# **Introduction**

As the 20<sup>th</sup> century drew to a close, GATT’s original goal of a gradual abolishment of tariffs and quotas had been achieved to a considerable extent. Yet, as Robert Baldwin points out as early as 1970, this leaves the playing field still far from level: “The lowering of tariffs has, in effect, been like draining a swamp. The lower water level has revealed all the snags and stumps of non-tariff barriers that still have to be cleared away.” With tariff barriers becoming increasingly less important, differences in national regulatory regimes are becoming ever more visible. These regulatory regimes include areas as varied as government procurement rules, inward foreign investment, competition policy, labor standards and environmental norms as well as product standards and technical regulations (Hoekman, Mattoo, English, 2002).

This paper has singled out technical regulations (termed technical barriers to trade or TBTs in the WTO context) as one particular domestic regulatory regime and will analyze the means that have been employed in recent years to overcome the negative trade-effects thereof.

Firm-level surveys conducted in both industrial and developing countries, consistently identify technical regulations (along with rules of origin and customs procedures) as the main non-tariff export constraint (World Bank TBT Survey, 2004; OECD metasurvey 2003). Richard Baldwin (2000) points out that TBTs have been the main concern of the EU as far as trade barriers are concerned ever since the abolishment of all internal tariffs in 1973. In the context of the recently launched trade talks between the EU and ASEAN, Pascal Lamy expressed the belief that harmonizing standards and rules in areas such as safety, health or consumer protection rather than abolishing tariffs and quotas, were “the real 21<sup>st</sup> century trade issues”.<sup>1</sup> The urgency of the topic is further underlined by the significant rise in WTO dispute settlement case load that turns on standards-related issues.

This study will investigate trade effects of TBT liberalization in the form of harmonization and mutual recognition agreements for testing procedures (MRAs). The theoretical part of the paper is framed in terms of Melitz’s (2003) heterogeneous firms approach. The paper develops Melitz’s model so as to formalize the effects of MRAs and harmonization initiatives on bilateral trade flows and applies this new theoretical framework in the empirical part of the paper. The latter consists of a twostage gravity estimation and investigates sectoral effects of TBT liberalization on parties to the agreement as well as excluded industrialized and developing countries respectively.

In Section I, technical issues surrounding standards as well as liberalization efforts in this area will be discussed. Different types of standards will be defined and classified. The paper will subsequently focus only on government imposed technical regulations. The various categories of legal instruments that have been employed to overcome trade-distorting effects connected to them will be discussed. The analysis will then focus on harmonization initiatives and mutual recognition agreements (MRAs) of testing procedures as two such instruments.

> 1 quoted in Chen and Mattoo (2004)

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