Deep trade agreements and harmonization of standards

Abstract This study examines how free trade agreements (FTAs) and customs unions (CUs) affect multilateral trade agreements when countries endogenously determine the standards as well as tariffs. Raising standards reduces the negative consumption externalities of a traded good but increases firms' costs. We find that a deep FTA with the harmonization of standards may be a stumbling block for multilateral free trade with the international standard that maximizes world welfare, whereas a deep CU with standards is a building block. As extensions, we consider asymmetry in firms' production costs and in the awareness of negative externalities between countries as well as transboundary externalities.