AbstractThis paper presents an international trade model of vertically related markets with quality differentiation at the stage of the intermediate good. Domestic input producers are at a disadvantage relative to higher quality foreign suppliers in providing inputs to a domestic final‐good producer. the input producer may be driven out of the market unless policies enacted by the domestic government can encourage domestic final‐good firms to use the domestic input. Results show that multiple tariffs and direct production subsidies are the most beneficial policy opti