Revisiting the economic effect of export subsidy: an expansion of the traditional analysis

Purpose - The purpose of this paper is to attempt to expand the traditional economic effect analysis of export subsidy, which has previously ignored the incentive of export subsidies in terms of competition from re‐importation. Design/methodology/approach - The paper performs a comparative static analysis based on the traditional welfare analysis of export subsidies by introducing different transportation costs and using small country model and large country model, respectively. Findings - Compared with the traditional analysis, exporting countries that implement export subsidies suffer less welfare loss and induce intra‐industry trade of homogeneous products. Due to export subsidy policy incentives, transportation costs heavily influence trade patterns, trade volumes and welfare. Trade patterns evolve from unidirectional export to intra‐industry trade as transportation costs are reduced, with the main source of welfare loss coming from transportation costs. The distribution of export subsidies is biased when domestic transportation costs are high. Under low domestic transportation costs, inefficient intra‐industry trade would emerge as a result of export subsidy incentive. Practical implications - The findings could be helpful to understand the impact of export subsidy policy on trade pattern, trade volumes and welfare when considering international and domestic transportation cost. Originality/value - The paper emphasizes the incentive of export subsidy on re‐importation, and links it with transportation costs, which expand the traditional export subsidy analysis.