Export subsidies and international market share rivalry

Countries often perceive themselves as being in competition with each other for profitable international markets. In such a world export subsidies can appear as attractive policy tools because they improve the relative position of a domestic firm in noncooperative rivalries with foreign firms, enabling it to expand its market share and earn greater profits. In effect, subsidies change the initial conditions of the game that firms play. The terms of trade move against the subsidizing country, but its welfare can increase because, with imperfect competition, price exceeds the marginal cost of exports. International noncooperative equilibrium involves such subsidies by producing nations, even though they are jointly suboptimal.