Cato Online Forum

Private Rule-Making in the TTIP: The Role of Standard Setting

By Michelle Egan
October 2015

The Transatlantic Trade and Investment Partnership (TTIP) negotiations will address regulatory barriers as part of an ambitious 21st century agreement. Since the mid-1980s, multinational businesses on both sides of the Atlantic have expressed concerns about the impact of divergent standards and conformity assessment practices required to obtain market access. Although tariffs are generally low, differences in standards, technical regulations and certification requirements can create significant obstacles to cross-border trade. We barely notice that the cereal, cosmetics or sunscreens we use are governed by different testing and safety regimes, or that the privacy settings on our social media pages are regulated differently.

Many of these standards are developed by the private sector, often to promote goals of technological compatibility, product innovation and safety protocols. Governments often reference these private standards in regulations, incorporating specific technical requirements that impact a substantial number of goods and services. Core difficulties in EU-U.S. trade negotiations often result from differences in standards and their associated testing, licensing, and accreditation practices that lead to substantial non-tariff barriers to trade.1

Both sides claim to have the superior approach — beliefs that are based more on longstanding practice than on any meaningful differences in outcomes. Negotiators must navigate this “new world of trade,” where many of the different precautionary measures are products of private, not public standards.

Standards and International Trade

Although standards are typically developed by private bodies, they can become de facto mandatory through incorporation into public legislation or market dominance. Government may use standards in legislation to provide the necessary technical guidelines to meet regulatory objectives at a lower cost. For its advocates, private-sector standard setting is often viewed as crucial for complex business environments and responsiveness to market needs, particularly in rapidly changing environments where stakeholders have the expertise to reach agreement on specific rules or guidelines. For opponents, the devolution of power to non-state actors to formulate and enforce standards threatens democratic legitimacy. Such delegation of law-making to private actors raises anti-trust concerns and possible conflicts of interest.

In both Europe and the United States, efforts to bridge regulatory differences have been initiated under the umbrella of the Transatlantic Business Dialogue (TABD), New Transatlantic Agenda (NTA) and Transatlantic Economic Partnership (TEP). So far, those efforts to increase agency cooperation and foster best practices through early warning systems, mutual recognition agreements, exchanges of information, and broad regulatory principles and guidelines, have produced only modest results.2

In 2012, President Obama issued an Executive Order to promote international regulatory cooperation to ensure that divergent regulatory approaches between U.S. agencies and their foreign counterparts do not impair the ability of U.S. companies to export and compete globally.3 In Europe, the “Better Regulation Agenda” aims to ensure that the impact of European regulations on trade and investment do not introduce excessive compliance costs — especially given the prominence of global value chains and the growing dependence of European businesses on third-country inputs.4

Requirements to comply with multiple sets of regulations and standards increase trade costs. In some cases, under federal systems, for example, compliance costs are compounded by state and other sub-federal level requirements.5 Though a clean comparison of the U.S. and EU regulatory systems is complicated by the fact that each delegates different kinds of powers, both support reforms that result in greater transparency through notice rule and comment approaches.

U.S. and EU Standard-Setting

The World Trade Organization (WTO) concluded the Technical Barriers to Trade (TBT) Agreement in 1994, which requires signatories not to create “unnecessary obstacles to international trade.”6 This obligation applies to standards for packaging, marking, and labeling requirements, and procedures for assessment of conformity.

The TBT Agreement assumes that signatories use international standards as the basis of regulations and give preference to performance standards wherever possible. It requires that applicable regulations be transparent, justifiable, and non-discriminatory. Both the European Union and United States have established standards-setting bodies, with different institutional and legal frameworks, which sometimes make harmonization and mutual recognition difficult to accomplish. Both have established procedures for the public use of private standardization. U.S. policy is set out in statute and executive order.7 The European Union has an annual standardization program, financed with support from the European Commission.

In the United States, there are more than six hundred standards development organizations (SDOs), but the vast majority of standards are set by a small number of major standards bodies. While trade and professional organizations, such as American Society for Testing and Materials International (ASTM), the American Petroleum Institute (API), and the American Society of Mechanical Engineers (ASME), have played dominant roles in setting standards, a number of consortia in the information technology sector are aiming to respond to new developments more rapidly. The American National Standards Institute (ANSI) has a coordinating role, but it does not determine the standards developed or the bodies responsible for specific standards. Instead, it accredits the procedures of standards development organizations.

