Cato Online Forum

Classifying Regulatory Trade Barriers in the Transatlantic Trade and Investment Partnership

Soon after the Transatlantic Trade and Investment Partnership (TTIP) negotiations were announced, there was a great deal of talk about how it would make reducing regulatory barriers a signature issue. In remarks to his Export Council, President Obama noted that the talks will emphasize “smoothing out differences in regulatory approaches.”1 And an April 2013 report based on a stakeholder survey conducted by the Bertelsmann Foundation and the Atlantic Council indicated that while “transatlantic regulatory process convergence” would be one of the most challenging components of the negotiations, it is also “the most important overall to the agreement.”2

One widely cited 2009 study, by Ecorys, suggests some substantial benefits from addressing “non-tariff measures,” including regulatory divergence issues, within the context of U.S.-EU trade. After noting that the “total elimination” of such barriers would amount to a 2.5-3.0 percent increase in GDP, the study then tried to identify those barriers that are “actionable,” that is, ones that could realistically be eliminated. Doing so, the report said, would boost EU GDP by 0.7 percent per year, leading to an annual potential gain of $158 billion in 2008 dollars; and it would boost U.S. GDP by 0.3 percent, or $53 billion per year.3

Unfortunately, when the parties actually sat down to talk, it turned out they had different ideas of what the focus should be. For the United States, the emphasis was on applying its domestic regulatory reform efforts on a global basis. On a trip to Europe in September of 2013, soon after the TTIP negotiations began, U.S. Trade Representative Michael Froman extolled the virtues of the U.S. approach to regulating, and urged the EU to take into account the principles of “transparency,” “participation,” and “accountability.” He noted that the U.S. process promotes these principles by providing: “advance notice of specific regulatory measures” (transparency); “meaningful opportunities for input from a broad range of stakeholders” (participation); and “responses to that input” (accountability).4

His emphasis on these features reflects U.S. criticism of the EU regulatory process, in particular the EU’s system of issuing general papers for comment prior to proposing actual rules, without allowing comments on the text of the regulation itself. The implication of Froman’s remarks, made in Brussels before an audience of trade officials, is that, from the U.S. perspective, the EU should reform its regulatory process to take these principles into account more fully.5

Not surprisingly, the EU was not receptive to this call for change. In a speech just a week and a half after Froman’s, then European Trade Commissioner Karel De Gucht put it as follows: “Neither side will be successful if it seeks to impose its system on the other.”6 He also defended the transparency and openness of the existing EU system, and made clear that the EU focus in TTIP is on addressing the outcome of regulation, by trying to reconcile regulatory differences that exist across various sectors. This approach includes finding “ways to cooperate on future regulations to avoid unnecessary trade barriers,” and “to make existing regulations more compatible.” To this end, he proposed that the TTIP establish “a new Regulatory Cooperation Council that brings together the heads of the most important EU and US regulatory agencies.”7 For the EU, the greatest benefits come from focusing on key sectors of transatlantic trade, such as autos, pharmaceuticals, and chemicals, among others, to examine where regulatory divergence is especially costly and prevents the free exchange of goods that have already gone through extensive testing and certification processes to evaluate their safety.

Based on this expression of views from high-level officials, it seems that the United States and the European Union characterize the problem of regulatory issues in trade agreements very differently. In part that reflects a more general lack of consensus and understanding of the issue of “regulatory trade barriers.” For example, the Ecorys study noted above refers to many regulatory issues that cannot easily be handled, such as tort reform in the United States or postal monopolies in both economies.8 But resolving such deeply embedded national policies through a trade negotiation seems unlikely. Attempts to address regulatory trade barriers in the TTIP might be more productive if these varied issues were separated out into appropriate categories, rather than all being lumped together. This paper sets out briefly a classification system for doing so.9

Classifying Regulatory Trade Barriers

For decades now, trade negotiators have made reference to the problem of regulatory trade barriers.10 But what exactly are these barriers? In this section, I set out a framework for thinking about the problem, based on three areas where domestic regulation may affect trade to some extent: regulatory protectionism, regulatory divergence, and regulatory reform.

