Economics professors, Tina Das and Steve DeLoach, have published their latest paper, “Strategic Trade Policy in the Presence of Reputational Spillovers,” in the most recent edition of the Journal of International Trade and Economic Development.
The paper examines how the quality of goods exported ultimately affects the welfare of developing countries. With the growth of international trade in products where consumers value quality, exporting countries potentially face significant barriers into the international marketplace. For example, a recent study of Taiwanese exports found significant evidence of ‘statistical discrimination’ against Taiwanese products based on their quality reputation. Since consumers do not have perfect information about new products in a foreign market, a country’s reputation becomes an important factor in determining whether consumers choose to make a purchase.
Das and DeLoach’s theoretical work is innovative because it is one of the first to model the impact of learning externalities across products to a standard model of international trade. Based on their findings, they argue that the optimal international trade policy depends on both the quality of new firms the global marketplace as well as the degree of product inter-relatedness. In the presence of both high and low-quality producers, across-the-board export subsidization hinders growth in developing countries.
This work has important implications for all developing countries, but especially for those that, despite their export subsidies, have found themselves unable to break the ‘reputation disadvantage’ faced in the international market. The challenge for international policy makers is to find ways to reward firms willing to invest in a positive reputation without encouraging production by marginal firms with short-term profit horizons.