stages of production. Volume andcomposition of production depends, among other things, on conditionality of the subsidy, which

means the target of the subsidy. In general, subsidies can be conditional on the main categoriesinput, output, and profits and income (OECD 2003c). These categories and their effects are

SubsidyRecipientSector

Volume ofActivities

Emission,resourceUse

Environment-alDamage

Filtered byEnvironmentalPolicy

Absorbed by theAssimilative capacityOf the environment


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described further in chapter 2.4. Furthermore, one needs to know how and if the subsidy results inreplacement of technologies or products and if these technologies or products have lessenvironmentally harmful effects. Potentially harmful is the so-called lock-in effect, where atechnology is not replaced by a new (less harmful) technology because support favors the oldtechnology, which then has a competitive advantage.

The impact of the changes in the level and composition of output on actual pollution, waste levelsand resource use is linkage 2. The change in actual pollution levels or resource use will depend onhow much is filtered out by environmental policy (with its associated costs). With a strictenvironmental policy, the change in the levels of pollution or resource use will not be as severe aswithout the policy.

The environmental damage caused by the changes in pollution and waste levels will depend on theassimilative capacity, or capacity to regenerate, of the affected environment, which isLinkage 3.

Adverse economic effects:

There can be negative economic effects for society as a whole. Subsidies can result in economicefficiency losses as a result of the relative market prices being distorted and resource allocation becomingless efficient. For instance, if inefficient industries are kept artificially alive because of subsidies, thengrowth or GDP in society might be less than it would have been without the subsidy. Another example ofinefficiency is when taxes are raised to finance a subsidy, and since almost all taxes have deleteriousefficiency effects, the adverse effects of the tax can be expected to lower any economy-wide growth

benefits arising from the subsidy17. Economic inefficiency can also be the result when a subsidy does notreach the intended recipient effectively (the transfer efficiency is low) 18, or when the lock-in effect19results in inefficient technologies not being replaced by more efficient ones. The described efficiencylosses for society also affect global efficiency where the comparative advantages in the global market aredistorted. This means that production does not take place in those countries where production is mostefficient.

A note on equity effects

In the text above, changes in efficiency are described from the level of overall society, expressed by e.g.changes in a countrys GNP. Removing or reforming subsidies, and thereby achieving efficiency gains,might have distributive consequences and lead to equity concerns. This is the case when subsidy reformresults in a financial loss to the receivers of the subsidy, though at the aggregated (societal) level, theselosses may be too small to outweigh the benefits. These equity concerns will then have to be addressed by

policymakers, e.g. if and how compensation is to be given, and using measures that do not link thetransfers to particular practices or the use of particular inputs or factors of production (capital or land).

A win-win situation

If a subsidy generates societal benefits (even after accounting for efficiency losses) that are bigger thanthe environmental damage it results in, there is reason to maintain the subsidy. If, on the contrary, a

subsidy results in environmental damage, the value of which is bigger than the societal benefits from thesubsidy, there is reason to reform the subsidy. Finally, a subsidy might have adverse effects on both the


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economy and the environment in which case there is no doubt that net benefits are negative.Consequently it is important to look at the net benefits (benefits minus costs) from subsidies. Thisargument also holds for decisions about implementing new subsidies; expected environmental, economicand social outcomes should be considered and not just the availability of financial resources. One

problem with the approach is that to calculate net benefits, environmental consequences must have a(monetary) value, which can be very difficult to estimate. Such a valuation is less important when asubsidy also has adverse economic effects, since the removal of the subsidy will generate benefits for theeconomy as well as for the environment a win-win situation. In this report perverse subsidies aredefined as subsidies which have adverse effects on both the economy and the environment, even thoughin some literature the term appears with slightly different definitions.

5.4 Impact of Subsidies on trade:

Market price subsidies and input subsidies may distort trade. With the market price subsidy, thegovernment chooses to have higher domestic prices for a particular commodity than the world price. Thistype of subsidy is maintained through import restrictions. Input subsidies, on the other hand, lower thecosts of downstream input-purchasing activities, giving them a competitive advantage on domestic andforeign markets alike. As a consequence, the comparative advantages in the global market are distorted,meaning that goods are not produced in the countries with the most efficient production. This means thatresources are wasted globally. If subsidies are given to the same sector by a number of countries, thetrade distortions caused by the subsidy will be small. Furthermore, the subsidy will diminish the incentiveto reduce material and energy inputs, and it will delay or prevent the entrance of other technologies or

products into the market. Therefore, it will increase the exploitation of resources and may cause

significant environmental damage. Thus, the gain from removing trade barriers or subsidies worldwide isusually described by an increase in world GNP.