Regulatory protectionism

Protectionism is a familiar concept to anyone involved in trade policy. The basic idea is that governments might take action to “protect” their producers from foreign competition.11 For many, it is the essence of what causes trade conflict, and is the fundamental problem that trade law seeks to correct. Protectionism is a specific expression of the idea of economic nationalism.

Traditionally, protectionism was imposed at the border, through measures such as tariffs and quotas. However, governments have long taken advantage of the fact that they can apply protectionism through domestic measures. One implication of this latter approach is that protectionism is less easily discovered by trading partners, something which may appeal to the governments using it.

Sometimes protectionism is fairly obvious on the face of the measure. In other cases, though, it is only apparent when the industry, market share, and other factors are looked at closely. For example, in the context of alcohol regulation, the government might decide to tax beverages with higher alcohol content at a higher rate than those with lower alcohol content. On its face, such a regulation would not raise trade concerns. However, if it turns out that most of the domestic industry produces the lower alcohol content products, and most of the foreign industry produces the higher alcohol content products, this could be an indication that the real purpose of the measure is to favor domestic producers.12

Regulatory Divergence

Regulatory divergence is a less familiar concept for the trade community. At its core, it refers to a difference in regulatory outcomes (as distinguished from the regulatory process). Such differences act “as [a non-tariff barrier] by making the importation of products or services from [another] country costly.”13 The costs of doing business therefore increase when companies have to comply with multiple sets of regulations, even those with minor differences. Within U.S. law, President Obama has placed an emphasis on reducing the cost of diverging regulation across nations, issuing an executive order on “promoting international regulatory cooperation.”14

Divergence occurs for a number of reasons. For one thing, policy objectives may vary across countries. Sometimes, however, two countries may have the same regulatory goals, but produce different regulations. Regulating through an isolated process, in which national agencies make decisions without consulting their international counterparts, will often lead to differences in regulation across countries.

Divergence can be dealt with in a number of ways, but the three main options are harmonization, equivalence, and mutual recognition.

The first approach, which is also the most difficult, is through harmonization, whereby all parties agree to adopt the same regulation or standard (sometimes with reference to international standards). Harmonization thus “eliminates or reduces the difficulties that arise from the fact that national legal systems are not only divergent but applicable only within the territory of each nation-state,” through agreement on a single approach or best practice.15

The second approach is through the recognition of equivalence in standards or regulations. The key difference between equivalence and harmonization is that harmonization takes two separate regulations or standards, and turns them into a single standard or regulation; equivalence allows for differences in regulation and acknowledges that their desired outcomes are nearly the same. Simply put, both parties agree that the specific standards or regulations of each country are functionally equivalent, and that the domestic certification process of one country is sufficient to ensure safety and compliance in the other.

Finally, there is mutual recognition, under which “two or more countries agree to recognize some aspect of the other’s regulatory regime as being interchangeable with their own,” though the broad application of mutual recognition in this manner does not exist widely outside of the EU internal market.16 It is a process that is complementary to harmonization and equivalence because it “can be based on harmonization, on equivalence, or on satisfaction of external criteria such as the importing party’s standards or international standards.”17 As applied by the U.S., mutual recognition tends to have a more limited application, embodied in mutual recognition agreements (MRAs). MRAs typically aim to eliminate duplicative testing or certification processes which can impede the free movement of goods and services across borders; they do this by recognizing the testing results of a particular facility or facilities to examine products or services for the necessary technical requirements for export into the destination territory. Basically, MRAs, typically bilateral arrangements, allow both countries “to accept product inspection, testing, or certification results performed by the other country.”18

Regulatory Reform

With all of the regulation that exists today, there will inevitably be some variation in how effective particular regulations are. Sometimes this might be due to the substantive nature of the regulation, based on whether it was well-constructed by its drafters to accomplish its goals; or it may be due to the regulatory process itself, which can have flaws such as too much or too little input from interest groups.

