Since the advent of the GATT regime in the mid-1990s, declines in applied tariff rates and increases in non-tariff measures (NTMs) have been observed. The possibility of NTMs being deployed as protectionist measures in lieu of conventional tariffs has been studied in some literature, for example in Moore and Zanardi (2011) and Beverelli et al. (2014). However, the use of NTMs for protectionist purposes is strictly prohibited by the World Trade Organization (WTO). Their use is only permitted in the protection of human health and the environment, or for the prevention of deceptive practices and so forth. Nevertheless, significant efforts are being made to resolve non-tariff barriers (NTBs) in bilateral or multilateral agreements because in some countries NTMs have been utilized for protectionist purposes, camouflaged by superficially legitimate rhetoric. And even when they are used for legitimate purposes, their limiting effects on trade can be more significant than those of a tariff. Technical barriers to trade (TBTs) refer to regulations or systems that build unnecessary obstacles to international trade in terms of technical requirements for goods to be traded and comprise the largest proportion of NTMs in terms WTO notifications. The TBTs erected by Korea’s trading partners increase the export costs of Korean firms, and thereby function much as classical trade barriers. Since the Korean economy depends highly on trade, there is a need for the Korean government to understand TBTs and to find a way to cope with its trading partners’ TBTs.TBTs function as impediments to trade through the followings: technical regulations and standards, conformity assessment procedures, and labeling requirements. Among them, TBTs originating from norms (technical regulations and standards) can be further divided into two sub-categories: vertical-norm TBTs and horizontal-norm TBTs. Vertical-norm TBTs relate to norms which can be measured by their level of stringency. It occurs when some particular characteristic of a given product, which can vary in scale and scope, is required to meet, exceed or stay below a certain threshold in order to be lawfully marketed. For example, the EU’s Euro VI vehicular emission standards regulate new vehicles sold in EU by limiting exhaust emissions to a certain level. The U.S. fuel economy standards, termed the Corporate Average Fuel Economy (or CAFE) standards, which set a limit on the average fuel economy of the vehicles sold in the U.S. by each carmaker, are another example. Horizontal-norm TBTs arise when some of the specifications of a locally-differentiated product are adopted as national standards not used in other countries. U.S vehicle safety standards, the Federal Motor Vehicle Safety Standards and Regulations (FMVSS), are a good example. In most countries, vehicles are produced according to international safety standards promulgated by the United Nations Economic Commission for Europe (UNECE) and are viable to sell only if these standards are satisfied. However, the U.S. and Canada follow FMVSS instead. The technology gap is a critical issue in vertical-norm TBTs. The vertical-norm TBTs erected by technologically advanced countries make it difficult for less-advanced countries to penetrate advanced countries’ markets, since many of them do not have the technology to satisfy TBT requirements, causing international disputes. In addition, vertical-norm TBTs are established predominately in developed countries, such as the U.S. and the EU, for purposes of safety, health, environmental protection, and so on. Our analysis thus focuses on vertical-norm TBTs set by developed countries. There are two kinds of vertical-norm TBTs: barriers that limit the maximum values, such as emission standards, and others that establish minimum values, such as fuel economy standards. We concentrate on Minimum Quality Standards (MQS).In view of the above-mentioned characteristics of TBTs, we employ a two-country, vertically-differentiated duopoly model in which a technologically advanced firm competes against a less-advanced firm in quality and price in the domestic market. The government of the technologically advanced country chooses its MQS policy endogenously. Under this structure, we examine the economic effects of MQS and drive the optimal MQS policy of the technologically advanced country considering technological differences. To gain further insight, using the obtained optimal MQS policy of the technologically advanced country, we examine what strategies the government of the less advanced country might employ in response.Several studies have considered MQS in an international context. For example, Motta and Thisse (1999) analyzed the effects of minimum environmental quality standards under autarky and open economy. Boom (1995) set up a model of two segmented countries and examined the effects of differing MQS across countries. Lutz (2000) compared two MQS-setting arrangements, mutual recognition and full harmonization, in a two-country model. Most of these works introduced MQS as exogenous constraints. A notable exception is Petropoulou (2012), who analyzed governments’ incentives for the formation of MQS in an open economy setting. MQS are endogenously determined and are the result of a standard-setting game between governments. However, all these studies assumed that firms in different countries have identical technology. The effects of MQS can differ according to the degree of technological asymmetry among firms, and thus so can optimal MQS policy. Therefore, there is a need to study MQS issues taking into consideration technology gaps between firms.The remainder of this paper is organized as follows. Section 2 builds the model. Section 3 derives market equilibria without MQS. Market equilibria with MQS are derived in Section 4. In Section 5, using the results from the sections 3 and 4, the economic effects of MQS and optimal MQS policies are analyzed. Section 6 provides some policy suggestions for the technologically less advanced country based on the results of the analysis. Concluding remarks follow in Section 7
