Quality upgrading, competition and trade policy : evidence from the agri-food sector

This paper analyses the extent to which the reduction of import tariffs as a measure of import competition affects the quality upgrading of the food products exported to the European Union (EU). This relationship is studied using a ‘distance to the frontier’ model which is based on a non-monotonic relationship between competition and innovation. Quality is inferred from trade data using an innovative method recently proposed by Khandelwal. The results strongly support the existence of a non-monotonic relationship between competition and quality upgrading, with varieties close to the world frontier being more likely to upgrade quality in response to an increase in import competition. This relationship holds true for both developing and developed countries and is even stronger for countries/products targeted by specific FDI policies. Moreover, there is a strong positive relationship between the diffusion of EU voluntary and quality upgrading.