The welfare implications of lobbying on international regulatory agreements

EGC Research Summary, August 2024

Even amid the rising protectionism and trade wars of recent years, tariff levels are still at historically low levels. As a result, most trade agreements in recent years have not focused on reducing tariffs. Rather, they have focused on domestic policy reforms within countries, such as environmental regulations or product standards. Such “deep” agreements are controversial, however, given their exposure to lobbying by special interests. An international agreement to reduce carbon emissions, for instance, might seek to set stricter regulations on car emission standards across multiple countries – a move that car manufacturers around the world might seek to influence through political pressure.

In a recent paper published in the American Economic Review, Giovanni Maggi – the Howard H. Leach Professor of Economics and International Affairs at Yale University – and his coauthor, Ralph Ossa (University of Zurich), use a novel theoretical model to examine the role of lobbying on international regulatory agreements and the resulting welfare effects. Their analysis distinguishes between deep agreements focused on "product" standards, defined as restrictions on the characteristics of products that can be sold in a given country, and "process" standards, defined as restrictions on production processes that can take place on domestic soil. They find that international agreements on product standards provide interest groups with strong incentives to lobby together across countries, which often leads to excessive deregulation and decreased welfare – whereas international agreements on process standards often lead to tighter regulations and enhanced welfare.

Background and context

With tariffs at historically low levels, international agreements increasingly focus on domestic regulatory policies such as product standards and process standards. These “deep agreements” are controversial, however, largely because they are more exposed to the domestic political process and thus lobbying by special interests.

Recent international regulatory negotiations, including the Comprehensive Economic and Trade Agreement (CETA) between the European Union (EU) and Canada and the Transatlantic Trade and Investment Partnership (TTIP) between the United States and the EU, have triggered large scale protests. The main concern is that deep agreements can get hijacked by lobbyists because business groups exert disproportionate influence on regulatory cooperation bodies, undermining consumer safety and endangering the environment.

“Deep agreements involve imposing constraints on domestic regulatory policies,” Maggi said in an EGC interview. “One of the main controversies concerns lobbying by big corporations, who have been very active in influencing these agreements. The concern is that these corporations may be distorting these agreements in a direction that is detrimental to public welfare.”

While the academic literature has extensively analyzed agreements that focus on tariffs and other border policies (“shallow agreements”), little attention has been paid to the political economy of international regulatory agreements and the impact that such agreements have on welfare. In this paper, Maggi and his coauthor set out to fill this gap.

Study & main findings

Maggi and Ossa construct a novel model of regulatory cooperation that examines how interest groups influence international regulatory cooperation, and the welfare effects of such agreements. As noted above, their theoretical framework distinguishes between two types of deep agreements: those that focus on product standards (or restrictions on the characteristics of products that can be sold in a country) and those that focus on process standards (or restrictions on production processes that can take place on domestic soil, such as environmental standards imposed on factories and workplace safety standards). In the model, agreements are motivated by lobbying pressures as well as welfare considerations, such as pollution mitigation.

The researchers find that international regulatory negotiations focused on product standards tend to be influenced more heavily by producer interest groups than negotiations focused on process standards. This is because international cooperation on product standards tends to align producers’ interests across countries, whereas cooperation on process standards does not. When a country loosens its product standards, domestic producers clearly benefit, but foreign producers also benefit, because a lower domestic price leads to stronger demand at home, and this puts upward pressure on the world price of the product.

Given these considerations, international cooperation on product standards incentivizes global producers to lobby together. As a result, international cooperation on product standards tends to lower standards, increasing global producers’ profits while decreasing welfare – making it easier for all kinds of products to be sold, but potentially reducing consumer safety or harming the environment.

By contrast, the researchers find that cooperation on process standards typically pits domestic and foreign producers’ interests against one another. This is because loosening process standards in one country benefits domestic producers at the expense of foreign producers. Intuitively, loosening process standards increases the domestic supply of the product, and this puts downward pressure on the world price of the product. For this reason, international negotiations focused on process standards trigger “counter-lobbying,” whereby producers in a given country push for tighter standards in other countries. As a result, international cooperation on process standards tends to tighten standards and increase global welfare.

The way forward

Maggi and Ossa’s study sheds light on how political interests interact across countries in shaping international regulatory cooperation, providing new insights on the welfare impacts of politically pressured deep agreements. While their focus on product and process standards highlights several important policy areas, future research on other salient features of deep integration – including foreign investment and intellectual property rights – will lead to a broader understanding of the welfare impacts of international cooperation.

The authors' findings underscore that controversies surrounding deep agreements warrant serious attention and necessitate a deeper understanding of their welfare effects. Moreover, investigating alternative strategies to mitigate the potentially detrimental welfare impacts of lobbying is a critical area for future research, with important implications for policy design.

“In a perfect world, the lobbies would be kept out of the negotiation room when governments work on coordinating their regulatory policies," said Maggi. "If there was a way to do that, it would be fantastic – but it is wishful thinking. Nonetheless, raising the concern and understanding when the concern is more justified or less justified is very important.”

Research summary by Odile Mukiza.