The “New” Economics of Trade Agreements: From Trade Liberalization to Regulatory Convergence?

Gene M. Grossman, Phillip McCalman, Robert W. Staiger

Research output: Contribution to journalArticlepeer-review

24 Scopus citations

Abstract

What incentives do governments have to negotiate trade agreements that constrain their domestic regulatory policies? We study a model in which firms design products to appeal to local consumer tastes, but their fixed costs increase with the difference between versions of their product destined for different markets. In this setting, firms' profit-maximizing choices of product attributes are globally optimal in the absence of consumption externalities, but national governments have unilateral incentives to invoke regulatory protectionism to induce firm delocation. An efficient trade agreement requires commitments not to engage in such opportunistic behavior. A rule requiring mutual recognition of standards can be used to achieve efficiency, but one that requires only national treatment falls short. When product attributes confer local consumption externalities, an efficient trade agreement must coordinate the fine details of countries' regulatory policies.

Original languageEnglish (US)
Pages (from-to)215-249
Number of pages35
JournalEconometrica
Volume89
Issue number1
DOIs
StatePublished - Jan 2021

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics

Keywords

  • Firm delocation
  • deep versus shallow integration
  • harmonization
  • international trade agreements
  • regulation

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