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
Tinbergen Institute

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