Asymmetric Country-of-Origin Effects on Intraindustry Trade and the International Quality Race

A model of North-South intraindustry trade in quality differentiated products is proposed to examine the role of country-of-origin reputation in determining the competitive edge of emerging industries. It is shown that if consumers rationally harbor negative expectations about the quality of Southern products, economic progress in either the North or the South shifts the terms of trade against Southern exports, and worsens Southern producers' incentive to produce high-quality products. In addition, the paper illustrates the role of income redistributive policies in shifting consumer's demand in favor of Southern high-quality products