Do US Producers Operate at a Disadvantage Relative to Less-Regulated Producers in Poor Countries?

by Don Boudreaux on August 11, 2006

in Regulation, Trade

One frequently encountered argument against free trade is that the generally lower regulatory burdens faced by companies in poor countries afford companies in these countries an "unfair" advantage over companies in rich countries (because rich-country governments generally have more stringent regulations on worker safety and emissions of environmental pollutants).

‘Tain’t nuthin’ unfair going on.

First, an economy’s ultimate purpose is not to produce for the sake of producing, but to produce for the sake of consuming.  The ultimate standard for judging an economy’s performance is how well it satisfies consumers’ material desires, not how secure and fairly treated it makes producers feel.  If producers in another country are better, for whatever reason, than are domestic producers at satisfying consumer desires, no economic or moral imperative is served by government protecting these domestic firms from competition — for do so, really, is to threaten to inflict violence upon consumers who insist on taking advantage of the good deals offered by the foreign suppliers.

Second, as with the focus on wages, focusing on the government-imposed regulatory burdens gives too narrow a view.  Indeed it’s true: all other things equal, firms generally prefer to have to comply with fewer than with more regulations (just as, all other things equal, they prefer to pay less taxes and lower wages).  But all other things are emphatically not equal.  Rich countries are rich principally because they have good institutions — formal and informal — that make property rights reasonably secure, contractual commitments reasonably trustworthy, dispute-settlement processes reasonably unbiased, and on and on.  Perhaps the greatest challenge to people who care about fostering wide-spread economic progress is to figure out how to create pro-growth institutions.  Doing so is monstrously difficult.  But it’s also terrifically important, for it’s the mix of these institutions that matter most for freedom and prosperity.

Suppose you’ve saved your pennies and have accumulated $10M to invest.  You want to produce ball-bearings.  Geographically, two places seem an ideal location for your factory: Nebraska and Nigeria.  But geography is hardly all that counts.  Will you commit your funds to Nigeria immediately upon learning that environmental and work-place regulations in Nigeria are more lax than they are in Nebraska?  Hopefully not.  (If your instinct is to say "Yes!", e-mail me; I have lots of things in my attic that I know you’ll just love to buy.)

Because your property — both immobile and mobile — will be much less secure in Nigeria, because in Nigeria you’re likely to have to pay bribes again and again and again, because your Nigerian workers will likely be less educated and less skilled, because the road, air, rail, water, and telephone infrastructures there are much poorer than in Nebraska, the fact that the Nigerian government imposes only lax environmental and worker-safety regulations on firms operating there means very little.  The more-attractive place to set up shop is Nebraska.

Indeed, Nigerian factory owners might sing a related song: "We in Nigeria are forced to compete against factories in the U.S. and other developed countries that enjoy many more advantages than we enjoy — a rule of law, secure property rights, very little corruption."  Would the Nigerian people be well-served if the Nigerian government heeded this (accurate) claim and, in response, protected Nigerian producers from foreign competitors enjoying the immense advantages that come from being located in the US?


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