Trade Policy and Quality Leadership in Transition Economies

Posted: 24 Aug 2005

See all articles by Jean-Marie Viaene

Jean-Marie Viaene

Erasmus University

José L. Moraga-González

VU University Amsterdam; University of Groningen


Trade policy and quality leadership in transition economies are analyzed in a duopoly model of trade and vertical product differentiation. We first show that the incidence of trade liberalization is sensitive to whether firms in transition economies are producers of low or high quality. Second, we find that neither free trade nor the absence of a domestic subsidy are optimal: Both a tariff and a subsidy increase price competition and while the former extracts foreign rents the latter results in quality upgrading. Third, there exists a rationale for a government to commit to a socially optimal policy to induce quality leadership by the domestic firm when cost asymmetries are low. Finally, we establish an equivalence result between the effects of long-run exchange rate changes and those of trade policy on price competition (but not on social welfare).

Keywords: Exchange rate, quality reversal, optimal trade policy, product quality, trade liberalization

JEL Classification: F12, F13, P31

Suggested Citation

Viaene, Jean-Marie and Moraga-Gonzalez, Jose Luis, Trade Policy and Quality Leadership in Transition Economies. European Economic Review, Vol. 49, No. 2, pp. 251-530, February 2005, Available at SSRN:

Jean-Marie Viaene (Contact Author)

Erasmus University ( email )

P.O. Box 1738
3000 DR Rotterdam

Jose Luis Moraga-Gonzalez

VU University Amsterdam ( email )

De Boelelaan 1105
1081 HV Amsterdam


University of Groningen

P.O. Box 800
9700 AV Groningen, Groningen 9700 AV

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