DP17199 A simple theory of deep trade integration
Which countries should aim for international regulatory cooperation? We develop an imperfectly-competitive trade model where countries differ in technology and regulatory preferences over local consumption externalities. Countries set different product standards, but tailoring products to each market is costly for firms. Trade occurs when Ricardian gains outweigh countries’ asymmetric regulations. Regulatory cooperation is more beneficial for countries with intermediate differences in regulatory preferences, particularly when tariffs are already low. Mutual regulatory concessions allow countries with strong comparative advantages in different externality-generating goods to implement deeper agreements. With highly-dispersed regulatory preferences, international cooperation is characterized by regulatory blocs.