Trade policy dynamics, entry costs, and exchange rate uncertainty

This article analyzes trade policy dynamics when there are sunk costs of entry and demand uncertainty. A natural generalization of the classic export tax prescription for a domestic industry facing downward-sloping foreign demand is defined and implemented as a dynamic competitive equilibrium with fully rational firms. The optimal tax rate adjustment policy is a trigger strategy. This provides a rationale for infrequent revisions of trade policy in response to exogenous shocks.