Social Regulations as Trade Barriers: How Regulatory Reform Can Also Help Liberalize Trade

By Vogel, David | Brookings Review, Winter 1998 | Go to article overview

Social Regulations as Trade Barriers: How Regulatory Reform Can Also Help Liberalize Trade


Vogel, David, Brookings Review


As U.S. regulatory reformers scrutinize the costs and benefits of federal regulations, they should also heed the regulation-related complaints of unfair trade practices from America's trading partners. For Just as many U.S. health, safety, and environmental regulations impose substantial costs on American industry without yielding significant gain to society, some also disproportionately burden foreign producers seeking to do business here.

Criticisms of U.S. regulations by foreign firms are not always well founded. Just because a regulation imposes undue strains on importers does not automatically make it protectionist. But as a brief review of two important U.S. social regulations--fuel economy standards and rules for reformulated gasoline--will show, the regulatory burdens imposed on domestic firms are often closely connected to the emergence of new nontariff trade barriers. In cases such as these, trade liberalization and regulatory reform can be mutually reinforcing.

U.S. FUEL ECONOMY STANDARDS

When Congress faced the challenge of formulating a long-term plan to reduce the nation's use of oil during the early 1970s, federal price controls on fuel were encouraging excessive consumption. Nowhere was this more apparent than in automotive fuel use, which accounted for 25 percent of American energy demand and the dominant share of domestic petroleum consumption. But fearful of a political backlash from ending price controls--let alone adding to the price with a new fuel tax, the policy adopted by virtually all other advanced nations--Congress shifted the burden of conservation onto motor vehicle manufacturers. It established fuel economy standards for all passenger vehicles sold in the United States. Beginning in the 1978 model year, the average fuel economy standard for all cars produced by each company was set at 18 miles per gallon. (Since 1990 the requirement for passenger cars has been 27.5.)

But the corporate average fuel economy (CAFE) standards are a dubious means of conserving energy. Their biggest shortcoming is that they focus the entire effort to reduce fuel consumption at the point of vehicle purchase. Once a consumer has bought a relatively fuel-efficient vehicle, he or she has no further incentive to drive less, or more slowly, or carpool--all good ways to conserve energy. In fact, because a new vehicle gets better gas Mileage, motorists are inclined to drive more. Between 1973 and 1994 the average cost of motoring an extra mile fell by one-third, driving up the use of vehicles and driving down--by between 10 percent and 30 percent--the potential fuel savings from CAFE.

Although nearly 20 years of CAFE standards have helped improve overall fuel efficiency in the United States, a gas tax would have been much more efficient. According to Robert A. Leone and Thomas W. Parkinson, a "gasoline tax required to match CAFE's conservation effect would have reduced producer and consumer welfare by 8 cents a gallon saved while the regulatory alternative actually reduced welfare by around 60 cents a gallon saved." Pietro Nivola and Robert Crandall estimate that a tax of (at most) 25 cents a gallon beginning in 1986 would have yielded as much, if not more, oil conservation as was achieved by CAFE through 1992.

Meanwhile, total fuel usage by all U.S. motor vehicles grew by 50 percent between 1970 and 1988. Average motor fuel consumption per vehicle in the United States has remained twice as high as in Europe and Japan. U.S. gas consumption reached a record 7.79 million barrels a day in 1995.

FUEL STANDARDS AND TRADE DISPUTES

Although CAFE may not have cut the U.S. use of oil, it has improved the competitive position of the American auto industry by handicapping European makers of luxury cars. Nearly A the vehicles turned out by Jaguar, BMW, Volvo, Saab, Mercedes Benz, Rolls-Royce, and Porsche are high-end products with relatively low mileage per gallon. …

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Social Regulations as Trade Barriers: How Regulatory Reform Can Also Help Liberalize Trade
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