The discovery of lead paint in a wide range of Chinese goods exported to the U.S. (from toys to jewelry) raises difficult public policy questions. But it also allows us to scrutinize some unexamined assumptions about globalization. It is an opportunity to think about some other issues which seem quite distinct, but are actually quite analogous in many respects. One analogy, which I discussed earlier, is the parallel with the export of "damaged" U.S. financial assets, which lies at the source of the global subprime mortgage crisis. Another has to do with labor standards in international trade.
Consider the similarities.
- In both cases, we deal with exporting countries that have domestic regulations and standards which on paper are even stronger than those in the U.S. (As this story explains, Chinese lead standards are more stringent than those in the U.S. In the labor standards arena, most countries have ratified more ILO conventions than the U.S. has.)
- Enforcement of these domestic regulations is weak and problematic.
- Producing goods that are sub-standard is cheaper and provides a competitive advantage.
- The relevant attribute of the exported good is not directly observable to the final consumer in the U.S. (A consumer cannot tell whether the toy contains lead paint or has been manufactured using, say, child labor under exploitative conditions.)
- Final consumers have preferences over this "hidden" attribute. (We are less likely to buy the good, ceteris paribus, if it contains lead paint or has been made by children.)
- Consumers' preferences are heterogeneous. That is, each one of us is likely to have a different evaluation of the tradeoff between the "hidden" attribute and other aspects of the good, such as its price. (Put differently, the price discount at which we are likely to prefer buying the leaded or child-manufactured good differs across consumers.)
Now in view of these parallels, we might think that the policy response to the problems in these two areas would be similar. Not quite.
In the area of consumer safety and lead paint, the general tendency has been to push for more regulation and better enforcement of existing standards. The U.S. toy industry itself has gone so far as to ask the federal government to impose mandatory safety-testing standards for all toys sold in the U.S. Free-trade economists would find it perfectly appropriate for the U.S. to pressure the Chinese government to enforce its own lead standards, and if not, to impose testing and other restrictions at the border. As far as I know, not even libertarian economists have proposed that the best way to deal with the problem is to simply label Chinese-made toys as having uncertain lead content and letting U.S. consumers sort themselves out according to their own preferences and health-hazard/price trade-offs.
But in labor standards, we have a totally different approach. Most of my economics colleagues think it is inappropriate for the U.S. to ask foreign governments to enforce standards that they have already signed into law or ratified in international agreements. They would be horrified at the thought that the U.S. should impose restrictions at the border for goods that do not satisfy core international labor standards. And they would generally favor so-called market-based solutions, and labeling in particular, so that consumers who really care about labor standards can channel their buying power appropriately.
So what gives? Why do we accept regulation in one sphere so easily, yet reject it in the other so fiercely?
UPDATE: I should have added that there is by now a growing literature that shows that consumers (or major segments thereof) are willing to pay substantial premia for goods made under fair labor standards. See here and here. So it is not correct to say that consumers care about the (tiny) probability that their children will be harmed by lead paint, but not about labor practices abroad.