Dismantling barriers to trade

Issues in Science and Technology, Spring 1996 by Hufbauer, Gary

Product Standards for Internationally Integrated Goods Markets, by Alan O. Sykes. Washington, D.C.: Brookings Institution, 1995, 235 pp.

Sherlock Holmes wondered about the dog that didn't bark. Astronomers are puzzled by "missing" matter. And international economists are perplexed by the hidden barriers that explain why many international trade flows are so small, despite the virtual elimination of tariffs and quotas. For example, trade between the states of the United States and between the provinces of Canada is about 10 times larger than trade across the U.S.-Canadian border (after allowing for geographic distance and income differences between pairs of states or provinces). For those who, like myself (but unlike Pat Buchanan), believe that integrated markets are essential for world prosperity, it is important to identify and dismantle such hidden barriers.

Three culprits are usually mentioned in the literature: differences in language; business law and culture;and product standards and assessment procedures. In Product Standards for Internationally Integrated Goods Markets, Alan O. Sykes, a University of Chicago law professor, takes up the issue of standards and assessment, explores how national differences impede trade, and investigates what is being done to remove unnecessary barriers. His book is part of a major 21-volume series, Integrating National Economies, launched by the Brookings Institution.

After introducing the topic, Sykes devotes two chapters to describing the problem and surveying the economics. His last two chapters present and evaluate international means of reducing intentional and unintentional barriers, ranging from international standards organizations to trade agreements. A useful feature of the book, for which the Brookings Institution should be commended, are extended comments on the main text by two scholars, Kalypso Nicolaidis and Jacques Pelkmans.

Broadly speaking, Sykes argues that differing national standards and test procedures significantly hinder international commerce. However, Sykes is so conversant with, and sympathetic to, the domestic institutional reasons underlying these differences that he finds scope only for incremental, evolutionary measures that promote the integration of the international marketplace. My main complaint is that Sykes does not make bolder recommendations.

THE ROLE OF STANDARDS

National systems for establishing product standards, verifying that products conform to those standards, and providing international means of oversight in order to dismantle unnecessary barriers are highly complex, reflecting the intricacies of modern economies in which hundreds of thousands of products are made by tens of thousands of firms, which in turn are regulated by hundreds of governments. Sykes does a superb job of explaining the economic and social arrangements that underpin the standards and assessment system.

Most business commentators agree that technical barriers to trade (TBTs, to use the jargon of the field) are important. But neither Sykes nor anyone else has estimated whether national differences in product standards and assessment procedures work like a 2 percent tariff, 0 percent tariff, or perhaps even a 50 percent tariff. A National Research Council committee that I chaired discovered a daunting absence of empirical work on the costs and consequences, domestic and international, of product standards and assessment procedures. We can count the number of standards (93,500 in the United States) and of standards-setting organizations (the American Society for Testing and Materials, the Society of Automotive Engineers, and so on). We can say something about the average time it takes to promulgate a standard (36 months for the Joint Technical Committee of the International Standards Organization and the International Electrotechnical Commission). But when it comes to identifying the cost of designing a product to meet a certain standard, or the cost of testing products, or the benefits of common international standards, we must fall back on anecdotes. At this juncture, the most that we can say about the system as a whole is that TBTs probably act as a major hindrance to economic integration. They are sufficiently important that 100 chiefs of major U.S. and European corporations, meeting at the TransAtlantic Business Dialogue in Seville in November 1995, called for concerted negotiations between the United States and Europe on this issue.

Of course, national standards and assessment procedures were not principally designed to thwart economic integration. Their intent is quite different from that of tariffs and quotas. Standards are designed to advance useful goals, notably to protect health, safety, and the environment (especially in circumstances where caveat emptor is not adequate), and to ensure interoperable systems (such as the ability to use the same cellular telephone anywhere in Europe).

As a byproduct of these worthy goals, however, standards and assessment procedures can alter the tenor of competition, both domestically and internationally. A standard can serve to enlarge the number of market participants by creating common characteristics that define interchangeable products made by different firms (as in the cellular telephone example). But standards can also stifle innovation by blocking the path for new variants of old products (a major critique of local building codes). And they can narrow the market by embracing specific design or test features that very few firms can meet (a severe problem with military specifications issued by the Department of Defense).