The Race to the Bottom in a Federal System: Lessons from the World of Trade Policy

Abstract

A concern frequently expressed in policy discussions of both federalism and international trade is that the decentralized units-states in the first case, countries in the latter-will engage in interdependent behavior that will be detrimental to all. The fear expressed is that left to choose their own individual policies without external constraints, the separate entities will engage in "a race to the bottom." The rhetoric is common to federalism and international-tradepolicy discussions, and the same set of theoretical economic models and empirical studies is used to inform both conversations.