Introduction

Critics claim that international trade undermines a nation's ability to maintain an independent national regulatory structure that would be chosen under democratic-representative processes. The result supposedly is a “race to the bottom” in protection of public interests. That claim underlay recent protests against the World Trade Organization. Those who take to the streets in protest are not the only ones who subscribe to this theory. Politicians and other commentators frequently conclude that public welfare is reduced by open trade without some mechanism to safeguard domestic regulation or otherwise to secure its ends.

The race-to-the-bottom metaphor builds on economic writings suggesting that, at least under certain conditions, open trade in goods leads to factor price equalization with reduced returns to factors that are relatively abundant in other nations. Thus, for example, if low-skilled labor is relatively abundant outside the United States, open trade in products intensively utilizing such labor will (according to this theory) lead to lower real income for low-skilled American workers. That conclusion has led to calls for restraining trade, for harmonizing divergent national rules, or for adopting uniform transnational regulatory accords. Economists, however, debate whether this relationship actually describes reality, noting that the conditions from which factor price equalization was deduced seldom occur.

Even if trade does not bring about factor price equalization, its contribution to competition in a domestic economy alters both economic and political activity.