Strategic trade policy: Export subsidies and countervailing tariffs.

This thesis analyses the effect of retaliation with countervailing tariffs and/or production subsidies on the strategic argument for export subsidies, and also proves the existence and uniqueness of equilibrium in the standard model of international trade under oligopoly. Retaliation will be modelled as a multistage game. At the first stage, the foreign country sets its export subsidy to maximise national welfare. Then, at the second stage, the domestic country sets its trade policy, import tariff and/or production subsidy, to maximise national welfare in response to the foreign export subsidy. The solution concept employed is the subgame perfect equilibrium. When the domestic country uses a tariff in response to a foreign export subsidy, then the optimal domestic response is a partially countervailing tariff, and the foreign country does not usually gain from an export subsidy. There is usually no profit shifting argument for an export subsidy when the foreign country faces retaliation with countervailing tariffs. When the domestic country uses a tariff and a production subsidy in response to a foreign export subsidy, then the surprising result is that an export subsidy may increase foreign welfare. In this case, the foreign export subsidy increases both foreign and domestic welfare. The domestic country will always gain from a foreign export subsidy when it sets its trade policy optimally