A welfare analysis of the principle of mutual recognition

Countries set norms to protect consumers against ill-functioning products. In the absence of coordination, countries can set different norms and still achieve the same level of consumer protection. Such differences in specifications create barriers to trade because exporting firms incur adaptation costs. The principle of mutual recognition addresses the problem by ensuring that products lawfully manufactured in one country are acceptable in other countries, even without adaptation. The principle shifts the transaction costs of adapting to several norms from firms to consumers. We identify the winners and the losers, and we show that this principle is a source of disparity.