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.