Narrowing the Channel
The Politics of Regulatory Protection in International Trade
University of Chicago Press, 2020
Chicago Series on International and Domestic Institutions
The Argument
Why do governments continue to erect regulatory barriers to trade even as tariffs have fallen to historic lows? Narrowing the Channel argues that the answer lies in the competitive dynamics among firms of different sizes and the interests of multinational corporations.
Regulatory barriers—such as testing requirements, labeling rules, and registration fees—differ fundamentally from tariffs. Tariffs are variable costs that scale with the value of goods traded, hitting high-volume exporters hardest. Regulatory barriers, by contrast, impose fixed costs: a fee to register a product or a requirement to test it applies whether a firm sells one unit or one million. This distinction has profound consequences.
Because regulatory barriers raise fixed costs, they disproportionately burden small and marginal producers while leaving the largest, most productive firms relatively unscathed. When regulations tighten, smaller firms are forced to exit the market entirely. The survivors—large multinational corporations—face less competition, can charge higher prices, and capture greater market share. The result is that large firms don't merely tolerate regulatory protection; they actively support it.
This creates what I call entangled mercantilism: a new form of protectionism in which national interests flow through global production networks. Governments seek to shift profits toward multinational firms that maintain local affiliates—firms that hire local workers, pay local taxes, and generate domestic economic activity. Because MNCs organize production across national borders, governments can use regulatory barriers to channel trade through affiliated firms at the expense of smaller, unaffiliated foreign exporters.
The book demonstrates this argument through analysis of past trade negotiations and case studies of regulatory protection in the US and the European Union—including the Consumer Product Safety Improvement Act (CPSIA) in the American toy industry and the EU's REACH chemical regulations. These cases reveal substantial support among large multinational firms for regulatory barriers. The book further considers the implications for the design of international trade agreements, finding that the norms governing commercial relations for the past two centuries—reciprocity and nondiscrimination—are ill suited to address regulatory protectionism.
The Distribution of Imports across Firms
Figure 1.2: The distribution of imports across firms. Small foreign exporters are excluded by regulatory barriers (fixed costs), while the MNC—with its local affiliate—can absorb these costs and continue to trade, channeling profits across the border.
Interdependence vs. Entangled Mercantilism
| Interdependence | Entangled Mercantilism | |
|---|---|---|
| Market condition | Globalization with MNC | Globalization with MNC |
| Government interests | Promote revenue, employment, and GDP | Promote revenue, employment, and GNP |
| Goal of commercial policy | Promoting market access | Shifting profit |
| Predicted cleavages pro–free trade | All exporters | Marginal exporters |
| Protectionist | Nonexporters | Local affiliates of MNCs |
| State strategy | Free trade | Regulatory protectionism |
Table 1.4: Connection between Narrowing the Channel and existing work. Adapted from the book.
Contents
- Part I — A Theory of Regulatory Protection
- Chapter 1. Introduction
- Chapter 2. A Theory of Global Firms and Local Regulation
- Part II — Evidence
- Chapter 3. Determinants of Regulatory Barriers to Trade
- Chapter 4. Regulatory Preferences in the Chemical Industry
- Chapter 5. Regulatory Preferences in the Food Industry
- Part III — Institutional Design
- Chapter 6. The Design of Reciprocal Trade Agreements
- Chapter 7. Designing Optimal Standards Agreements
- Chapter 8. Conclusion: Markets and Borders