Does Trade Liberalization Boost Quality Upgrading? Evidence From Indonesian Plant-Product-Level Data

In this paper, we examine the effects of tariff reduction on product quality upgrading by employing Indonesian plant-product-level panel data matched with plant-level data. In particular, the effects of reduction in output tariffs and input tariffs are separately explored. We focus on the apparel industry. By estimating the Berry-type demand function, we derive product quality indicators based on the Khandelwal methodology, which enables us to isolate changes in prices from quality upgrading. Our findings are as follows. First, a reduction in output tariffs does not affect product quality upgrading. Second, a reduction in input tariffs boosts quality upgrading in general. In particular, this impact is greater for import plants, as is consistent with our expectation that the source of the boost is the import of high-quality foreign inputs.