The Effect of Cross-Country Differences in Product Quality on the Direction of International Trade 2002

Despite considerable theoretical work predicting that product quality plays an important role in determining the direction of international trade, there is no empirical evidence on the existence and magnitude of such a quality e.ect on trade. In this paper, I provide a framework to estimate the impact of cross-country di.erences in product quality on bilateral trade flows. The model allows countries to di.er both in the quality of goods they produce and in their aggregate demand for quality. It also takes into account other determinants of international trade, such as di.erences in factor proportions. I estimate the model using cross-sectional data on bilateral trade flows at the sectoral level. The empirical results confirm the theoretical prediction: rich countries import relatively more from countries that produce high-quality goods. Even though traditional determinants of comparative advantage are still the main driving force of trade, quality di.erences between countries have a significant e.ect on the pattern of international trade flows.