BILATERALISM IS GOOD: TRADE BLOCS AND STRATEGIC EXPORT SUBSIDIES

This paper considers the effect of exogenous trade bloc enlargementin a multi-country version of the Brander-Spencer export subsidygame. In the single-shot game, it is shown that trade bloc enlargementleads to a reduction in the Nash equilibrium export subsidiesand thereby increases the welfare of the exporting countries.Although the welfare of the importing countries decreases, worldwelfare may increase if the export subsidies are financed bydistortionary taxation. When the export subsidy game is infinitelyrepeated, it is shown that trade bloc enlargement reduces thecritical discount factor making it easier to sustain free trade.