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What are the strategic advantages that export promoting policies create
for domestic firms? What is the optimal trade policy with respect to exporting
firms? How much should we invest to promote international demand of domestic
products? Do competitive devaluations give a real advantage to national firms
in the foreign markets? There is a lot of debate about these questions between
policymakers. This is not surprising since also at a theoretical level there are
not clear or unambiguous answers. This paper provides a unified framework to
rethink about the real advantages of the policies of export promotion both in
terms of trade policy and exchange rate policy.

Common wisdom on the benefits of export subsidization largely departs from
the implications of trade theory. While export promotion is often seen as welfare
enhancing at least in the short run and often supported by governments, theory
is hardly in favour of its direct or indirect forms. In the standard neoclassical
theory with perfect competition, the scope of trade policy is to improve the
terms of trade, that is the price of exports relative to the price of imports, and,
as long as a country is large enough to affect the terms of trade, it is optimal
to tax exports (since this is equivalent to set a tariff on imports). The same
outcome emerges under monopolistic competition, as shown by Helpman and
Krugman (1989). In case of imperfect competition, a second aim of strategic
trade policy is to shift profits toward the domestic firms, hence a large body of
literature has studied models with a fixed number of firms competing in a third
market with positive profits. Here, the optimal unilateral policy is an export tax
under price competition, or whenever strategic complementarity holds (Eaton
and Grossman, 1986). Under quantity competition, an export subsidy can be
optimal (Brander and Spencer, 1984), but only under certain conditions.
1 The
same ambiguity of these results “creates information requirements for policy
intervention that appear to many of the architects of this theoretical innovation
to be sufficiently intimidating to suggest that policymakers had better leave it
alone” (Bhagwati, 1988, p.106).
2

Nevertheless, different forms of direct or indirect export subsidies are wide-
spread. Governments strongly support exporting firms, they often hide forms of
export promotion behind nationalistic pride, and consider the conquer of larger
market shares abroad as a positive achievement in itself. The European Union
coordinates trade between its members and the rest of the world in a similar
spirit, and subsidizes exports of agricultural products and the aircraft industry.
France is use to support its “national champions” with public funding. Italy
has a long tradition of public support of the Made in Italy, which is quite im-

1These conditions are derived by Dixit (1984) and Klette (1994). See also Horstmann and
Markusen (1986) for related results.

2 The literature has developed other arguments against export subsidies, as in case of
asymmetric information between firms and government or in case of retaliation (see Bhagwati,
Panagariya and Srinivasan, 1998, Brander, 1995, and Wong, 1995, for surveis), and some
in their favour, as in case of international competition both at the market level and at a
preliminary R&D level (Zigic, 2003).



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