Asymmetric Quality Effect of Input Trade Liberalization

Restrictive trade policies pursued by the developing countries are often regarded as a major reason for the low quality of goods produced by them that adversely affect their merchandise export growth to the developed countries. The IMF data however suggests that variations in quality indices have not only been non-monotonic but also asymmetric across different products. This paper offers a plausible theoretical explanation for such asymmetric quality variations by examining the impact of input tariff liberalization when quality upgrading requires more of domestic factors as well as imported inputs. We show that a reduction of tariff on the input that is directly used to produce the quality-differentiated export good will induce quality upgrading only when higher qualities are relatively more intensive in imported input than skilled labour. If tariff on the input that is used in production of homogenous traded goods is lowered, on the other hand, export quality would be upgraded for those exports whose higher qualities are more intensive in skilled labour than capital. Improvement in quality of the export good, if at all, may also raise the value of such exports, despite a fall in volume of exports, under reasonable conditions.