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Profit-Shifting Export Subsidies and the Sustainability of Free Trade


  • Collie, David


This paper analyzes trade wars and the sustainability of free trade in the J. A. Brander and B. J. Spencer (1985) model of profit-shifting export subsidies. It is shown that both countries will usually be worse-off if there is a trade war than under free trade but that one country may be better-off if its firm is very competitive. In an infinitely repeated version of the Brander-Spencer game, it is shown that free trade is sustainable as a perfect equilibrium if the two countries are sufficiently similar and the discount factor is sufficiently large. Copyright 1993 by Scottish Economic Society.

Suggested Citation

  • Collie, David, 1993. "Profit-Shifting Export Subsidies and the Sustainability of Free Trade," Scottish Journal of Political Economy, Scottish Economic Society, vol. 40(4), pages 408-419, November.
  • Handle: RePEc:bla:scotjp:v:40:y:1993:i:4:p:408-19

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    References listed on IDEAS

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    8. Schiantarelli, Fabio, 1996. "Financial Constraints and Investment: Methodological Issues and International Evidence," Oxford Review of Economic Policy, Oxford University Press, vol. 12(2), pages 70-89, Summer.
    9. Cornelli, F. & Portes, R. & Schaffer, M., 1996. "The Capital Structure of Firms in Central and Eastern Europe," DELTA Working Papers 96-05, DELTA (Ecole normale supérieure).
    10. Schaffer, Mark E., 1998. "Do Firms in Transition Economies Have Soft Budget Constraints? A Reconsideration of Concepts and Evidence," Journal of Comparative Economics, Elsevier, vol. 26(1), pages 80-103, March.
    11. Michael Devereux & Fabio Schiantarelli, 1990. "Investment, Financial Factors, and Cash Flow: Evidence from U.K. Panel Data," NBER Chapters,in: Asymmetric Information, Corporate Finance, and Investment, pages 279-306 National Bureau of Economic Research, Inc.
    12. Rajan, Raghuram G & Zingales, Luigi, 1995. " What Do We Know about Capital Structure? Some Evidence from International Data," Journal of Finance, American Finance Association, vol. 50(5), pages 1421-1460, December.
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    Cited by:

    1. Praveen Kujal & Juan Ruiz, 2003. "Policy Synchronization and Staggering in a Dynamic Model of Strategic Trade," International Trade 0302003, EconWPA.
    2. Brander, James A., 1995. "Strategic trade policy," Handbook of International Economics,in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 27, pages 1395-1455 Elsevier.
    3. Alexandr Knobel, 2010. "Factors of important Tariff Information," Research Paper Series, Gaidar Institute for Economic Policy, issue 143P.
    4. Roger Clarke & David R. Collie, 2008. "Welfare In The Nash Equilibrium In Export Taxes Under Bertrand Duopoly," Bulletin of Economic Research, Wiley Blackwell, vol. 60(2), pages 183-189, April.
    5. Soegaard, Christian, 2013. "An Oligopolistic Theory of Regional Trade Agreements," The Warwick Economics Research Paper Series (TWERPS) 1007, University of Warwick, Department of Economics.
    6. David Collie, 2000. "A Rationale for the WTO Prohibition of Export Subsidies: Strategic Export Subsidies and World Welfare," Open Economies Review, Springer, vol. 11(3), pages 229-245, July.
    7. Conconi, P., 2000. "Trade Bloc Formation Under Imperfect Competition," The Warwick Economics Research Paper Series (TWERPS) 571, University of Warwick, Department of Economics.

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