Do Geographical Indications Really Increase Trade? A Conceptual Framework and Empirics

Abstract

Abstract Production location matters to many consumers and regulators and policymakers are pressed to statue on labels about country of origin, local foods and geographical indications (GIs). This paper investigates the incidence of the EU policy on GIs on bilateral trade flows. We develop ttheoretical arguments and provide empirical evidence to analyze heterogeneity in consumer preferences regarding country of origin (domestic versus foreign) and the implicit quality signals from GI logos. The objective of the paper is to investigate whether producing GIs really boots bilateral trade, assuming heterogeneity in consumers’ preference. We first develop an analytical framework of a simple partial equilibrium two-country model through a Cobb-Douglas utility structure to assess the impact of GIs on trade. In addition, we empirically corroborate the analytical findings with a unique data on protected GIs by product and European country. Our main findings indicate that GI-products have ambiguous effect on international trade. Indeed, their trade-impact depends on the importance of product for consumers (i. e., the intensity and the reputation of GI-product considered as deterministic weight in consumers’ preference). As expected, a heterogeneity in consumers’ preference – due to home bias about local or foreign varieties – can increase or decrease trade, despite the presence of GI-products.