We study the profitability incentives for merger and the endogenous industry structure in a strategic trade policy environment. Merger changes the strategic trade policy equlilibrium. We show that merger can be profitable and welfare enhancing, even though it would not be profitable in a "laissez-faire" economy. A key element is a change in the governments' incentives to give subsidies to their local firms. National merger induces more strategic trade policy, whereas international merger does not. Copyright The editors of the "Scandinavian Journal of Economics", 2004 .