International Agreements on Product Standards Under Consumption Externalities: National Treatment Versus Mutual Recognition

Abstract

This paper provides a comparative analysis of product standards agreements between heterogeneous countries. A simple model of vertical standards is developed where countries have heterogeneous preferences for a negative or positive consumption externality. I compare two major types of standards agreements, those based on national treatment (NT) and mutual recognition (MR). Unlike NT, MR can induce a mismatch of standards between countries, a problem that tends to get worse as country preferences diverge. Due to this mismatch problem, NT tends to become relatively more welfare‐enhancing than MR for countries with more dissimilar preferences. These findings explain why the World Trade Organization, the Trans‐Pacific Partnership, and the European Union choose different types of standards agreements. The paper also sheds new light on the desirability of international harmonization of product standards. (JEL F13, F18, O24)

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

“…5 See also Geng (2019), who extends the analysis of Costinot to consider preference heterogeneity across countries in the valuation of a consumption externality. 6 Campolmi, Fadinger, andForlati (2014, 2018) extend Ossa's (2011) analysis of delocation to domestic policies, but they focus on fiscal instruments and do not consider product standards.…”

“…55 See also Geng (2019), who extends the analysis of Costinot to consider preference heterogeneity across countries in the valuation of a consumption externality. …”

Global digital platforms, technology transfer and foreign direct investment policies in two‐sided markets

“…9 9 Although this is the first paper to consider FDI policies in an environment with two‐sided network externalities, several earlier papers studied the effects of trade policies and agreements on technological standards in open economies with the same‐side network externalities or more generic consumption externalities. See, for example, Barrett and Yang (2001), Costinot (2008), Gandal and Shy (2001), Geng (2019), Klimenko (2009) and Matutes and Regibeau (1996). In a recent working paper, McCalman (2022) analyzes optimal tariffs and international trade agreements in the context of an open economy model with the two‐sided market characteristics. …”

Does trade weaken product standards?

“… These externalities can take a variety of forms. For example, Gandal and Shy () focus on compatibility standards in the presence of network externalities; Geng () examines different types of international recognition of standards under a consumption externality, and Petropoulou () considers national standard‐setting under an international duopoly, where international trade links create cross‐country externalities.…”

“…Under the alternative, mutual recognition, it is the foreign government that sets the standard for its firms exporting abroad. See Costinot () and Geng (). Dinopoulos, Livanis, and West () demonstrate the welfare benefits of country‐of‐origin labeling when product risk depends on origin.…”