Domestic Regulation and International Trade: Where's the Race?--Lessons from Telecommunications and Export Controls

Abstract

This paper examines the effects of international trade on domestic regulation, illustrating general points through discussion of recent experience in telecommunications regulation and export control regimes. Critics of international trade assert that trade undermines a nation's ability to maintain an independent national regulatory structure that would be chosen under democratic-representative processes, promoting instead a "race to the bottom" in protection of public interests. The race-to-the-bottom metaphor builds on economic writings suggesting that, at least under certain conditions, open trade in goods leads to factor price equalization with reduced returns to factors (e.g., low-skilled labor) that are relatively abundant in other nations.

Although the conditions from which factor-price-equalization was deduced seldom occur, the transmission of competitive effects from trade resembles the effects predicted by the race-to-the-bottom metaphor. Unlike that metaphor, however, trade's competitive effects generally benefit both national economic welfare and individual liberty. That is generally true of trade's effects, including reduction of the scope or bite of domestic regulation: trade-induced changes in such regulation most often will enhance national welfare by allowing increased competition and diminishing economic rents protected by regulatory intervention. Trade can produce a diminution of national welfare in some instances, where trade undermines the ability of a nation to deal with certain negative externalities of production, but this will be the exceptional case.

Trade's tendency to diminish regulatory rents will be inimical to the interests of many politicians and politically influential groups, which will face higher costs to maintaining favored regulatory policies. These individuals and groups have incentives to argue that particular instances of open trade fit the limited circumstances in which trade reduces national economic welfare. They will claim as well that trade reduces the ability of national polities to design regulation favored by each nation's citizens. If all processes governing regulation in the absence of trade are taken as part of the calculus of what a nation's citizens favor, this claim is a tautology. If, however, citizens' views are abstracted from current political-decisional processes, trade is seen to serve (under most conditions) to counteract antidemocratic tendencies in domestic governance, protecting individual liberty in a world of diverse tastes.