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Endogenous Quality Effects of Trade Policy

Author

Listed:
  • Jose Luis Moraga

    (Groningen University)

  • Jean-Marie Viaene

    (Erasmus Universiteit Rotterdam)

Abstract

We study the optimal trade policy against a foreign oligopoly withendogenous quality. We show that, under the Most Favoured Nation(MFN) clause, a uniform tariff policy is always welfare improvingover the free trade equilibrium. However, a nonuniform tariff policyis always desirable on welfare grounds. First best policy typicallyconsists of setting a subsidy on the low-quality product and a tax onhigh-quality one. Another example of such a nonuniform tariff policyis a Regional Trade Agreement (RTA). We show that, if a welfareimprovement is possible through a RTA, it is always with the low-quality producing country that it has to be achieved.

Suggested Citation

  • Jose Luis Moraga & Jean-Marie Viaene, 1999. "Endogenous Quality Effects of Trade Policy," Tinbergen Institute Discussion Papers 99-094/2, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:19990094
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    File URL: https://papers.tinbergen.nl/99094.pdf
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    More about this item

    Keywords

    Endogenous Quality; Hedonic Prices; Most Favored Nation (MFN) clause; Optimal Tariff; Regional Trade Agreement (RTA);
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F15 - International Economics - - Trade - - - Economic Integration

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