Judging a measure’s effectiveness is a difficult task. Certainly it is hard to do in the abstract, before the measure has been implemented. But even after a measure takes effect, there is the challenge of comparing the actual situation to that of the counterfactual, where no measure was taken or a different measure was taken.

Beyond the substance of a regulation, there are also questions about the regulatory process. While regulations may be well-intentioned, there can be problems with the process: (1) benefits are often highlighted while costs are ignored; (2) special interests often influence the process in negative ways; and (3) the state of the world evolves, making regulations quickly out of date. As a result, getting regulations to achieve their intended goals is not easy. To address this, the United States has spent decades attempting to improve its domestic regulatory process.19 Other countries have pursued similar goals.

In terms of how international rules could help here, a U.S. trade negotiator has explained that one of the objectives of including regulatory issues in trade talks is “to provide tools to help countries regulate better.”20 If this is the goal, the question then becomes, can domestic regulation be made better through the use of formal international rules to improve the regulatory process? In theory, general principles and guidelines could be developed at the international level to promote more effective and less costly regulation. Domestic efforts by the United States and other countries could serve as a model, with these practices incorporated into international legal instruments. In practice, though, there may be concerns related to foreign policy “bullying,” as well as competence (do we really know how to regulate better than others?).

Conclusion

Many questions remain as to the best way to address regulatory trade barriers. First, there are questions about which barriers to address. The classification system set out above attempts to define the issues more clearly. As noted, the EU appears more focused on regulatory divergence, and the U.S. on regulatory reform. Unless they can agree on the problem, finding solutions could be a challenge.

Beyond this particular difference of opinion, the broader question of where to focus these efforts is difficult. Should there be additional attempts to address protectionist regulations, or do WTO obligations already cover this? If the issue is regulatory divergence, can we convince regulators to work together on developing new regulations, and how can mutual recognition or equivalence of old regulations be promoted? And with regard to making regulations better, what is the role of international institutions in establishing and promoting norms of good regulatory practices?

In addition, there is the question of where to pursue these issues. To a great degree, they are already being dealt with at the WTO, in the TBT Committee and other places. Does the development of new disciplines in the TTIP support this effort, or confuse things by creating competing fora? And does it exclude other countries from playing a role?

And finally, trade agreements have typically relied on binding dispute settlement to enforce their rules. It is not clear, though, that such an approach makes sense in an area where cooperation is one of the main goals. Litigation may set the wrong tone for cooperative attempts at improving the regulatory process and promoting regulatory convergence. Thus, a very different set of institutions might be needed on regulatory issues than what is normally seen in trade agreements. TTIP negotiators need to take into account that negotiations on regulatory issues are fundamentally different in this regard from traditional trade issues.

