35 Pages Posted: 4 Jan 2004
Date Written: December 2003
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. The share price declines were largest for exporters whose tax situations made the threatened export subsidy particularly valuable. Share prices of exporters with high profit margins also declined markedly on November 18, 1997, suggesting that the export subsidies were most valuable to firms earning market rents. This last evidence is consistent with strategic trade models in which export subsidies improve the competitive positions of firms in imperfectly competitive markets.
Keywords: Multinationals, Trade, Exports, Subsidies, Tax Policies, Event Studies
JEL Classification: F12, F13, H87, H25, D43
Suggested Citation: Suggested Citation
Desai, Mihir A. and Hines Jr., James R., Market Reactions to Export Subsidies (December 2003). Ross School of Business Paper No. 912. Available at SSRN: https://ssrn.com/abstract=483483 or http://dx.doi.org/10.2139/ssrn.483483