Labour and environmental standards: The 'lemons problem' in international trade policy

In this article, we examine various alternative policy responses to differences in labour and environmental standards that have been used by various countries and have been brought to GATT and WTO panels. These policies include: (1) continuing to allow unrestricted access to unlabelled imports, (2) imposing a total import embargo, (3) enacting a partial embargo that permits only certified conforming imports, and (4) implementing a labelling system for certified imports and domestic output while continuing to allow uncertified non-conforming imports. The fourth alternative differs from the first in that consumers can differentiate between the two types of goods giving rise to two separate markets for conforming and non-conforming goods rather than a single pooled market. Import restrictions such as tariffs could be coupled with either the first or fourth alternatives.