This is simply incorrect, (both your and Eliezer’s explanations) and shows a misunderstanding of basic macroeconomics that would be taught at an intro-level university course.
When countries run a trade surplus—positive net exports—there mechanically must be a net inflow of capital. When I export goods and services, foreign buyers need to exchange their currency for the domestic currency to purchase those exports. This causes the domestic currency to appreciate, which puts downward pressure on domestic real interest rates relative to other countries. Businesses in the exporter’s country are thus able to invest more heavily in capital goods, raising their productivity and increasing long-term GDP growth.
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.
This is simply incorrect, (both your and Eliezer’s explanations) and shows a misunderstanding of basic macroeconomics that would be taught at an intro-level university course.
When countries run a trade surplus—positive net exports—there mechanically must be a net inflow of capital. When I export goods and services, foreign buyers need to exchange their currency for the domestic currency to purchase those exports. This causes the domestic currency to appreciate, which puts downward pressure on domestic real interest rates relative to other countries. Businesses in the exporter’s country are thus able to invest more heavily in capital goods, raising their productivity and increasing long-term GDP growth.
For a thorough treatment, Mankiw’s textbook is a good resource: http://students.aiu.edu/submissions/profiles/resources/onlineBook/T9D9B4_Principles_of_Economics-_7th_Edition.pdf
This mechanism is covered in Chapter 31.
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: