International Trade
Evolving standards

Standards are regulations aimed at attaining public goods that a community deems desirable. If these standards are shaped by society's demands, then they will evolve with economic conditions and change as allocations change. Could harmonization be the spontaneous result of opening trade? If some convergence occurs, does it need to be inefficient, as in many 'race to the bottom' arguments, or can it be the appropriate response to the changed allocations caused by trade flows? Research Fellow Alessandra Casella addresses these questions in Discussion Paper No. 1204.

The first part of the paper analyses a very stylized model of international trade. It is shown that uniformity of standards generally has no necessary correlation with gains from trade, and that trade causes standards convergence if its effect is to reduce differences in national incomes. If standards are either adopted voluntarily by groups, or if government regulations defer to technical specifications developed by private industry groups, then standards are not necessarily defined geographically, but according to product types, and the coalitions of producers can be physically located anywhere. The evidence presented supports this view, and this alternative approach to the determination of standards is discussed in the second part of the paper. Two simple models of coalition formation are described which reach two main results: an increase in market size is consistent with an increase in the optimal number of coalitions; and the reorganization of coalitions is not simply a secession by a subgroup, but a wider rearrangement. This suggests that larger markets will be associated with a shift from national alliances to international partnerships organized along more and more narrow industry lines.

Free Trade and Evolving Standards
Alessandra Casella

Discussion Paper No. 1204, July 1995 (IT)