Quantifying Different Gains from Trade in Quality

Abstract

In this paper, I study to what extent countries differ in their preferences for quality and their technologies for improving quality. The paper also quantifies the contribution of those differences to the differences in gains from trade across countries. I adopt ANTONIADES, which allows endogenous quality choice of firms. This paper extends that framework into multi-country and multi-sector setting. The new feature is that bilateral trade liberalization yields spillover effects on the competitiveness of another country. This paper structurally estimates the model under multi-country and multi-sector framework. It is found that richer countries generally have stronger valuation for quality. The quantification demonstrates that variations in the strength of quality preferences and in the technology of improving quality across countries add to their heterogeneities in market competitiveness. Subsequently, I simulate a 5% increase in the trade barriers. If the quality channel is shut down, countries with stronger preferences for quality have larger degrees of underestimations in their losses from the trade barrier. Finally, gains from a universal rise in quality preference are unequal among countries, with larger economies generally gaining more than smaller economies.