Trade liberalization and export diversification

The paper examines the implications of tariff reductions for diversification of export basket across and within industries measured in terms of larger sets of homogeneous goods and horizontally-differentiated varieties in two country world. In a synthesis of analytical structures of Dornbusch, Fisher and Samuelson (1977) and Krugman (1979) we establish that unilateral tariff reduction may make the liberalizing country's exports diversified both across and within sectors whereas the trading partner may experience across-sector diversification. Under bilateral tariff reduction exports of larger number of differentiated varieties may be realized only for the country in whose favour the ratio of national wages moves.