4 Conclusion
In this paper I adopted a simple model to show the general optimality of unilat-
eral export promotion policies in foreign markets where free entry holds. The
implications for markets with price competition are strong: the opening up of
such markets to entry of foreign firms would change the optimal unilateral trade
policy from export taxation to export subsidization and would create new strate-
gic incentives to implement competitive devaluations. Notice that limitations
to the possibility of adopting export subsidies (due to international agreements)
and of implementing competitive devaluations (as for countries joining monetary
unions) would push toward other indirect forms of export promotion as invest-
ments in infratructures or R&D promotion to provide a competitive advantage
to domestic firms in the international markets.
Our model could be relevant for trade between developed and developing
countries whose markets open up. A spectacular example is given by China,
whose huge market is starting to massively import from the Western world.
China lacks many advanced industries and, in the near future, it will represent
a crucial market for automobiles, high technology commodities, luxury goods,
and so on. Our results suggest that the gains from promoting exports of these
items from the Western world will be quite large and trade wars for the Chinese
market may be behind the corner.
Further theoretical research could extend these results. On one side, one
could study more complex models of interaction between firms and governments
and introduce this set up in a standard two country framework of international
trade. Moreover it would be interesting to extend the model of strategic trade
policy for the domestic market in presence of free entry. On the other side, one
could analyse of the strategic effects of devaluations in general equilibrium mod-
els and study the strategic effects of devaluations on both foreign and domestic
markets. Finally, it would be interesting to fully characterize equilibria in trade
wars based on export subsidization or in exchange rate wars.
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