Pesticide regulatory homogeneity and firms' import decisions: Evidence from EU‐Swiss agri‐food trade

Abstract

Country‐specific variations in food standards often reflect national regulatory traditions, but they also disrupt trade by increasing associated costs and limiting market access. Aligning such standards between countries should reduce or eliminate the additional market access costs and enhance trade. Yet, whereas evidence abounds on the trade effects of country‐specific public mandatory food standards, relatively little is known about the trade effects of regulatory homogeneity across countries. Exploiting the EU–Swiss trade relationship and data on maximum residue limits (MRLs) for pesticides, we assess the channels that explain the effects of regulatory homogeneity of standards on agri‐food imports. Estimating a reduced‐form gravity model, we find that similarity in Swiss‐EU MRLs on a product‐pesticide pair increases Swiss product‐level imports from the EU by 10%. This consists of a 7.7% increase in the average import value per product per firm, a 1.4% increase in the number of product varieties imported and a 0.6% increase in the number of importing firms. Regulatory homogeneity also increases import volumes by 9.4% and decreases import prices by 1.6%. Accounting for firm heterogeneity, we find more pronounced trade effects for smaller firms. These findings are confirmed in firm‐product level estimations, where we also find that the import‐enhancing effects increase with increasing regulatory heterogeneity. Our results imply that even with mutual recognition, there remains a preference for imports that align with domestic standards. In terms of policy implications, our findings show that regulatory homogeneity enhances food security by increasing product variety and lowering prices.