Domestic product standards, harmonization, and free trade agreements

This study considers endogenous domestic standards on products to control negative consumption externalities using a three-country model of international oligopoly with a possible free trade agreement (FTA). The authors examine how the level of product standards and welfare are affected under an FTA and how the harmonization of standards affects the impact of the FTA. They find that if asymmetries in preferences or transboundary externalities are not too strong, an FTA makes product standards more stringent. In such a case, the FTA may or may not make the member countries better off, but it does make the non-member country better off. They also demonstrate that harmonizing the standards across the FTA members makes an FTA more favorable.