Liberalization, quality and welfare: removing the Italian VER on Japanese car exports
The empirical evidence that evaluates ex-post the effects of trade policy confirms the presumption, well known in theory, that quantitative barriers to trade have an impact on the average quality of exports. Yet, in evaluating ex-ante the effects of trade policy reform, very few studies take into account the role of the induced change in quality. The paper evaluates the effects of liberalization in the Italian car market through a calibrated model where the choice of the quality of exports is made endogenous. Simulating the removal of the VER on Japanese exports, there are substantial gains from liberalization when only quantity effects are considered. Results change dramatically if quality effects are taken into account: the downgrading in Japanese exports entails a strong reduction in consumers' gains.
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