Regulatory Protection and the Role of International Cooperation

Abstract

Domestic regulations that impede international trade have become a central concern in contemporary trade negotiations. In this paper, I develop a general-equilibrium framework to analyze the welfare consequences of product regulations and their international harmonization. In my model, raising product standards reduces a negative externality associated with consumption but also increases the marginal and fixed costs of production. When a country sets its product standards non-cooperatively, the effects of standards on other countries' wages and number of firms are not internalized, giving rise to an international inefficiency. I show that the World Trade Organization's non-discrimination principle of national treatment cannot lead to an efficient equilibrium when standards affect the fixed cost of production. I then conduct a quantitative exercise and find that current international cooperation on product standards is still far from complete: welfare losses from abandoning national treatment average 1.44 percent, whereas potential welfare gains from efficient multilateral cooperation average 12.59 percent.

Keywords: Regulatory Protection, National Treatment, Product Variety

JEL Classification: F12, F13, O19