This paper builds a tractable partial equilibrium model to
help explain the role of trade preferences given to developing
countries, as well as the efficacy of various subsidy policies.
The model allows for firm level heterogeneity in demand
and productivity and lets the mass of firms that enter be
endogenous. Trade preferences given by one country have
positive spillovers on exports to others in this model. Preferences
given by the European Union to Bangladesh in
an industry raise profits, resulting in entry, and some of
these firms also export to the United States. The parameters
of the model are estimated using cross sectional customs
data on Bangladeshi exports of apparel to the United States
and European Union. Counterfactual experiments regarding
the effects of reducing costs, both fixed and marginal,
or of trade preferences offered by an importing country
are performed. The counterfactuals show that reducing
fixed costs at various levels has very different effects and
suggest that such reductions are more effective in promoting
exports when applied at later stages when firms are
more committed to production. A subsidy of 1.5 million
dollars to industry entry costs raises exports by only 0.4
dollars for every dollar spent, but when applied to fixed
costs of production, it raises exports by $25 per dollar spent.