Product variety, trade, and growth.

• Author: Feenstra, Robert C.

Since the early 1980s, theoretical work in international trade has incorporated models of monopolistic competition.(1) Much of my own research has used these models to estimate the effects of trade barriers and economic growth on trade patterns.

Variety

One trade policy that dramatically affected the characteristics of imports was the "voluntary" export restraint (VER) that limited the sale of Japanese autos in the United States. The VER began in April 1981 and limited the number of cars that could be exported by Japanese firms; the VER thus created an incentive for Japanese firms to upgrade their export models. In the following years, many Japanese models became heavier, more powerful, and added air conditioning, automatic transmissions, and other features as standard equipment. I estimate that fully one-half of the nominal increase in prices of Japanese imports from 1980 to 1985 reflects the upgrading of their characteristics.(2)

Correcting the price increases for the quality upgrading is one step toward inferring the "pure" increase in prices explained by the VER. The other step is to estimate what would have happened to Japanese auto prices in the absence of any trade restriction, To determine this, I use the prices of Japanese compact trucks imported into the United States. These were not subject to the export restraint, but did have an increase in their tariff from 4 percent to 25 percent effective August 1980. By incorporating this tariff change into a hedonic regression for trucks, I can estimate the quality-adjusted price change that would have occurred under free trade. I find that the export restraint raised prices by $1000 by 1983 and 1984. In later years the export restraint was loosened, so the price effect fell.

The tariff imposed on imports of Japanese trucks allows us to evaluate the effect of trade policy on new product varieties. After the imposition of the tariff, several U.S. companies began producing compact trucks that were very similar to existing Japanese trucks. Using econometric methods, I find that some Japanese trucks were sufficiently different, or distinctive, to provide a substantial welfare gain. However, the American models produced only a small additional welfare gain, since they were similar to the Japanese models.(3)

In joint work with James A. Levinsohn, I identify the close substitutes of a product in terms of its characteristics in order to compute demand elasticities.(4) The firm uses these own and cross-price...