Policy Synchronization and Staggering in a Dynamic Model of Strategic Trade

This paper studies steady-state, Markov-Perfect strategic trade policy when (infinitely lived) governments are committed to trade policy during two periods. We compare the case in which both governments choose their export subsidies in the same periods (synchronization) versus the case in which they set them in alternate periods (staggering). We find that, under Cournot competition, welfare is higher when both governments synchronize their choice of export-promoting policy, since export subsidies are lower (closer to the cooperative solution) than when governments set them sequentially. Retaliation is therefore stronger and more harmful when governments alternate as (temporary) Stackelberg leaders. Synchronization is the equilibrium of the pre-commitment game in which both governments choose when to set their export subsidies. These results are robust to having stochastic length of commitment period and to allowing predetermined but flexible choice of subsidies by both governments. We also analyze the results of policy-staggering under alternative modes of competition and the possibility of firms investing in R&D.