Export Quality and Trade: A Theoretical and an Empirical Analysis

Abstract: We explore the impact of export quality on the levels of exports and domestic trade. First, we developed a theoretical framework, using the two-country oligopolistic model with quality differentials in product. We find that a consumer-preference driven increase in export quality improves export performance of a country, but it reduces domestic trade, in the absence of any constraint on production capacity. We then test the theoretical findings empirically, using annual bilateral inter-country and intra-country trade data for 142 countries from 1963 – 2014 and by applying the gravity model of trade. We use the IMF’s Export-Quality Index to estimate a two-stage gravity model and to examine the effects of exports quality on both exports and domestic trade. The empirical findings are consistent with our theoretical predictions. The empirical findings suggest that an one percent increase in quality leads to an increase in total exports by 1.08% and a fall in intra-national trade by 2.69%. We also find that the effect of export quality is more pronounced for OECD member countries than the non-OECD member countries.

Authors: Shahroo Malik and Sajal Lahiri