Abstract
This study examines the strategic export policy towards raw materials in a model with vertically related markets. It shows that if the number of downstream firms in the material exporting country is not too small and these firms have a cost advantage, then the optimal export policy towards raw materials is a tax. In contrast, if the number of downstream firms in the material importing country is sufficiently large, these firms have a cost advantage, and the material exporting country values local pollution less, then the optimal export policy is a subsidy. Furthermore, the import tariff on the final good imposed by the government of the material importer weakens the incentive to levy export tax on raw materials, and may lead the material exporter’s government to provide an export subsidy. In addition, the interventions by the two governments make the material exporting country worse off, but may make the material importing country better off relative to free trade.
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