This paper develops an effciency theory of contingent trade policies. We model the

competition for a domestic market between one domestic and one foreign firm as a pricing

game under incomplete information about production costs. The cost distributions are

asymmetric because the foreign firm incurs a trade cost to serve the domestic market.

We show that the foreign firm prices more aggressively to overcome its cost disadvantage.

This creates the possibility of an inefficient allocation, justifying the use of contingent trade

policy on efficiency grounds. Despite an environment of asymmetric information, contingent

trade policy that seeks to maximize global welfare can be designed to avoid the potential

ineffciency. National governments, on the other hand, make excessive use of contingent

trade policy due to rent shifting motives. The expected inefficiency of national policy is

larger (smaller) for low (high) trade costs compared to the laissez-faire case. In general,

there is no clear ranking between the laissez-faire outcome and a contingent national trade

policy.