Federal agencies typically adopt already established private standards in their regulations. Though use of these standards is voluntary, they can become dominant in the marketplace by their frequency of reference in federal and state statutes.  This has resulted in more than 360 organizations providing voluntary standards for 26 federal agencies. Such standards may be used through a safe harbor program that carries a presumption of regulatory compliance, or agencies may use standards in voluntary programs, letting the market determine the appropriate level of safety, rather than mandating it through regulation.8

There is also scope for misapplication of legal standards. In the United States, antitrust agencies act as enforcement bodies in ways similar to other business review bodies, but they do not adjudicate the legality of standards development activity. U.S. courts, consequently, have not developed a consistent or unified way of treating private standards.

In the European Union, standards are set by both national and EU standards bodies. Under the so-called “New Approach,” which was adopted by the European Commission in 1985, the European standards bodies must eliminate all conflicting national standards when developing standards to fulfill regulatory obligations. The three European standards bodies, CEN, CENELEC and ETSI, provide the standards to meet the “essential requirements” of safety, health, environmental, and consumer objectives in European legislation. They receive public financing, although they also develop standards that are not adopted into European legislation, much like their American counterparts. Once standards fulfill essential regulatory requirements, there is a presumption of conformity (like U.S. safe harbor), and goods and services can circulate freely within the EU single market.

European harmonized standards remain voluntary and a manufacturer is free to use another standard or present an alternative solution that meets the “essential requirements,” which is easier than going through third-party certification by a recognized, accredited body. And the EU has been active in preventing member states from imposing additional performance requirements that impede trade.9 As in the United States, there is concern in Europe about the role played by standards bodies, given the potential impact on competition, especially since the European Court of Justice has not applied consistent principles to such private law-making.

These different approaches have complicated the TTIP negotiations.10 Europeans argue that the United States does not use international standards in domestic regulation, with only a minimal number of internationally agreed standards in effect. They also raise concerns that standards referenced in legislation can become obsolete, requiring updates that necessitate additional, cumbersome rounds of notice-and-comment rulemaking.11<</sup>

While those concerns have some merit, not all U.S. agencies take that approach to updating standards. For example, the Occupational Health and Safety Administration (OSHA) issues de minimis violations to manage updated standards by regulated entities; the Coast Guard allows “equivalence” for an updated standard;, and, the Environmental Protection Agency updates final rule-making to incorporate changes proposed by SDOs.12

U.S. regulators also argue that reliance on international standards, touted by the Europeans, may be the result of too much compromise.  This can also lead U.S. bodies to develop their own standards, especially if they are used in local production or in segments of global value chains.

Another longstanding complaint, mainly from U.S. companies, is that ICT standards developed in consortia were not recognized in the European standard setting process until the European Union amended its rules to allow more flexible options to develop standards in this area.13 U.S. firms want to ensure that European standards reflect market needs, and that their development is led by industry and supported by government. This is especially true for the digital single market, where it is unrealistic to expect government mandated technology standards for the European market to become global.

Considerations for a Successful TTIP

If the TTIP negotiations on regulations and standards are to succeed, both sides will have to move beyond their entrenched positions and embrace best practice examples from prior EU-U.S. and international experiences. 

First, negotiators need to evaluate prior best practice efforts to promote regulatory cooperation through early warning systems, mutual recognition, and safe harbor principles. Although MRAs were viewed as providing minor cost advantages, attention should be paid to the successful cooperation efforts including US-EU certification of aircraft agreement, and veterinary agreement for best practices.14

Second, much attention has focused on the proposed Regulatory Cooperation Council (RCC). To succeed, any new institutional framework must have a defined scope and purpose, firm deadlines, and adequate funding. The U.S.-Canada and U.S.-Mexico RCCs have had minimal impact because of — among other things — funding shortfalls, which have perpetuated dual bilateralism at the expense of North American integration.15

The European Commission’s Secretariat General and the U.S. Office for Information and Regulatory Affairs (OIRA) can learn from these earlier efforts to promote regulatory cooperation by coordinating future regulations under a system akin to Europe’s mutual information directive, which provides information exchange, standstill arrangements, and notifications of proposed new regulations and standards.16

Third, the European standards bodies (SDOs) and the American National Standards Institute (ANSI) should avoid the ultimately unwinnable debate about the respective benefits of their own organizational structures. Instead, they should rely more on existing international fora with track records of promoting international standardization.

Fourth, TTIP should build upon prior FTAs. The limited reference to standardization in other FTAs suggests little appetite for addressing the problems of standards and conformity assessment. However, the inclusion of a Protocol on the Mutual Acceptance of the results of Conformity Assessment in EU-Canada agreement (CETA) is an important model, as it includes an annex of product categories that might result in mutual acceptance of conformity assessment by designated bodies.

