Narrowing the Channel

The Politics of Regulatory Protection in International Trade

Robert Gulotty

• Publisher: University of Chicago Press
• Year: 2020
• ISBN:
  9780226669533
• Topic: Politics & International Relations
• Subtopic: Politics
• Index: Politics & International Relations

While large, multinational corporations have supported the removal of tariffs, behind the scenes these firms have fought for protection in the form of product regulations, including testing, labeling, and registration requirements. Unlike tariffs, these regulations can raise fixed costs, excluding smaller firms from the market and shifting profits toward global giants. Narrowing the Channel demonstrates that globalization and globalized firms can paradoxically hinder rather than foster economic cooperation as larger firms seek to protect their markets through often unnecessarily strict product regulations. To illustrate the problem of regulatory protectionism, Robert Gulotty offers an in-depth analysis of contemporary rulemaking in the United States and the European Union in the areas of health, safety, and environmental standards. He shows how large firms seek regulatory schemes that disproportionately disadvantage small firms. When multinationals are embedded in the local economy, governments too have an incentive to use these regulations to shift profits back home. Today, the key challenge to governing global trade is not how much trade occurs but who is allowed to participate, and this book shows that new rules will be needed to allow governments to widen the benefits of global commerce and avoid further inequality and market concentration.

PART I

A Theory of Regulatory Protection

CHAPTER ONE

Introduction

In the late summer of 2007, US regulators were alerted that 1.5 million children’s toys contained dangerous levels of toxic lead. These toys were designed and sold by the American toy giant Mattel but manufactured by a network of affiliates and subcontractors in China. One of these Chinese manufacturers used neurotoxic lead paint on toys featuring characters from Sesame Street and Dora the Explorer. The defect went unnoticed by Mattel’s internal testing and audits, allowing toxic toys to spread across the world.1 By the end of the year, product defects, including other lead paint incidents, had forced companies to recall 44 million children’s products. Consumers, legislators, and safety advocates were outraged, and within a few months of the first incident, the US legislature passed the Consumer Product Safety Improvement Act (CPSIA) of 2008, overhauling the regulatory regime for children’s clothes, books, and toys across the supply chain.2

The new legislation made two major changes to the regulation of children’s products. The first was to provide additional funding and authority for inspectors, a natural response to Mattel’s detection failures. The second was to slash the level of lead allowed in technical standards for children’s products. The new standard moved the allowed level of lead down from 600 parts per million to 100 parts per million, the technical boundary of reliable testing.3 This level of sensitivity would have made no difference to the 2007 lead crisis. Tests of the faulted toys revealed lead levels as high as 50,000 parts per million, more than 80 times higher than the existing legal limit.4 Nonetheless, one of the sponsors of the legislation, Bobby Rush of Illinois, boasted that only the holy ground of Mount Horeb, where Moses received the Ten Commandments, would meet the new standard.5 The effect was a steep increase in testing costs: all children’s products sold in the United States would be required to undergo independent laboratory tests at a cost of tens of thousands of dollars.

The new standard reshaped the American toy industry. Most producers of children’s products are small, surviving by producing niche products at relatively low volume. In the United States, crafters of handmade goods and other small-batch producers struggled to cover the costs of sending each version of their craftwork to laboratories for testing. As one producer put it, “The CPSIA wants our company to sell 50 items, not our current 2,000, and wants us to sell them in lots of 50,000 units, not 500–10,000 as we do currently” (Woldenberg 2009). Companies were forced to reduce variety, raise prices, or exit the market entirely. Before the CPSIA, there were 770 firms producing children’s toys in the United States, but by 2012, that number had fallen to 559.6 The survivors passed on the costs to consumers—toy prices rose dramatically. The outcome was industrial concentration: in a period when the value of domestic toy shipments rose from $28 billion to $44 billion, the tonnage of shipments dropped by 7 percent.7

While these domestic effects were severe, the impact of the CPSIA was magnified abroad. Many small exporters were unable to charge 50 percent more to cover testing costs for their products and were forced to abandon the American market.8 In China, where 80 percent of toys are manufactured, access to the US market is sine qua non for survival.9 After the CPSIA came online in 2009, the number of toy manufacturing companies in Guangdong Province plummeted from 8,000 to 3,000.10 Small and independent producers bore the brunt of the losses, decimated by the 10-fold increase in testing costs under the CPSIA (Huang 2011). These smaller firms lacked American headquarters or affiliates and US Congress could safely enact regulations at their expense.

