Economics Letters 22 (1986) 369-373 North-Holland 369 zyxwvutsrqpo INADEQUACIES OF THE STRATEGIC RATIONALE OF EXPORT SUBSIDIES David COLLIE and David DE MEZA * London School zyxwvutsrqponmlkjihgfedcbaZYXWVUTSRQPONMLKJIHGFEDCBA of Economics, London WCZA ZAE, UK Received 15 August 1986 A major attraction of strategic trade theory is that it appears to explain governments’ desire to subsidise exports. We argue that this appearance is illusory. 1. Introduction The prospect that mercantilistic trade policies can be explained or justified as devices to maxirnise the national interest of countries trading in imperfectly competitive world markets has excited considerable recent interest [e.g., Brander and Spencer (1985), Spencer and Brander (1983), Dixit (1984), Spence (1984), Venables (1985)]. One line of criticism of this strategic approach questions the reasonableness of the assumptions, notably the ability of governments to credibly precommit themselves to trade policy prior to the firms acting. Here we examine some predictions of strategic models. We show that export taxes rather than subsidies are often implied and that price controls are better still. These are rarely observed in practice and we therefore contend that strategic models cannot be taken seriously as an explanation of why export subsidies are routinely used in practice; explanations must be sought elsewhere. Although some authors explicitly state that they are presenting ‘ _. . a positive theory to explain [R&D and export subsidies]’ [Spencer and Brander (1983, p. 707)], others seem to view strategic policy analysis as only attempting to derive what governments should do, not predict what they will do. It is, of course, difficult to find evidence to challenge normative propositions, though we think that a continual refusal of governments to do what they ‘should’ might give the analyst pause for through. But our main contribution here is to note that the standard strategic model implies that firms should encourage governments to subject them to maximum prices. In reality there is no clamour for this to happen and hence we believe the adequacy of the model is open to question and so, therefore, is the policy advice based upon it. The rest of this paper details what we consider to be some unappealing implications of strategic models. * We should like to thank Gene Grossman, John Sutton and Thomas von Ungem-Stemberg for useful comments. Collie’s research is supported by a grant from the ESRC. 0165-1765/86/$3.50 0 1986, Elsevier Science Publishers B.V. (North-Holland)