This paper examines how the location of the upstream firm shapes optimal trade policy in a vertically related industry. Following the framework of Bernhofen (1997), when the upstream firm is located inside or outside the exporting country, trade policy affects welfare not only through horizontal competition in the final-good market but also through vertical interactions with an upstream firm possessing market power. In such a setting, export policies (tariffs or subsidies) influence the derived demand elasticity faced by the upstream firm, thereby altering its pricing behavior and the allocation of rents across countries.
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