Normally, both import duties and export subsidies are recommended as policy tools for correcting a deficit in balance of payments. Export subsidies lower the export prices and thereby encourage their demand in foreign countries. Import duties have the impact of pushing up import prices and thus discouraging imports. However, the effectiveness of customs duties and export subsidies in correcting a balance of payments deficit is influenced by several factors including the following:
1. Demand and supply elasticity’s of imports and exports of the country. For example, imposing import duties on items having inelastic demand does not reduce the import bill of a country. Similarly, giving export subsidies to items having inelastic demand in foreign countries does not increase export earnings of a country.
2. The nature of items which are subjected to import duties or of the exports which are subsidised. For example, levying import duties on items which are used as inputs for export items would increase the prices of exports and thus discourage exports.
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3. The existing levels of duties and subsidies and the extent of changes in them.
4. The response of the foreign countries. It should be noted that moderate rates of customs duties may not always be effective enough for bringing about desired changes in imports and exports. For example, in the case of items of low demand elasticity, the rates of import duties may have to be very high. Quantitative restrictions may be necessary when an imported commodity has a prestige value for the consumers, or when it is otherwise considered by them a necessity.
Non-Use of Export Duties:
Use of export duties is not popular with governments. This can be explained easily. Since most countries want to encourage their exports, widespread use of export duties is ruled out. This tool has relevance only for those items which have substantial export value and which have highly inelastic demand in foreign countries.
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Governments encourage exports by various means. International agreements permit them to exempt export items from domestic taxes (such as excise duties, sales taxes, etc.); and if the same have been collected already, to refund them. In addition, subsidising exports is also a common practice with governments faced with the task of improving the balance of payments.