Strategic policies with foreign non-tradable input suppliers
We consider strategic government policies on the exports of final goods and on the input production when the inputs are non-tradable and produced by the foreign firms. If the policies consist of only per-unit tax/subsidies either on the final goods or on the inputs, it is optimal for the governments to impose taxes. However, if the governments can impose profit taxes on input production and per-unit tax/subsidies either on the final goods or on the inputs, it is optimal to impose per-unit subsidies along with a positive profit tax on the inputs. We find that the per-unit tax/subsidies on the final goods are perfect substitutes to per-unit tax/subsidies on the inputs. These results hold whether the input suppliers are the same firms or different firms.
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