Minimum quality standards and international trade

This paper investigates the impact of a non-discriminating minimum quality standard (MQS) on trade and welfare when the market is characterized by imperfect competition and asymmetric information. A simple partial equilibrium model of an international Cournot duopoly is presented in which a domestic and a foreign firm are identical except that the foreign firm faces positive transport costs. Asymmetric information generates a market failure, which the government attempts to alleviate with a MQS. It is found that although firms face the exact same costs of compliance, they will generally prefer different levels of regulation. As a result, international trade disputes are likely to arise even when regulation is non-discriminating.