Cato Online Forum

TTIP and Regulatory Governance: Building from the Past

By Gregory Shaffer
October 2015

Introduction

The proposed Transatlantic Trade and Investment Partnership (TTIP) raises fascinating issues of regulatory governance, which date back to the first Bush and Clinton administrations in the 1990s. The central challenge is to remove regulatory barriers to trade and investment while retaining democratic accountability to domestic values and preferences concerning social protections in a world of global production and distribution networks, economic interdependence, and rapid technological change.

Why is Regulatory Cooperation a Focus of TTIP?

The average U.S. and EU tariffs are currently only about 2 percent and 3 percent, respectively. As tariffs have receded in importance and global supply chains and cross-border investment have proliferated, regulatory barriers to transatlantic trade have become more prominent. Officials, businesses, and scholars have been focusing greater attention on regulatory barriers to trade — especially those that may be duplicative and fail to provide greater social protections.

Non-Tariff Barriers are the greatest challenge to freeing transatlantic trade. Estimates of NTBs vary widely, and should be subject to a skeptical eye, especially as some of them are based on firm surveys. In a 2013 EU-commissioned study, economist Joe Francois estimated that eliminating NTB’s would add around 0.5% to GDP, while reducing tariffs would have almost negligible effects on the economy.1 Francois thus concluded that focusing on eliminating NTBs is a better approach.

Although rarely emphasized, another reason for engaging in regulatory coherence/ cooperation discussions is that the process can lead to improved regulation through recognition and adoption of best practices. This, too, can lead to reduced trade costs.

It’s important to note that regulatory barriers to trade can be more pernicious and more difficult to reduce than tariff barriers because they often reflect certain cultural values and preferences, and there are often more interests vested in the status quo.

Transatlantic Regulatory Cooperation since 1990

TTIP is not the first effort to address problems associated with transatlantic regulatory coherence and cooperation. Globally, NTBs became a part of trade negotiations back in the 1970s during the Tokyo Round, which gave rise to the GATT Standards Code — a predecessor to the Agreement on Technical Barriers to Trade (TBT) in the WTO established in 1995.

Given the challenges to advancing regulatory coherence and cooperation through global organizations, U.S. and EU officials turned to new transatlantic fora in the 1990s. In the 1990 Transatlantic Declaration, the two sides agreed to address regulatory barriers and established a bi-annual consultations process. At the time, U.S. officials were particularly concerned about the EU’s internal market program leading, inevitably, to creation of a so-called “Fortress Europe.”

In the mid-1990s during the Clinton administration, U.S. business (in particular), took the lead in establishing a Transatlantic Business Dialogue (TABD) and a Transatlantic Advisory Committee on Standards, Certification, and Regulatory Policy with the objective of creating a process through which products would be “approved once, and accepted everywhere in the new Transatlantic Marketplace.”2

In December 1995, the Clinton administration established the New Transatlantic Agenda (NTA) to address regulatory coordination and coherence. In 1997, the two sides concluded Mutual Recognition Agreements for six sectors, which soon was followed by a seventh sector.

In 1998, the Transatlantic Economic Partnership (TEP) was created to further advance regulatory cooperation.3 The TEP Action Plan called for the removal of technical trade barriers and enhanced dialogue between EU and U.S. regulators.

In May 2002, the two sides endorsed new Guidelines for Regulatory Cooperation and Transparency, again encouraging agency-to-agency cooperation. In 2005, they created the EU-US High Level Regulatory Cooperation Forum to address regulatory issues and exchange best practices across sectors of common interest.

The institution overseeing regulatory cooperation again changed names in 2007 when the two sides established the Transatlantic Economic Council (TEC), another “high-level” political body that this time was to advance regulatory cooperation through a Framework for Advancing Transatlantic Economic Integration (FATEI). That effort collapsed, however, over a dispute regarding EU restrictions on the import of chlorine-rinsed chicken.

Under the Obama administration, the two sides used the TEC EU-US High Level Working Group on Jobs and Growth (HLWG) to assess options for regulatory cooperation. Most notably, in 2012, President Obama issued Executive Order (EO) 13,609, which, in order to promote regulatory cooperation, required all agencies to consider it as part of their functions.4

So, the regulatory coherence discussions in the TTIP did not just emerge out of the blue. There is a long history with lessons to guide TTIP negotiators.

