Author
Sheldon, Ian
In this paper, we analyze the effect of nontariff measures (NTMs) on upgrading food product quality. Based on a multisector Schumpeterian model—and given threat of entry, compliance costs, and monopoly profits—NTMs are predicted to have heterogeneous effects on quality upgrading. Using disaggregated data for 14 European Union (EU) countries across 18 food industries for the period 2008–2019, NTM enforcement is found to deter quality upgrading for products distant from the quality frontier due to compliance costs. Conversely, NTM enforcement stimulates quality upgrading for products close to the quality frontier, given an increased probability of capturing monopoly profits.
We develop a heterogeneous firm model that allows us to identify the relationship between firm productivity and product quality. The model is used to analyze the impact of trade costs on food and agricultural trade based on a bilateral trade dataset covering 159 countries over the period 2010–2013. The results show that a high firm capability cutoff—implying an ability to produce high quality—limits export market entry. In addition, fixed and variable trade costs have a negative and significant impact on the probability of firms entering export markets, while variable trade costs have a negative and significant effect on firms’ export levels.