The Implications of Marketing-Order Quality Regulations in a Free-Trade Environment

Among other functions, federal marketing orders allow producers to impose quality regulations and inspections, and, under the section 8e provision, require imports to be subject to the same quality standards and regulations as the domestic industry. As efforts to liberalize trade continue apace, the degree to which a minimum quality standard (MQS) can be used in conjunction with section 8e as a nontariff trade barrier becomes a subject of increasing importance. The high incidence of utilization of the section 8e provision, coupled with a relatively high degree of variability of standards over time, serves to motivate this research on how MQS imposed through marketing orders can affect producer profits, consumer welfare and influence trade patterns. Our model investigates specifically the impacts of a MQS imposed by a domestic agricultural industry under the auspices of a marketing order in both a closed- and open-economy setting under both perfect and imperfect competition. The model allows domestic producers to act collectively, as permitted under marketing-order provisions, and to choose whether or not to impose a MQS based upon whether the industry profit under the MQS exceeds the profit under no regulation. We show that when the product is sold competitively, any market condition that causes the domestic industry to impose an MQS insures that all consumers of the product are harmed by the MQS and total welfare declines. An open-economy setting expands the range of model parameterizations when a domestic industry will implement an MQS because it can often direct the costs imposed by the MQS primarily to importers, while capturing the majority of the benefits, a type of “raising rivals cost” phenomenon. However, in duopoly competition between a domestic industry and an exporter, we show that a MQS can eliminate the incentives of the duopolists to under provide quality enhancement, potentially leading to situations where MQS can be socially beneficial.