Standards Harmonization and Institutional Quality in Exporting Countries

ABSTRACT

The existing literature has documented the positive impact of standards harmonization in the importing country on trade, but it has not examined whether better institutional quality in exporting countries helps enhance the gains from this harmonization. Combining disaggregated trade data with data on maximum residue levels (MRLs) in pesticides, we exploit the EU's 2008 harmonization of pesticides MRLs to study the impact of institutional quality in non‐EU exporting countries on EU imports of horticultural products from these countries over 2005–2014 in a structural gravity framework. We find that multiple dimensions of institutional quality—government effectiveness, regulatory quality and rule of law, which reflect institutional capacity to implement and enforce harmonized standards and ensure transparency, and control of corruption that fosters trust between trading partners—enhance the positive impact of harmonization on the probability of exporting to the EU. However, a similar effect on export value is found to be inconclusive.