Conclusion

Standards-related trade barriers are more common than other non-tariff issues. Governments, on average, impose TBTs on 30 percent of products. For firms active in international markets, different national requirements from conformity assessment measures can impede access to foreign markets.

The United States and European Union have an opportunity to improve the TBT regime through TTIP. In conjunction with trade association, government regulators, and international standards forums, negotiators should focus on how to achieve equivalency. TTIP affords the United States and Europe the opportunity to assert global leadership in setting rules for market access. This can happen only if both sides stop arguing over whose regime is better. 

If the TTIP negotiators fail, other trade and regulatory architecture, authored and agreed in other parts of the world, could emerge to fill the void, putting U.S. and EU producers on the outside looking in.

Notes
1 See Michelle Egan and Jacques Pelkmans, “TTIP’s Hard Core: Technical Barriers to Trade” CEPS Working Paper August 2015 http://www.ceps.eu/publications/ttips-hard-core-technical-barriers-trade-and-standards
2 Fernanda Nicola, Will TTIP Make its Own History? The Paradox of Transparency in International Regulatory Cooperation; Duke Law and Contemporary Problems, Vol. 78 [2015]; Gregory C. Shaffer and Mark A. Pollack, “Hard vs. Soft Law: Alternatives, Complements, and Antagonists in International Governance,” 94 Minnesota Law Review 706 (2010); Peter Chase and Jacques Pelkmans, “This Time it’s Different: Turbo-Charging Regulatory Cooperation in TTIP”, CEPS Special Report no 110, June 2015 http://www.ceps.eu/system/files/SR110%20Regulatory%20Cooperation%20in%20TTIP.pdf
3 See Executive Order of 13609 of May 1, 2012, Promoting International Regulatory Cooperation, Code of Federal Regulations, title 3 (2012): 26413-5, http://www.whitehouse.gov/sites/default/files/omb/inforeg/eo_13609/eo13609_05012012.pdf.
4 European Commission, Tool #22 External Trade and Investment http://ec.europa.eu/smart-regulation/guidelines/tool_22_en.htm
5 Bernard Hoeckman, Trade Agreements and International Regulatory Cooperation in the Supply Chain World, EUI Working Paper, RSC Global Governance, 154 2015/04 p. 2
6 Agreement on Technical Barriers to Trade pmbl., Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1A, 1868 U.N.T.S. 117
7 National Technology Transfer and Advancement Act of 1995 (NTTAA), Pub. L. No. 104‐113, § 12(d), 110 Stat. 775 (1996) and Office of Management and Budget Executive Office of the President, OMB Circular No A-11
8 Emily Bremer, “American and European Perspectives on Private Standards in Public Law”, Unpublished manuscript, 2015
9 In the recent case, the German national system requires construction products that are already CE-marked to undergo additional testing and acquire national approval, before they can be marketed, the European Court (CJEU) ruled this inadmissible, in October 2014.
10 http://www.cencenelec.eu/News/Policy_Opinions/PolicyOpinions/TTIP__std_mutual_recognition.pdf; https://www.uschamber.com/issue-brief/ttip-and-flawed-policies-standards-don-t-mix
11 Currently, there are over 10,000 citations of standards in the Code of Federal Regulations.
12 Emily Bremer, Regulating by Reference, 2013 https://www.acus.gov/newsroom/administrative-fix-blog/regulating-reference; Lesley K. McAllister, Regulation by Third-Party Verification, 53 B.C.L. Rev. 1 (2012).
13 Regulation  1025/2012 This now allows the EU to use consortia to develop standards especially important in IT sector.
14 Josling, Tim and Tangerman, Stefan Agriculture, Food and the TTIP: Possibilities and Pitfalls. CEPS Special Report No. 99/December 2014. TTIP Series No. 3 and Paper No. 1 2014
15 UNITED STATES-CANADA REGULATORY COOPERATION COUNCIL: JOINT ACTION PLAN (2011) [hereinafter RCC ACTION PLAN], available at http://www.whitehouse.gov/sites/default/files/us-canada_rcc_joint_action_plan3.pdf.
16 Directive 83/89/EEC. Updated Directive 98/34.

The opinions expressed here are solely those of the author and do not necessarily reflect the views of the Cato Institute. This essay was prepared as part of a special Cato online forum on The Economics, Geopolitics, and Architecture of the Transatlantic Trade and Investment Partnership.

Michelle Egan is a professor and Jean Monnet Chair in the School of International Service at American University, and a current fellow at the Wilson Center.