This paper, authored by James A. Brander and Barbara J. Spencer, explores the role of export subsidies in international trade policy, particularly in the context of imperfect competition. The authors argue that export subsidies can be attractive to countries because they improve the relative position of domestic firms in noncooperative rivalries with foreign firms, enabling them to expand their market share and increase profits. Despite the terms of trade moving against the subsidizing country, the resulting increase in exports can still raise domestic welfare due to the price exceeding the marginal cost of exports. The paper models the interaction between domestic and foreign firms in an imperfectly competitive market, where governments can set credible subsidies before firms decide on their output levels. The analysis shows that a domestic subsidy shifts the reaction function of the domestic firm, increasing its exports and reducing foreign exports. This leads to a higher profit for the domestic firm and a lower profit for the foreign firm, but the overall welfare of the domestic country increases. The authors also examine the noncooperative Nash equilibrium in subsidies, where both exporting countries choose their subsidy levels simultaneously. They find that this equilibrium is characterized by positive production subsidies in both countries, which are jointly suboptimal. The optimal subsidy levels would be lower, but reducing them would decrease joint welfare. Finally, the paper discusses the implications for international regulations, such as those in the General Agreement on Tariffs and Trade (GATT), suggesting that these regulations may need regular reinforcement to be effective. The authors conclude that while export subsidies can provide strategic advantages to domestic firms, they are jointly suboptimal from the perspective of the producing nations.This paper, authored by James A. Brander and Barbara J. Spencer, explores the role of export subsidies in international trade policy, particularly in the context of imperfect competition. The authors argue that export subsidies can be attractive to countries because they improve the relative position of domestic firms in noncooperative rivalries with foreign firms, enabling them to expand their market share and increase profits. Despite the terms of trade moving against the subsidizing country, the resulting increase in exports can still raise domestic welfare due to the price exceeding the marginal cost of exports. The paper models the interaction between domestic and foreign firms in an imperfectly competitive market, where governments can set credible subsidies before firms decide on their output levels. The analysis shows that a domestic subsidy shifts the reaction function of the domestic firm, increasing its exports and reducing foreign exports. This leads to a higher profit for the domestic firm and a lower profit for the foreign firm, but the overall welfare of the domestic country increases. The authors also examine the noncooperative Nash equilibrium in subsidies, where both exporting countries choose their subsidy levels simultaneously. They find that this equilibrium is characterized by positive production subsidies in both countries, which are jointly suboptimal. The optimal subsidy levels would be lower, but reducing them would decrease joint welfare. Finally, the paper discusses the implications for international regulations, such as those in the General Agreement on Tariffs and Trade (GATT), suggesting that these regulations may need regular reinforcement to be effective. The authors conclude that while export subsidies can provide strategic advantages to domestic firms, they are jointly suboptimal from the perspective of the producing nations.