Endogenous sequencing in strategic trade policy games under uncertainty

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This paper examines a trade policy game with endogenous timing. A tradeoff between commitment and flexibility is identified. The timing of trade policy decisions is shown to depend on the degree of demand uncertainty. When demand uncertainty is low, countervailing duties will never be used because the home government sets its tariff first followed by the export subsidy of the foreign government. When demand uncertainty is very high, the foreign government sets its subsidy first followed by the tariff set by the home government. The foreign government actually imposes an export tax anticipating the tariff retaliation of home government to any export subsidy. Finally, when demand is moderately volatile, countervailing duties will be used with positive probability.


HKIBS Working Paper Series 004-967