DP1204 Free Trade and Evolving Standards
Because standards and regulations respond to a society's demand for specific public goods, we expect them to be shaped by preferences, endowments, technologies - the fundamental determinants of this demand. There is no a priori reason why standards should be equal in different societies. This paper studies the interaction between standards and international trade. It shows that although standards can be used to manipulate trade flows, there is no logical connection between standards harmonization and gains from trade. Moreover, standards themselves will be modified by the opening of trade and under reasonable assumptions harmonization will be one of the outcomes of free trade. The empirical evidence suggests that industry groups are assuming an increasing role in shaping government regulations. In this perspective, standards need not be automatically identified with national policies, and the possibility of international alliances of industry groups must be considered. The result of market integration is then international harmonization together with increased differentiation across industries.