Regulatory Competition

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REGULATORY COMPETITION
AND INTERNATIONAL HARMONISATION

Konstantine Gatsios* and Peter Holmes**

* Athens University of Economics and Business, 76 Patission St, Athens 104-34, Greece; and CEPR.

** School of European Studies, University of Sussex, Brighton, BN1 9QN, UK.
Tel : (01273) 678832, email p.holmes@sussex.ac.uk

Abstract

In recent years more attention has been paid to the extent to which various form of domestic regulatory policies could, deliberately or inadvertently, constitute barriers to trade.

Producer interests often demand trade measures to force harmonisation on trading partners. Economists on the other hand argue that differences in national rules and regulations are just one factor which determine comparative advantage and many writers have argued that "regulatory competition" is positively beneficial as a way of selecting the best norms, and cite the writings of Tiebout in support of this claim.

Regulatory competition can be defined as the process where regulators deliberately set out to provide a more favourable regulatory environment, in order either to promote the competitiveness of domestic industries or to attract more business activity from abroad. The setting of national regulations in response to the actual or expected impact on internationally mobile goods, services or factors on national economic activity may lead to a form of arbitrage by economic actors across the various market opportunities.

Critics claim that it can lead to a "race to the bottom" in national standards. Here we argue that the "Tiebout Theorem" is in fact wholly inapplicable to regulatory competition and we conclude that regulatory competition is neither as beneficial as its advocates say nor as harmful as critics maintain.

Acknowledgements

The authors are grateful for advice to the editors of the 'New Palgrave Dictionary of Law and Economics' where this essay is scheduled to appear. Peter Holmes is grateful to the ESRC's Global Institutions Programme for financial support for work on the International Regulation of Competition and Competition Policy.

Keywords : International Harmonisation; Regulation; Fiscal Federalism

JEL Classifications : F2,H1,K2,L5,

Regulatory Competition
By Konstantine Gatsios and Peter Holmes

As formal tariff and non-tariff barriers are reduced across the world, more attention has been paid to the extent to which various form of domestic regulatory policies could, deliberately or inadvertently, constitute barriers to trade. A debate has opened up in which producer interests regularly highlight differences in regulatory conditions in particular foreign markets and argue that this gives exporting firms an unfair advantage. The implication is that trade measures should be taken against countries who do not agree to amend their legislation to conform to that of the complaining country. The United States has been very active in this area, but the EU has in its own way pursued this goal by promising totally free access to goods from its neighbours in Central and Eastern Europe only when they harmonise their internal economic rules along EU lines. Economists have been extremely sceptical of demands for a "level playing field" of this kind, arguing that differences in national rules which modify relative prices are no like any other distinctive factors determining national comparative advantage. The concept of "regulatory competition" has been developed to suggest that it is in fact desirable that countries should differentiate their rules and standards so that market forces may assist in the selection of the best régimes in some sense. It is widely held that the work of Tiebout (1956) provides a theoretical case for this kind of approach. The recent research project reported on in Bhagwati and Hudec (1996) makes it clear that the issue does not lend itself to simple conclusions. In this paper we explore one aspect of the larger debate, namely the...
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