Effects of price versus non-price export promotion: the case of cotton

Government outlays for commodity price support are coming under increased scrutiny as policy makers seek to reduce federal budget deficits. Export price subsidies have been shown to be cost-effective in reducing treasury outlays for the cotton program. This research extends earlier findings on export price subsidies to consider export promotion (advertising). A comparative static framework is used to analyze the effects of non-price promotion and price subsidies for the export market. The model accounts for supply response in the domestic market, industry cost-sharing of the non-price promotion expenditure, and the feedback effects of promotion-induced changes in the U.S. cotton price on competitors' cotton prices. Based on previous estimates of supply, demand, and export promotion elasticities, the analysis suggests that both tools (export price reduction and advertising) can be effective in raising the domestic cotton price and lowering the government costs for cotton programs. However, the relative effectiveness of the two policy instruments hinges on the relative magnitudes of the export demand and the promotion elasticities. Holding constant the promotion elasticity, as export demand becomes less price elastic, non-price promotion becomes the more effective tool. For example, if the export demand elasticity is unitary, export promotion is at least five times more effective at reducing government costs than an equivalent expenditure on an export price subsidy. When the export demand elasticity is increased to -2.00, non-price promotion is about as effective as a price subsidy if the government pays the full cost of non-price promotion and the export markets are relatively unresponsive to export promotion. Although the results suggest that non-price promotion is generally more effective than export price subsidies at reducing treasury net outlays for the cotton price-support program, further research is needed to refine estimates of important elasticity values, p