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Endogenous Quality Effects of Trade Policy

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  • 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.

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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 99-094/2.

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Date of creation: 22 Dec 1999
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Handle: RePEc:dgr:uvatin:19990094

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Web page: http://www.tinbergen.nl

Related research

Keywords: Endogenous Quality; Hedonic Prices; Most Favored Nation (MFN) clause; Optimal Tariff; Regional Trade Agreement (RTA);

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