Five Options for Transatlantic Regulatory Governance

One complication to resolving issues of regulatory protectionism is that there isn’t consensus over how to proceed. There is a variety of option, each with benefits and costs.

The first option is to do nothing substantively new with respect to regulatory harmonization, mutual recognition, or applying procedural constraints on regulation. Beyond avoiding the transaction costs associated with trans-border regulatory negotiations, other benefits would include the emergence of regulatory competition, which, could lead to convergence through the market process.

This potential outcome has been characterized as both a race to the top and a race to the bottom. Most scholars contend that regulatory competition tends to lead to a race to the top regarding product regulation, as evidenced by the development of high regulatory standards within the European Union (EU) itself. One potential cost of this approach is the emergence and persistence of duplicate standards that create increased manufacturing and certification costs without improving safety or protection. This prospective outcome is often cited by proponents of a TTIP regulatory coherence chapter.

A second option for regulatory cooperation is harmonization of common standards, whether in a bilateral, plurilateral, or multilateral forum. The main advantage of harmonization is that it reduces compliance and production costs; the main cost of harmonization is that such standard setting processes are cumbersome, and the resulting standards less reflective of local priorities and contexts. The European Union has been viewed as the party advocating greater harmonization, but it actually has done little in its existing free trade agreements.

A third option is mutual recognition whereby one party agree to accept products from the other regardless of the specific regulatory requirements the other party adopts, provided general safety principles are met. This approach is linked to the famous Cassis de Dijon case in the EU, and it is reflected in the EU’s so-called new approach that is now over thirty years old.5 Under the new approach, EU legislation sets forth general standards and EU standard-setting bodies (such as CEN, CENELEC, and ETSI) create detailed ones, and any trader producing in compliance with these standards can sell its products throughout the EU.

In its recent trade negotiations, the EU has advocated the acceptance of UNECE standards for autos, which the EU applies, as equivalent to the national standards of the other party, so that European cars produced according to these standards can be imported.6 A variant of the mutual recognition approach is mutual recognition of certifiers (known as conformity assessment bodies, or CABs), who assess and certify the conformity of a product to a particular standard, including the standard of the importing country. In this way, a producer can have its product certified in its home country of production, which reduces compliance costs. The EU is advocating these approaches in TTIP, as it has in earlier transatlantic negotiations.

A fourth option is to create horizontal processes for all regulation, which is what the United States and U.S. business stakeholders have promoted in TTIP negotiations. Namely, U.S. stakeholders are pressing the EU to create a body that is analogous to the U.S. Office of Information and Regulatory Affairs (OIRA), which would require cost-benefit analysis for all European legislation and regulation. U.S. negotiators are also pushing for a mandatory notice and comment period for all EU regulation.

A fifth option is to combine horizontal and vertical processes by combining concepts of mutual recognition and equivalence and placing it under a new governance approach. Regulators would agree on particular principles, exchange information, conduct joint trials and risk assessments, and share results. They would monitor the results and adapt their own regulatory practices accordingly. Transparency is central to this model, which relies on information exchange, peer review, questioning, and response. This approach is reflected in different aspects of EU governance, including the EU’s so-called comitology processes that bring together national regulators from all EU member states.7

Ongoing Challenges

Not surprisingly, each side has hoped to convince the other to adopt its particular approach to the coherence issue. To generalize, the United States would like the European Union to adopt its system of cost-benefit analysis and notice and comment being applied to all regulations, so that if such procedures are not followed, regulators can be sued in court, and the regulation subject to injunction.

The European Union, in contrast, would like the United States to apply its approach of adopting common harmonized standards, such as international standards, and where common standards are not adopted, to provide for mutual recognition of each other’s standards or, failing that, mutual recognition of conformity assessment bodies (CABs) that certify compliance with standards.

Neither side, however, is likely to adopt the other’s regulatory approach wholesale. Unlike in the United States, most regulation in the European Union is passed by the EU legislature (consisting of the European Parliament and the Council of Ministers), and not by EU regulators.8 It would be inconceivable for the U.S. Congress to agree to a notice and comment process applied to it. It is thus not surprising that EU legislators will not agree to follow a U.S.-style notice and comment administrative law process.

