# **Standards as Trade Barriers**

Despite the fact that standards are important in achieving efficiency, their presence can turn out to be an obstacle to trade: while integrating the markets of those who participate, standards can act as a barrier to those who are excluded. In the case of compatibility standards, market forces will act to bring standards in line with those generally prevailing in the market, even though these standards are technically voluntary. Products not meeting these standards may simply not be demanded by firms/consumers as they are incompatible with the other inputs (as in Case 1a) or the prevailing network (as in Case 1b). In the case of government imposed quality standards, on the other hand, compliance is mandatory. In this case the standards are also known as technical regulations. Products not meeting these technical regulations will be banned from the market.

Country-specific standards effectively create additional costs for foreign producers by forcing them to adjust their product and production process so as to meet individual national standards. Further costs will arise from the requirement to subsequently prove conformity with these standards (World Bank TBT Survey, 2004; Baldwin, 2000; Chen and Mattoo, 2004; Wilson, Chen and Otsuki, 2006). This creates two negative side effects: Firstly, foreign producers are hurt by increased (possibly prohibitive) production costs. This may turn out to be particularly burdensome for developing countries trying to get access to industrialized countries’ markets.<sup>2</sup> Second, by creating artificial entry barriers to national markets, standards have a negative effect on efficiency. This is due to the fact that firms which are forced to meet different standards for different markets are unable to take advantage of economies of scale, thereby dampening productive efficiency. As markets remain segmented by standards barriers, firms are further able to raise price over marginal cost, implying less allocative efficiency than could be reached with integrated markets. Even though standards are valuable in and of themselves, these effects have to be taken into account when setting them.

Additionally, Baldwin (2000) points to a “magnification effect of globalization”: the greater the freeness of trade, the greater the effect of any remaining barriers especially from an economic geography point of view. In other words, a reduction in distortion arising from tariff barriers, will lead to an increased impact of regulatory differences on the location of production. Finally, such regulations can easily be abused by protectionists to create artificial entry barriers to the domestic market. It is generally difficult to tell, which purpose a particular standard or regulation serves, but there is likely to be an element of both motivations in either. This inherent ambiguity makes it difficult to overcome standards and regulations as technical barriers to trade (TBTs) entirely, but two second-best measures in particular – harmonization and mutual recognition of testing procedures – will be the subject of this paper. The paper will focus on liberalization/harmonization of government-imposed regulations rather than voluntary industry standards.

> 2 cf. World Bank Survey on TBTs: Wilson and Otsuki (2004) “Standards and Technical Regulations and Firms in Developing Countries: New evidence from a World Bank Technical Barriers to Trade Survey”; find that standards and technical regulations are an important factor affecting a firm’s operation and ability to export.

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