Economic Applications of Product Quality Regulation in WTO Trade Agreements

• Main Author: Pienaar, Natalie
• Format: Doctoral Thesis
• Language: English
• Published: Stockholms universitet, Institutet för internationell ekonomi 2005
• Subjects: Economics; Nationalekonomi
• Online Access: http://urn.kb.se/resolve?urn=urn:nbn:se:su:diva-485; http://nbn-resolving.de/urn:isbn:91-7155-082-8

This thesis comprises three theoretical essays on the economic applications of product quality regulation in WTO Agreements: Economic Applications of the WTO Consistency Requirement Article 5.5 (consistency) of the SPS Agreement requires countries to avoid arbitrary distinctions in health protection on goods that are associated with the same disease, if such distinctions result in discrimination or a disguised restriction on trade. For a bound tariff, a marginally binding consistency constraint improves welfare but welfare is reduced if the constraint is interpreted too strictly. When tariffs are negotiated subject to consistency, the welfare effects of consistency depend on whether trade negotiators are myopic or forward-looking. Public Opinion, Product Quality Regulation and Trade attempts to answer the following questions. Should governments be forced to admit products that science deems healthy, but consumers do not? Are consumer fears sufficient to justify a ban on a healthy import or should the fears refect scientifically proven risk? To what extent can regulatory authorities exploit these fears for protectionist purposes? In an adverse selection model, consumers have imperfect information with regard to government type and import product quality. The government of the country exporting the product of uncertain quality has an incentive to commit to a strategy where it recognises the importing country's right to ban the unhealthy import but tariff retaliates if the importing country bans a healthy import. Under such a strategy first best is achieved; consumers learn product quality and consumption distortions associated with consumer fear are eliminated. Allowing the importing Asymmetric Information and Country-of-Origin Labelling concerns information asymmetries as a rationale for trade policy when adverse selection is an international problem. Firms in countries North and South choose between producing high or low quality. Those choosing low quality take advantage of adverse selection problems, while those choosing high quality do so to establish reputations and earn positive profits in subsequent periods when information is perfect. Cross-country differences in the relative costs of producing high quality result in different average qualities and prices in autarky. Trade is welfare deteriorating (improving) for the North (South). Allowing the Northern government the option of origin-labelling eliminates the international externalities associated with trade when adverse selection is a transnational problem, and is unambiguously welfare improving for the North.