Regulatory Protectionism and the Law of International Trade

Abstract

A wide array of policy instruments can protect domestic firms against foreign competition. Regulatory measures that raise the costs of foreign firms relative to domestic firms are exceptionally wasteful protectionist devices, however, with deadweight costs that can greatly exceed those of traditional protectionist instruments such as tariffs and quotas. This article develops the welfare economics of regulatory protectionism and a related political economy analysis of the national and international legal systems that must confront it, including the WTO, the NAFTA, the European Union, and the United States federal system. It explains why regulatory measures that serve no purpose other than to protect domestic firms against foreign competition will generally be prohibited in politically sophisticated trade agreements, even when other instruments of protection are to a degree permissible. It further suggests why regulatory measures that serve honest, non protectionist objectives will be permissible in sophisticated trade agreements even though their regulatory benefits may be small and their adverse effect on trade may be great -- that is, it explains why trade agreements generally do not authorize "balancing analysis" akin to that undertaken in certain dormant commerce clause cases under U.S. law.

JEL Classification: F13