Endogenous Quality Effects of Trade Policy
Working Paper No. 99-045/2
Posted: 22 May 2000
Date Written: 1999
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.
Keywords: International Trade, Economic Integration, Quality
JEL Classification: F12, F13, F15
Suggested Citation: Suggested Citation