Harmonization...What Else? The Role for International Regulatory Agreements

We examine the potential role of international agreements on product standards through a stylized model where countries have different regulatory preferences and firms incur fixed costs of regulatory diversity. Overall, our analysis suggests that the common perception of regulatory agreements as playing a key role in promoting harmonization may have been overstated. We show that regulatory harmony can arise even in the absence of an agreement, and that “spontaneous” harmonization may be inefficient, suggesting that the role of regulatory agreements could be to promote regulatory diversity rather than harmonization. Moreover, the role of regulatory cooperation depends in important ways on the pattern of trade: in the presence of intra-industry trade, the potential role of an agreement tends to be more limited, and under some conditions it can only play a coordination role. Finally, through the lens of our model, we examine the “Pop Critique” of regulatory agreements, according to which lobbying by corporate interests may lead to welfare-reducing harmonization. Our analysis lends only limited support to this critique.