We use a modelof sequentialduopoly to examine the effect of verticalownership structure on firms’ outputs and profit shares in the internationalmarket for raw and processed tropicaltimber products. The modelprovides insights that can be applied to the Indonesian logging and plywood industry; shedding light on the appropriate policy responses. We find that when industries are integrated, the government should subsidise both exports. Thus, despite log and plywood being strategic substitutes, log export barriers make Indonesia worse off. When industries are separated, however, plywood exports should be subsidised but the optimal trade policy on log exports depends on two effects. If the commitment failure effect (as in Brander and Spencer (1985)) dominates then log exports should be subsidised, however, if the negative cross-industry effect dominates then log exports should be taxed.