Another effect with consequences for the environment is the potential influence on poverty in developingcountries that trade barriers or subsidies may have. It is generally accepted that poverty is a major causeof environmental degradation. Thus, when trade barriers result in income losses, this will impact on

poverty in the developing world, and therefore ultimately also on the environment.

Finally, in the context of global environmental effects the (monetary) value of these effects may be ofimportance. For instance, a reform of subsidies worldwide might result in economic benefits for allcountries, but at the same time emissions might be reduced in developed countries and increased in

developing countries, resulting in a sum of emissions larger than before the subsidy reform. Assigningvalues to the emissions may give a different result. If, for instance, the value of a unit of environmentalgain is smaller in developing countries than in developed countries, the net environmental effect (value)globally may actually be positive. A lower environmental value in developing countries can be explained

by the different trade-offs between the environment and other (basic) needs, caused by (big) differencesin income. Valuation is not so important if there are all positive economic as well as all positiveenvironmental effects (in units of emissions) from reforming (perverse) subsidies world-wide.


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PART - 6


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6.1 Conclusion:

In our term paper, we have examined the impact of subsidy on trade and trade policy of Australia.Australia gives subsidy every year on different sector. Such as, agriculture, fossil and fuel, energy, water,export, road transport, electricity etc. In Australias economy these subsidy has some negative as well as

some positive effect. Some economists argue that all subsidies should be removed to allow markets tooperate efficiently, however most governments continue to use subsidies to achieve environmental andsocial goals. This is justifiable where the cost of the subsidy is less than the value of the environmentaland social gain that results from the subsidy.

The subsidy estimates in this paper are approximate and incomplete. Some possible subsidies have beenidentified but not investigated in detail, and there may be additional subsidies that have not beenidentified. Further research could uncover additional subsidies and improve the estimates of identifiedsubsidies. However, a clearer understanding of the subsidies given by Australian government is of littleuse if not linked to a clear process for subsidy removal or reform.


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6.2 Bibliography: (Journals):

1. Anderson, Kym , The Challenge of Reducing Subsidies and Trade Barriers

November 2009

2. Australia, Treasury, 2009. Budget 2009_10, Budget Paper No. 1, Budget Strategy and Outlook

Statement 4: Australia in the World Economy, Canberra.

3. Australian Government 2009a, 2009-10 Portfolio Budget Statements,

Australian Government, Canberra.

4. Van Beers, C. & de Moor, A. 2001 Public Subsidies and Policy Failures. Cheltenham:

Edward Elgar Publishing limited.

5. Runge, C. F. & Jones, T. 1996 Subsidies, tax incentives and the environment:

an overview and synthesis. in: OECD: Subsidies and Environment. Exploring

the LinkagesParis: OECD.

6. Anderson, K. 2004 Subsidies and Trade Barriers. Copenhagen Consensus

Challenge Paper: Centre for International Economic Studies

Websites:

1. http://www.adelaide.edu.au/cies/

2. www.scouts.com.au

3. http://www.informaworld.com/smpp/title~content=t713404203

4. http://www.pmc.gov.au/publications/energy_future/index.htm.

5. http://www.ejia.org/pages/national_energy_issue.htm/elect_subs/electricity_subsidies.htm.

6. http://www.treasury.nsw.gov.au/bp06-07/bp3/bp3.htm.
http://www.ejia.org/pages/national_energy_issue.htm/elect_subs/electricity_subsidies.htmhttp://www.ejia.org/pages/national_energy_issue.htm/elect_subs/electricity_subsidies.htmhttp://www.ejia.org/pages/national_energy_issue.htm/elect_subs/electricity_subsidies.htmhttp://www.ejia.org/pages/national_energy_issue.htm/elect_subs/electricity_subsidies.htm


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Documents

Subsidy Given by Australia by Imran Hossain