INTERNATIONAL AGREEMENTS ON PRODUCT STANDARDS UNDER CONSUMPTION EXTERNALITIES: NATIONAL TREATMENT VERSUS MUTUAL RECOGNITION

This paper provides a comparative analysis of product standards agreements between heterogeneous countries. A simple model of vertical standards is developed where countries have heterogeneous preferences for a negative or positive consumption externality. I compare two major types of standards agreements, those based on national treatment (NT) and mutual recognition (MR). Unlike NT, MR can induce a mismatch of standards between countries, a problem that tends to get worse as country preferences diverge. Due to this mismatch problem, NT tends to become relatively more welfare‐enhancing than MR for countries with more dissimilar preferences. These findings explain why the World Trade Organization, the Trans‐Pacific Partnership, and the European Union choose different types of standards agreements. The paper also sheds new light on the desirability of international harmonization of product standards. (JEL F13, F18, O24)