This paper examines the optimal trade policies when internationalsubcontracting occurs between two competing firms. It shows that ifthe comparative advantage effect dominates the cost saving transfereffect, the exporting country will impose a different policy on eachexport. In contrast, if the cost saving transfer effect dominates thecomparative advantage effect, the exporting country will impose a taxpolicy on both exports. However, there never exists an optimal policyto subsidize the export of both subcontracted product and finalproduct. Even though the exporting firm is assumed away its export offinal good, to subsidize the export of the subcontracted good is notnecessarily an optimal policy for the exporting country. For theimporting country, if the price elasticity of demand is sufficientlysmall and the marketing cost of final product is large enough, it isoptimal to set a negative tariff.