Abstract
This paper develops a partial-equilibrium model of a small open-economy trading an unsafe product. The model is used to analyze the welfare effects of trade with and without a country-of-origin labeling (COOL) program. The welfare gains from trade in the absence of COOL are ambiguous, may justify the imposition of a trade ban. Even if a full ban does not improve welfare and some restriction of trade is always welfare-enhancing. Under a tariff regime, more COOL trade is better than less trade. Independently of domestic market power, free trade coupled with a COOL program maximizes national welfare.
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