Final answer:
The subsidy of exports by a foreign government affects importing countries by making goods cheaper to import, benefiting domestic consumers but harming local producers. This leads to market distortions and can force protectionist measures, which may negate benefits of free trade.
Step-by-step explanation:
When a foreign government subsidizes the production of its exports, such as agricultural goods like sugar, it allows those products to be sold more cheaply on the world market. For countries that import these goods, this situation may lead to an increase in imports due to the lower prices offered by the subsidized goods. Domestic consumers of these imported products generally benefit from lower prices. However, the domestic producers of similar goods within the importing country are harmed because they face tougher competition and may not be able to compete with the lower prices of the subsidized imports. Economic implications of such subsidies include a potential distortion in market competition which can lead to job losses and company closures in the importing country's industry if it cannot compete with the subsidized prices from abroad. Moreover, if the importing country decides to enact protectionist measures to counteract such subsidies, consumers may end up paying higher prices, negating the benefits of free trade, such as comparative advantage, specialized learning, and economies of scale.