Illegitimate or Legitimate Non-Tariff Measures

This paper analyzes whether or not a standard reducing risks and influencing firms' entry is protectionist and can be interpreted as an illegitimate non-tariff measure (NTM). Domestic and foreign firms compete in selling products in the domestic market, in the presence of possible damages and endogenous sunk costs for reducing the risks of having these damages. A policymaker chooses a standard that is imposed on all firms, but may also impede their ability to enter the domestic market. Welfare can be improved with a legitimate NTM, particularly under relatively high levels of sunk costs and damages, justifying a reduction in the number of firms allowing a higher effort for curbing the expected damage. Protectionism related to an illegitimate NTM occurs when the standard maximizing domestic or foreign welfare is higher than the international standard, maximizing the world (or global) welfare inclusive of all profits and surpluses across countries. The characterization of protectionism is influenced by the domestic or foreign origin of firms, and by the nature of the expected damage incurred at either the production level or the consumption level. Configurations with expected damages related to consumption tend to exhibit more cases of protectionism compared to configurations with expected damages related to production.