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Product labeling, quality and international trade

This paper analyzes the reasons why countries may pursue different labeling policies in autarky and how this affects countries' welfare in the context of international trade. In an asymmetric information environment where producers know the quality of the goods they are selling and consumers are not able to distinguish between them, the quality governments choose to protect by a label depends on consumer preferences for and production costs of different qualities. Countries with different distributions of tastes and/or different production functions will thus decide to label differently. When they trade, welfare effects will be different on the country as a whole and on different types of consumers within each country depending on whether countries choose to mutually recognize each others labeling policy or to harmonize their policies. In particular it will be the case that a country with weak preferences for high quality will oppose the introduction of an international, harmonized label as it is better off under a regime of mutual recognition. When countries only differ in their costs of producing quality instead, none of the trading partners will lose from a move towards trade under an international, harmonized label.

No: DERD-2002-01


Marion Jansen — WTO and CEPR
André Lince de Faria — The University of Chicago

Manuscript date:  February 2002

Key Words

Product labels, international trade, mutual recognition.

JEL classification numbers  

D82, F13

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This is a working paper, and hence it represents research in progress. This paper represents the opinions of individual staff members or visiting scholars, and is the product of professional research. It is not meant to represent the position or opinions of the WTO or its Members, nor the official position of any staff members. Any errors are the fault of the authors. Copies of working papers can be requested from the divisional secretariat by writing to: Development and Economic Research Division, World Trade Organization, rue de Lausanne 154, CH-1211 Genéve 21, Switzerland. Please request papers by number and title.

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