Nonetheless, the CPSIA garnered support from the largest toy manufacturers. Mattel spent millions lobbying to support the legislation, twice as much as on all other issues in the previous eight years. The other major toy manufacturers followed suit. Hasbro, the second-largest US toy company, hired a lobbyist for the first time in the company’s history to push for the bill (Carney 2009). Anne Northup, the commissioner of the US agency tasked with enforcing the CPSIA, testified to Congress that these companies pushed the legislation because of its high costs.11 By ensuring higher prices and less competition, regulations benefited a small number of the most productive firms while “the backbone of [the US] economy, small businesses—from screen printers to manufacturers of chemistry sets for schools—are being forced to cut jobs or take other drastic measures due to the cost of compliance” (United States 2010). Meanwhile, multinationals saw import value from China rise by 11 percent and profits nearly triple.12

This book argues that the political dynamics of regulatory measures such as the CPSIA reflect a transformation in commercial politics. Governments are increasingly setting stricter regulations to advantage their large firms. Regulatory barriers such as the requirements to test and label children’s products raise fixed costs that exclude smaller and less productive producers from the market. Those firms exit, lowering the variety of products available and raising the prices of those that remain. Larger, more productive firms thereby have fewer competitors, can charge higher prices because they can cover the costs of the more onerous regulation. This simple account of firm preferences, typical of past theories of regulatory capture, is transformed when applied to international commercial relations.

While theories of regulatory capture have long identified beneficiaries of restrictive government actions, this book contributes to understanding when these interests would be acted on by governments. What interest do national governments have in the foreign ownership of imports? I argue that the connection lies in the development of a new kind of international commercial politics, entangled mercantilism, where national interests flow through the global production networks operated by multinational corporations.13 Governments seek to shift value toward large firms abroad because such firms have local operations that contribute to the local economy. By helping governments internalize the profits of regulatory protection, global firms promote the use of regulatory barriers to trade. Regulatory power is still bound by national borders, but profits, and so national interests, need not be.

1.1. International Conflict over Regulatory Protectionism

Regulatory protectionism originates in economic conflict among firms and results in political conflict between nations. Governments value the interests of their exporters as sources of revenue, engines of growth, and employers. Just as the largest exporters benefit from regulatory protection and smaller firms lose, there are national consequences to regulatory protection. To address these concerns, governments have tried to use the global trade system to limit regulatory protectionism—but to no avail. For instance, smaller exporters convinced Beijing to deploy diplomatic resources to oppose the CPSIA at the World Trade Organization (WTO). Chinese diplomats formally submitted a specific trade concern (STC) objecting to the CPSIA as a technical barrier to trade (WTO 2009). At the same time, Chinese regulators initiated an informal counteroffensive, rejecting imports of millions of dollars of frozen pig kidneys from the US (Beamish and Bapuji 2008).14 Both efforts failed. This case is only one of hundreds of new regulatory barriers being submitted to the WTO. Addressing the trade effects of programs like the CPSIA is high on the agenda in Geneva, where governments now raise STCs at a rate of 20 per month. Yet going from an agenda item to concrete negotiations has remained an elusive move, and regulatory barriers were left largely unaddressed in the Doha Round of multilateral negotiations, and today even cooperation on tariffs is beginning to unravel (Cho 2007).

The rise in regulatory protection and the absence of meaningful international rules addressing regulatory matters stand in stark contrast to the success of global agreements on tariffs. Even the global economic crisis did not cause governments to reverse their commitments on tariffs, and the system appears to be remarkably robust to challenge, but the prospects for new agreements on regulatory matters have, if anything, moved further out of reach with the failure of the Doha Round of negotiations at the WTO.

Some scholars and analysts would argue that the absence of rules addressing regulatory protection relative to tariffs is less a failure of international cooperation and more a consequence of the domestic trade-offs inherent in regulatory protection. From a national welfare perspective, even if a regulation reduces the number of varieties and raises prices, a regulation can serve consumer interests by ensuring that goods are safe and of high quality. This has led some scholars to argue that the adoption of regulatory barriers has little to do with international externalities and more to do with the competition between firms and consumers (Vogel 2012). The CPSIA would never have been written if not for real consumer demands for safe children’s toys. The consequences for foreign businesses, such as the small Chinese firms that cannot produce up to US standards, are an unintended side effect of meeting legitimate consumer demands. On this account, rising regulatory barriers around the world reflect the spread of democracy and accountable government and not some protectionist coalition of import-competing industry groups.15

However, even if governments around the world have become increasingly accountable to citizens, the public is too fickle and regulatory protection is too widespread to be caused solely by domestic public-policy demands. The variety of licensing requirements, labeling rules, and registration fee structures are too complex for even an attentive public to dictate. Consumer activists are ill-equipped to determine what sorts of tests would be technically feasible or what kind of fee structure is appropriate for a registration scheme. In addition, the behavior of Mattel, Hasbro, and the other major toy companies suggests that there is more to regulatory politics. It appears that the fight over the character and extent of regulatory protection is less about the consumer versus industry and more about the conditions of global competition. Paradoxically, this competition-driven regulation may have the effect of undermining support for commercial cooperation more generally by undercutting the tools of international cooperation.

These international competitive dynamics are central to understanding contemporary commercial politics, but they can also shed light on drivers of economic inequality within countries. Across a wide variety of developed economies, inequality is at levels not seen since the Gilded Age, and corporate profits have hit historic highs (Piketty 2014). Scholars and advocates have variously sourced these effects in campaign finance rules, international competition for capital, and captured governmen...