Bilateralism is Good: Trade Blocs and Strategic Export Subsidies

This paper considers the effect of exogenous trade bloc enlargement in a multi-country version of the Brander-Spencer export subsidy game. In the single-shot game, it is shown that trade bloc enlargement leads to a reduction in the Nash equilibrium export subsidies and thereby increases the welfare of the exporting countries. Although the welfare of the importing coun-tries decreases, world welfare may increase if the export subsidies are financed by distortion-ary taxation. When the export subsidy game is infinitely repeated, it is shown that trade bloc enlargement reduces the critical discount factor making it easier to sustain free trade. 1