We examine the endogenous formation of trade blocs when markets are characterized by imperfect competition and governments use import tari¤s and export subsidies to alter the strategic interaction between oligopolistic …rms. Using a simple model of intra-industry trade between three ex-ante symmetric countries, we …nd that, while ‘pure’ customs unions—entailing tari¤ cooperation only—are stepping stones towards global free trade, ‘impure’ customs unions— involving the coordinated use of both tari¤s and subsidies—are stumbling blocs against it. Our analysis suggests that an international ban on export subsidies could help to sustain global free trade