On the Promotion of Domestic Food Industry. Quantifying the Effects of Reducing Labor Cost and Upgrading Quality

We develop a methodology to evaluate the role of both price and non-price competitiveness factors for domestic industries competing with foreign imports. Using a structural trade model and an instrumental variables approach, we estimate the elasticities of the imported-to-domestic consumption ratio (i.e. the imported-to-domestic ratio) with respect to changes in labor cost, productivity, and product quality. We then perform counterfactual simulations to assess the impact of unilateral changes in labor cost or product quality at the country-industry level. By adapting the widely-used exact-hat algebra approach, we compute the effects on imports, domestic consumption, and both producer and consumer revenues. We apply this methodology to the EU food sector using publicly available trade and production data. Our results highlight the importance of both price and non-price factors in explaining the share of food expenditure on imports. 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 vary substantially between consumers and producers.