Endogenous Quality Effects of Trade Policy
We study the optimal trade policy against a foreign oligopoly with endogenous quality. We show that, under the Most Favoured Nation (MFN) clause, a uniform tariff policy is always welfare improving over the free trade equilibrium. However, a nonuniform tariff policy is always desirable on welfare grounds. First best policy typically consists of setting a subsidy on the low-quality product and a tax on high-quality one. Another example of such a nonuniform tariff policy is a Regional Trade Agreement (RTA). We show that, if a welfare improvement is possible through a RTA, it is always with the low- quality producing country that it has to be achieved.
|endogenous quality, hedonic prices, most favoured nation (MFN) clause, optimal tariff, regional trade agreement (RTA)|
|Models of Trade with Imperfect Competition and Scale Economies (jel F12), Commercial Policy; Protection; Promotion; Trade Negotiations; International Organizations (jel F13), Economic Integration (jel F15)|
|Tinbergen Institute Discussion Paper Series|
Moraga-Gonzalez, J.L, & Viaene, J.M.A. (1999). Endogenous Quality Effects of Trade Policy (No. TI 99-094/2). Tinbergen Institute Discussion Paper Series. Retrieved from http://hdl.handle.net/1765/7708