Strategic Export Promotion

This paper provides a general characterization of optimal export promoting policies for foreign competitive markets and apply it to strategic trade policy and exchange rate policy. Contrary to the ambiguous results of strategic trade policy under barriers to entry in the third market, I find that it is always optimal to subsidize exports as long as entry is free (under both strategic substitutability and complementarity) and I explicitly derive the optimal export subsidies under Cournot and Bertrand competition. Finally, I show that there is always a strategic incentive to implement competitive devaluations when entry in foreign markets is free, but not otherwise.