Certification programs and north-south trade

Abstract

This paper studies how the voluntary standards established by certification programs affect consumer welfare and international trade in an open world economy. I develop a two-country model with differentiated products and imperfectly-informed consumers. Consumers in both countries value the quality of goods, but cannot discern their quality unless they are certified. Firms in each country differ in their abilities to produce quality, and the distribution of technological ability is superior in the home country. I first consider the circumstance in which the home country's government unilaterally administers a certification program. I show that the home country's terms of trade are increasing in the standard. It follows that the standard chosen by the home country is protectionist in the sense that it is greater than the standard that would be chosen by a world welfare maximizing authority. Also, the volume of trade is lower under the home country's program than if the standard were chosen by a world authority. The volume of trade and foreign welfare, however, are greater under the home country's program than if there is no certification program at all. Next, I consider the case where a certification program is administered by each country, and standards are set non-cooperatively. I show that the home and foreign country standards are strategic complements. The paper concludes with a discussion of the global inefficiencies that result from the non-cooperative setting of voluntary standards and their policy implications.