The Effects of Farm Subsidies on Farm Exports in the United States

We estimate the elasticity of U.S. farm exports to U.S. farm subsidies using a gravity model of state-level farm exports to 100 major trading destinations for the period 1999 to 2011. Our identification strategy exploits the within-state variation that is free of endogeneity bias in the levels and trends of farm subsidies and farm exports. We find that a 1% decrease in farm subsidies would reduce U.S. farm exports by 0.40% per annum. This equivalently means that the complete abolishment of the farm subsidy program would reduce U.S. farm exports by approximately $15.3 billion per year. Importantly, we document robust evidence that amber box subsidy programs such as counter-cyclical payments and marketing loan gains have the strongest effect on farm exports, while green box subsidy payments, such as direct payments have negligible effects. Finally, subsidy payments affect exports only in agricultural commodities, not in livestock. Our subsidy elasticity estimates are statistically significant, stable, and economically meaningful, and are vitally needed by U.S. and global policymakers in the face of critical domestic and international developments.