Domestic regulation and international trade: Where's
the race? Lessons from telecommunications and
RONALD A. CASS AND JOHN R. HARING
Critics claim that international trade undermines a nation's ability to maintain an independent national regulatory structure that would be chosen under democratic-representative processes. The result supposedly is a “race to the bottom” in protection of public interests. That claim underlay recent protests against the World Trade Organization. Those who take to the streets in protest are not the only ones who subscribe to this theory. Politicians and other commentators frequently conclude that public welfare is reduced by open trade without some mechanism to safeguard domestic regulation or otherwise to secure its ends.
The race-to-the-bottom metaphor builds on economic writings suggesting that, at least under certain conditions, open trade in goods leads to factor price equalization with reduced returns to factors that are relatively abundant in other nations.1 Thus, for example, if low-skilled labor is relatively abundant outside the United States, open trade in products intensively utilizing such labor will (according to this theory) lead to lower real income for low-skilled American workers.2 That conclusion has led to calls for restraining trade, for harmonizing divergent national rules, or for adopting uniform transnational regulatory accords. Economists, however, debate whether this relationship actually describes reality, noting that the conditions from which factor price equalization was deduced seldom occur.3
Even if trade does not bring about factor price equalization, its contribution to competitioninadomesticeconomyaltersbotheconomicandpoliticalactivity. The transmission of competitive effects from trade resembles the effects predicted by the race-to-the-bottom metaphor, but trade's competitive effects generally benefit both national economic welfare and individual liberty. One effect could be a change in domestic regulation, including a change that would generally be characterized as reducing the scope or bite of regulation. Contrary to the race metaphor's implication, such changes typically enhance national welfare. The paradigm for trade's____________________