Profit-Shifting Export Subsidies and the Sustainability of Free Trade

David R Collie

Scottish Journal of Political Economy, 1993, vol. 40, issue 4, pages 408-19

Abstract: This paper analyzes trade wars and the sustainability of free trade in the J. A. Brander and B. J. Spencer (1985) model of profit-shifting export subsidies. It is shown that both countries will usually be worse-off if there is a trade war than under free trade but that one country may be better-off if its firm is very competitive. In an infinitely repeated version of the Brander-Spencer game, it is shown that free trade is sustainable as a perfect equilibrium if the two countries are sufficiently similar and the discount factor is sufficiently large. Copyright 1993 by Scottish Economic Society.

Date: 1993
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