Free Trade, Regulatory Competition and the Autonomous Market Fallacy

1 Colum. J. Eur. L. 29 (1994)

Joel R. Paul. Visiting Professor, University of Connecticut Law School, Visiting Lecturer, Yale Law School, 1994-1995; Professor of Law, The American University.

The theory of international regulatory competition has emerged as the strongest contemporary critique of the argument for free trade. According to this critique, when capital, finished goods and services are relatively mobile across national borders, regulatory authorities will be induced to compete for scarce capital by lowering regulatory standards. This “race-to-the-bottom” theory is a frequent theme advanced against the integration of markets, for example, through the European Union (EU)’ and the North American Free Trade Area (NAFTA), and the reduction of tariffs and non-tariff barriers to trade through the General Agreement on Tariffs and Trade (GATT). Advocates of both the free trade position and the regulatory competition critique share an implicit premise that the state and the market are autonomous. Legal scholars recognize that legal realism repudiated the separation of the state and the market more than a half century ago. Yet, the premise of an autonomous market persists in the trade debate. Understanding the fallacy of market autonomy, we can begin to construct a different paradigm to explain how the relationship between the state and the market affects the outcome of economic integration or free trade.

The wide acceptance of the race-to-the-bottom credo may be explained in part because of the risk of environmental degradation, the growing “green” consciousness, and political influence of environmental, labor and human rights groups. The race-to-the-bottom rhetoric is one of the most popular strategies for attacking the international trade regime. For some, the implied criticism of less developed countries by environmentalists also reflects historical, racial or class biases against the southern hemisphere.

Among both the elite proponents of free trade and its largely disenfranchised critics, there is an implicit acknowledgement of some causal relationship between economic integration and the necessity for states to lower regulatory policies to keep jobs at home and prevent capital flight. Free trade proponents typically minimize the threat by insisting either that the rising tide of economic growth will make it possible for less developed countries to adopt higher regulatory standards or that the whole question of regulatory policies is exogenous.

My purpose is not to debate the merits of free trade; rather, I am interested in how both positions rely upon a common erroneous presumption about that relationship. First, I will discuss how trade theory underlies the GATT rules and national trading statutes. In particular, I will look at the idea of a “fair price” which is implicit in the pure theory of trade and explicit in the unfair trading rules. Second, I will show how regulatory competition theory derives from the same autonomous market fallacy as the idea of a fair price. I will focus my discussion of regulatory competition on an ongoing case study of packaging waste regulations in the EU to illustrate that, contrary to the theory, economic integration between states with different levels of regulatory standards does not necessarily lead to a race-to-the-bottom. In fact, there has been a rise in packaging waste regulations in the EU at both the national and the EU level as a result of economic integration. Since regulatory competition theory is based on the false premise of market autonomy, it does not adequately predict the outcome for legislative regulation when free trade occurs.