STRATEGIC EXPORT PROMOTION
by Federico Etro*
First version: March 2002
Revised: October 2006
JEL Classification: F12, F13, F31
Key Words: Export Promotion, Strategic Trade policy, Export Subsidies,
Competitive Devaluation
Abstract
This paper provides a general characterization of optimal export promoting poli-
cies for foreign competitive markets and apply it to strategic trade policy and exchange
rate policy. Contrary to the ambiguous results of strategic trade policy under barriers
to entry in the third market, I find that it is always optimal to subsidize exports as long
as entry is free (under both strategic substitutability and complementarity) and I ex-
plicitly derive the optimal export subsidies under Cournot and Bertrand competition.
Finally, I show that there is always a strategic incentive to implement competitive
devaluations when entry in foreign markets is free, but not otherwise.
‘University of Milan, Department of Economics, Intertic and ECG. I am extremely thank-
ful to Kreso Zigic and seminar participants at Harvard University, CERGE (Prague), the
University of Milan and IUE (Florence) for useful comments. Contact: Universita degli Studi
di Milano, Bicocca - Piazza dell’Ateneo Nuovo 1, U6-360. E-mail: [email protected].