Rent-Shifting Export Subsidies with an Imported Intermediate Product

This chapter examines the implications of foreign or domestic imperfect competition in intermediate-goods supply for strategic trade policy. Assuming Cournot competition, an export subsidy aimed at shifting rents from foreign to domestic final-good producers may also shift rents to foreign suppliers, weakening the incentive for the subsidy. However, the incentive for a subsidy tends to increase if the intermediate-good industry is purely domestic or if the industry is purely foreign, but the subsidy reduces the price of the imported input. Alternative rent-shifting policies (a production subsidy and an import tariff) applied to the input are also considered.