Promoting Domestic Industry. Quantifying the Effects of Reducing Labor Cost and Upgrading Quality
Résumé
We develop a methodology to evaluate the role of price and non-price competitiveness factors for domestic industries facing import competition. Using a structural trade model combined with an instrumental variables strategy, we estimate the elasticities of the imported-to-domestic consumption ratio with respect to labor cost, productivity, and product quality. Counterfactual simulations then assess the effects of unilateral (country?industry) changes in labor cost or product quality on imports, domestic consumption, and producer and consumer revenues. We apply this approach to the EU food sector using publicly available trade and production data. The results highlight the joint importance of price and non-price competitiveness factors in shaping the import share of food expenditure. However, the counterfactual analysis shows that improving the cost or quality channel generates very different outcomes across countries, but also across industries within a country. Furthermore, competitiveness gains are distributed unevenly between consumers and producers.
