Berkeley Program in Law and Economics

The benefits of overseas outsourcing have come at a cost. Americans enjoy unprecedented levels of safety and security in the domestically-produced goods they use, food and drugs they ingest, and services they employ. Yet as U.S. firms increase the efficiency of their production, become more competitive globally, and offer better price-quality combinations to their customers by contracting with foreign companies for the production of goods and the provision of services, the mix of economic, legal, and societal forces that serve to protect consumers changes. Widespread revelations of Chinese-manufactured toxic toys and toothpaste, tainted food and drugs from abroad, and the failure of foreign call centers to protect the privacy of U.S. consumer data all illustrate the challenge for domestic governance. Though international trade in goods and services provides clear economic benefits, it can also frustrate consumer protection efforts. This paper provides a conceptual framework for understanding the mix of regulatory elements that govern domestic production of goods and services, and for understanding the ways in which international trade changes that mix. Specifically, it distinguishes between two types of domestic regulation—the first targeting the process by which goods are produced and services provided, and the second mandating particular outcomes. Foreign production disables the first type of regulation and weakens the second. Protecting domestic consumers in a globalized market, then, will frequently require the development of “substitutes” – including regulation by foreign governments and private regulators — for domestic forms of governance that are ineffective abroad. We propose a novel and necessary solution for addressing the threat posed by the foreign production of goods and provision of services to consumer welfare. Specifically, we make the case that the best “substitute” for domestic regulation will often be oversight of safety issues by U.S. partners in global trade. To provide incentives to domestic firms U.S. regulators should make those firms legally accountable for harmful products that make it to the United States Furthermore, they regulations should discriminate between domestic and foreign activity in regulation requiring safe outcomes, imposing higher penalties for violations of safety norms when production has taken place abroad.