regulations are generally considered the most important by the firms surveyed. The study shows that in order to meet standards, firms invest in additional plant or equipment, one-time product redesign, product redesign for each export market, additional labor for production, additional labor for testing and certification, or lay off workers instead of making these types of investment in order to keep the costs from increasing.

Quantitative analysis deriving the trade effect of diverging standards directly from the number or costs of standards has generally proven challenging due to the large number of standards in existence. Additionally, the wealth and idiosyncrasy of legal documents recording them makes it difficult to match standards across countries. Studies conducted in this vein are those by Moenius, 1999; Swann, Temple and Shurmer, 1996; Vancauteren and Weiserbs, 2003; Mantovani & Vancauteren, 2003. A general weakness of these attempts to estimate the impact of standards on trade is that they are generally not based on a sound theoretical framework.

The attempts of modelling standards barriers and their remedies theoretically are also very limited in number and have been undertaken only very recently. All of them use Krugman’s (1980) framework as the basis to model trade between countries, but are very different in the way they are being implemented. One paper that has endeavored to formally model TBTs (yet not their liberalization) and showing the need to overcome them is Ganslandt & Markusen (2001). Baldwin (2000) as well as Mattoo and Chen (2004) take the analysis a step further by modelling both TBTs and their liberalization, cautioning against the discriminatory effects that the latter may entail. Mattoo and Chen (2004) find that harmonization in the EU raises both intra-regional trade as well as trade with excluded developed countries; at the same time their results indicate that it diverts trade away from developing countries. The paper also shows that MRAs have a more powerful impact on both types of trade, but if they contain rules of origin, then intra-regional trade increases at the expense of imports from the rest of the world, especially developing countries. In a firm level analysis Chen, Wilson and Otsuki (2004) show that testing procedures and lengthy inspection reduce exports of developing countries by 9% and 3% respectively and standards reduce the likelihood of exporting to more than three markets by 7%.

# **SECTION III**

# **Melitz model and extensions**

Given recent developments in international trade theory, it seems that additional insight into the nature of technical barriers to trade as well as their liberalization can be gained by formulating a model in terms of Melitz’s (2003) heterogeneous firms framework. Melitz’s model constitutes an improvement over existing trade models to the extent that it is able to explain the many zero entries in the global trade matrix (i.e. the fact that more than half of bilateral country pairs have no trading relationship at all) as well as appropriately reflecting the asymmetry of bilateral trade-flows. Both of these features are obtained via the endogenous selection of individual firms into one or several export markets. Crucially, Melitz points to two margins of adjustment for 12