Notes:1 Remarks by the President at Meeting with the President’s Export Council (12 March, 2013) http://www.whitehouse.gov/the-press-office/2013/03/12/remarks-president-meeting-presidents-export-council
2See Tyson Barker and Garrett Workman, ‘The Transatlantic Trade and Investment Partnership: Ambitious but Achievable’, Atlantic Council & Bertelsmann Foundation (April 2013), 4.
3 Koen G. Berden, et. al. “Non-Tariff Measures in EU-US Trade and Investment — An Economic Analysis,” European Commission, Directorate-General for Trade OJ 2007/S 180-219493 (11 December, 2009), p. xviii http://trade.ec.europa.eu/doclib/docs/2009/december/tradoc_145613.pdf.
4 Remarks by U.S. Trade Representative Michael Froman on the United States, the European Union, and the Transatlantic Trade and Investment Partnership (September 30, 2013) http://www.ustr.gov/about-us/press-office/speeches/transcripts/2013/september/froman-us-eu-ttip.
5 “Froman Calls On EU Regulators To Be More Like Their U.S. Counterparts,” Inside U.S. Trade (30 September 2013) http://insidetrade.com/201309302448369/WTO-Daily-News/Daily-News/froman-calls-on-eu-regulators-to-be-more-like-their-us-counterparts/menu-id-948.html.
6 Karel De Gucht, “Transatlantic Trade and Investment Partnership (TTIP) — Solving the Regulatory Puzzle,” The Aspen Institute, Prague Annual Conference (10 October 2013) http://trade.ec.europa.eu/doclib/docs/2013/october/tradoc_151822.pdf.
7 Ibid., For more details on this proposal, see, “Leaked TTIP Paper Shows EU Seeking Broad Scope In Regulatory Chapter,” Inside U.S. Trade (December 19, 2013) http://insidetrade.com/Inside-US-Trade/Inside-U.S.-Trade-12/20/2013/leaked-ttip-paper-shows-eu-seeking-broad-scope-in-regulatory-chapter/menu-id-710.html, noting that the Council “would involve senior-level officials from regulatory agencies, as well as the Commission’s Secretariat General and the U.S. Office for Information and Regulatory Affairs.”
8 The study notes the following concern expressed by European companies: “Legal liability in the USA is an issue of particular concern not only to European companies but also domestic U.S firms. Currently, businesses spend millions of dollars in the U.S. defending themselves against frivolous class action lawsuits. Investors urge the finalization of tort reform and a moratorium on laws with extraterritorial effects.”
9 This paper is based on a longer book chapter: Inu Barbee and Simon Lester,”Addressing Regulatory Trade Barriers in Mega-Regional Trade Agreements” (forthcoming).
10> For a review of certain aspects of the 1970s era GATT discussions on technical barriers to trade and standards, which was an early source of thinking about these issues, see Simon Lester, “Finding the Boundaries of International Economic Law,” Journal of International Economic Law (2014) 17 (1).
11 Economist Alan Deardoff defines “protection” as: “Without any adjective, or as “import protection,” this refers to restriction of imports by means of tariffs and/or NTBs, and thereby intended to insulate domestic producers from competition with imported goods.” From, http://www-personal.umich.edu/~alandear/glossary/p.html.
12 Cases related to alcohol content have played a crucial role in the jurisprudence of both the ECJ and WTO. See, e.g„ Cassis de Dijon, Case 120/78 Rewe-Zentral AG v. Bundesmonopolverwaltung für Branntwein; and Appellate Body Report, Chile - Taxes on Alcoholic Beverages, WT/DS87/AB/R, WT/DS110/AB/R, adopted 12 January 2000, DSR 2000:I, 281.
13 Alberto Alemanno, The Transatlantic Trade and Investment Partnership (TTIP) and Parliamentary Regulatory Cooperation (April 10, 2014). European Parliament Policy Report, Brussels, April 2014, p. 19. Available at SSRN: http://ssrn.com/abstract=2423562.
14 The White House, Executive Order Promoting International Regulatory Cooperation (May 1, 2012) http://www.whitehouse.gov/the-press-office/2012/05/01/executive-order-promoting-international-regulatory-cooperation.
15 Michelle Egan, Constructing a European Market: Standards, Regulation, and Governance (New York, NY: Oxford University Press, 2001), 62.
16 Transatlantic Consumer Dialogue, “TACD Briefing Paper on Mutual Recognition Agreements (MRAs),” (March 2001) http://test.tacd.org/wp-content/uploads/2013/09/TACD-TRADE-2001-Briefing-Paper-on-Mutual-Recognition-Agreements.pdf.
17 Transatlantic Consumer Dialogue, “TACD Briefing Paper on Mutual Recognition Agreements (MRAs),” (March 2001).
18 Alberto Alemanno, 31.
19 Murray Weidenbaum, “Regulatory Process Reform, From Ford to Clinton,” Regulation, 1991.
20 Office of the United States Trade Representative, “UPDATE: What’s Happening in the TPP on 21st-Century Issues,” March 28, 2013 http://www.ustr.gov/about-us/press-office/blog/2013/march/tpp-21st-century-issues.

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.

Simon Lester is a trade policy analyst at the Cato Institute.