Export Product Quality, Optimal Import Tariffs and Firms’ Strategic Choice of Vertical Structure

Export Product Quality, Optimal Import Tariffs and Firms’ Strategic Choice of Vertical Structure

Using the export rivalry model based exclusive dealer channel, we examine the endogenous determination of firms’ vertical structure when optimal import tariffs are implemented by the importing country. In addition, we analyze the welfare effects of trade liberalization when firms’ vertical structures are endogenous. We show that, despite being heterogeneous firms, a symmetric vertical structure appears between firms under discriminatory tariffs, but an asymmetric vertical structure under uniform tariffs, with only one firm choosing vertical separation. Moving toward free trade is not always beneficial to all exporters. For the exporting country of low-quality products, the transition from discriminatory tariffs to free trade can be rather detrimental, depending on the equilibrium vertical structure in the discriminatory tariffs and the quality gap between products.