Regulatory Cooperation Makes Its Debut in NAFTA Round 2

Round two of the NAFTA negotiations wrapped up early this week, without any major new developments. Of course, it is still very early in the process, and until the parties propose actual text for particular chapters, it is difficult to assess how bargaining will unfold. However, there are some issues where the positions of Canada, Mexico and the United States are fairly well known. One such issue, which Canada raised in the second round, is the inclusion of provisions on regulatory cooperation. As I’ve written with my colleagues in a recent working paper, a chapter on regulatory cooperation would be beneficial to an upgraded NAFTA.

First, as traditional tariff barriers have decreased over time, many of the remaining trade frictions take the form of so-called non-tariff barriers. Among these are the various regulations and standards that different countries utilize to regulate their product markets. There are a wide range of reasons these rules may differ—protectionism, consumer preferences, or divergence resulting from regulating in silos. The first of these is already addressed at the World Trade Organization (WTO). The second can entail things like consumer attitudes towards genetically modified foods (GMOs). The third is the range of issues that make up the bulk of what would be addressed in any type of regulatory cooperation forum. Examples include differences in the dimming technology for headlights used in vehicles, or the size of soup cans.

In 2011, there were two bilateral initiatives between the U.S. and Canada and between the U.S. and Mexico to address this type of regulatory divergence (outside of the NAFTA framework). The initiative with Mexico, the High-Level Regulatory Cooperation Council, did not achieve much progress, though Mexico has remained a supporter of regulatory cooperation initiatives. However, the U.S.-Canada Regulatory Cooperation Council had some notable successes, though progress has been very slow. For example, Health Canada and the Federal Drug Administration created a common electronic submission process that allows for a single application to both agencies for pharmaceutical and biological products; progress was also made in establishing mutual recognition of foreign animal disease zoning, as well as a joint review process for crop protection products. Given that this initiative has been in place for six years, however, criticism of the limited number of outcomes is not misplaced.

As Inside U.S. Trade reported, this is but one of the many reasons Canada put forward a proposal to include something similar to what it negotiated as part of its trade agreement with the EU, the EU-Canada Comprehensive Economic and Trade Agreement (CETA). The CETA includes a separate chapter on regulatory cooperation (Chapter 21), which sets up a forum that will meet annually to discuss these issues. In general, the CETA seems to institutionalize much of what has already been happening with the U.S.-Canada RCC, though it goes beyond it in a few areas, for instance, by allowing the participation of other trading partners in certain discussions, pending agreement of both parties.

The Trans-Pacific Partnership (TPP) is the only other agreement that has something similar, but its chapter on regulatory coherence is distinct from CETA in that it is more heavily focused on issues relating to good regulatory practice and regulatory process, such as providing notice and comment on upcoming regulations, and having a central authority like the Office of Information and Regulatory Affairs (OIRA). The CETA has provisions on good regulatory practice as well, but it is clear that regulatory cooperation is the main focus of that chapter. This distinction may seem subtle, but it’s an important one I’ve noted previously with my colleague here.

Recent reports suggest that the U.S. is not too keen on including something like the CETA chapter in the new NAFTA, possibly because it is concerned about the extra burden or interference with domestic regulators. However, when the U.S. first launched negotiations with the EU under the aegis of the Transatlantic Trade and Investment Partnership (TTIP), the concern was not one of regulatory overreach, but rather a fight over this subtle distinction in regulatory process vs. regulatory outcome, with the U.S. pushing to export its domestic agenda to a global level.

I would bet that the same debate is what is taking shape with the NAFTA negotiations, because it would entail expanding the current ad hoc structure of the U.S.-Canada RCC to a broader regulatory cooperation forum that includes Mexico as well. While some of the regulatory issues are different between these two markets, it does not make sense to maintain two separate regulatory cooperation councils. In fact, having Mexico at the table will only enhance the dialogue on regulatory divergence and allow all three countries to tackle longstanding regulatory barriers.

The CETA chapter on regulatory cooperation, though not perfect, is a step in the right direction for the NAFTA countries to move forward in this area. A regulatory cooperation forum that allows for broad input from civil society and business, a regular dialogue on long-standing issues, and establishes a voluntary process for this exchange would be a welcome upgrade to NAFTA. Canada’s proposal is a recognition of the challenges non-tariff barriers pose to international trade today, and the U.S. should support it.