For many, it may seem that the EU approach is preferable. After all, the European Union has considerable experience in creating a single market among 28 states with 28 different legislatures and sets of regulators. Yet, it is also not surprising that U.S. officials are wary of adopting the EU approach, which involves a combination of harmonized standards, mutual recognition of standards, and mutual recognition of each other’s CABs.

Reasons for Cautious Optimism

Despite all of the ongoing concerns, there have been some positive developments. Sustained interaction among regulatory officials over time has reinforced mutual understanding of each side’s regulatory systems. That greater familiarity is likely to lead to discovery of approaches where greater trade, and its consumer benefits, can be facilitated without encroaching on domestic regulatory objectives.

The U.S. Food and Drug Administration has met with member state regulatory officials, for example, to compare their different processes for evaluating new products and the reasons why one authority may grant and the other withhold approval. Through these information exchanges, regulatory officials can learn to build on each other’s separate experiences, avoiding duplicative efforts so that they can target resources for other challenges.

Meanwhile, there already has been some convergence of U.S. and EU regulatory approaches. Under the 2003 Inter-institutional arrangement on better law-making, the European Union agreed to experiment with more flexible legal forms, including co-regulation and self-regulation. In sectors where both sides adopt these approaches, regulatory barriers to trade should decrease.

Similarly, the European Union has adopted programs to reduce administrative burdens and regulatory barriers generally, repealing and revising acts and merging texts to make them more coherent. Authorities claim that the efforts have reduced the administrative burden of EU law by 30.5% from 2007-2012. These efforts increase the possibility of reaching agreement on some U.S. supported horizontal disciplines in TTIP, such as on enhanced transparency and the use of regulatory impact assessments requiring some sort of cost-benefit analysis.

Another good sign is that, in the United States, there seems to be greater political willingness than in the past to pursue a transatlantic deal. Even OIRA, an agency that has greater regulatory expertise than the USTR, has become more interested in acting as an interlocutor with EU officials.

We should nonetheless be cautious in our optimism given the serious impediments to achieving regulatory coherence. Removing regulatory barriers to trade and investment while continuing to reflect local preferences and retain democratic accountability is, and always has been, a challenging undertaking.

Notes:
1 See Joseph Francois, Reducing Transatlantic Barriers to Trade and Investment: An Economic Assessment, European Union Report (March 2013); European Commission, http://ec.europa.eu/trade/policy/countries-and-regions/countries/united-states/, (last visted Sept. 13, 2015). Cf. Non-Tariff Measures in EU-US Trade and Investment — An Economic Analysis, at 45, available at http://trade.ec.europa.eu/doclib/docs/2013/march/tradoc_150737.pdf. Estimates are provided with regards to expected changes in GDP, sector output, aggregate and bilateral trade flows, wages, and labor displacement, among other issues. The analysis uses the GTAP8 database (projected to 2027), in conjunction with NTB estimates reported in the ECORYS 2009 Study, available at http://trade.ec.europa.eu/doclib/docs/2009/december/tradoc_145613.pdf.
2 David Vogel, Barriers or Benefits?: Regulation in Transatlantic Trade 11 (1997).
3 Mark Pollack, The New Transatlantic Agenda at Ten: Reflections on an Experiment in International Governance, 43 J. Common Mkt. Studies 5, 899-919 (2005).
4 See Exec. Order No. 13,609, 3 C.F.R. § 26413 (2012).
5 See Technical Harmonization and Standards: A New Approach: Bull. EC 1-1985.
6 See European Commission, The EU-Korea Free Trade Agreement in Practice 12 (2011), available at http://trade.ec.europa.eu/doclib/docs/2011/october/tradoc_148303.pdf; The EU-South Korea Free Trade Agreement, 54 Official Journal of the European Union 6 (May 2011), available at http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=OJ:L:2011:127:FULL&from=EN.
7See Christian Joerges & Jurgen Neyer, From Intergovernmental Bargaining to Deliberative Political Processes: The Constitutionalisation of Comitology, 3 Eur. L. J. 3 (1997).
8 Richard W. Parker & Alberto Alemanno, Towards Effective Regulatory Cooperation Under TTIP: A Comparative Overview of the EU and US Legislative and Regulatory Systems, European Commission, Brussels (May 15, 2014).

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.

Gregory Shaffer is the Chancellor’s Professor at the University of California, Irvine School of Law.