Talk of a ‘Right to Regulate’ Is Hurting the Trade Debate

A prominent issue among trade policy wonks and academics these days is whether trade and investment agreements undermine what is often referred to as governments’ “right to regulate.” The idea is that governments have a “right” to take certain regulatory actions, and that international economic agreements may interfere with this right. As a recent example, in the context of the debate over investor state dispute settlement (ISDS) in the TTIP, Chief U.S. negotiator Dan Mullaney said the United States has already revamped its ISDS system in a way that addresses concerns about “impartiality and the right of regulators to regulate in the public interest.”

Unfortunately, the term “right to regulate” is misleading, as it glosses over key distinctions in how international economic law rules affect domestic regulation. It is true that such international rules do affect regulation; but they do so in much more nuanced ways than the debate acknowledges, and the nuances are important here. In simple terms, international rules may identify and prohibit one particular policy goal (e.g., protectionism) that regulations might pursue; or, in the alternative, they may hold every policy goal open to review under a broader standard that gives international courts significant oversight power. It is this distinction that holds the key to the debate, but it is often ignored.

One of the core functions of international law is to impose constraints on states, requiring them to do, or not do, certain things. Thus, by its nature, international law affects domestic actions, including regulation. The question for the trade policy debate is: how does international economic law affect domestic regulation? It does so in a variety of ways, each with its own particular impact.

Talk of “rights” can be unproductive when carried out with a lack of precision, and that is what is going on here.

The most important way is that it prohibits governments from adopting regulations that discriminate against foreign goods, services, or investments based on their nationality. For example, governments can adopt environmental regulations that promote greater fuel efficiency. In doing so, however, they cannot impose higher standards on the equivalent cars produced abroad. In other words, they cannot use domestic regulation as a disguised means of giving an advantage to domestic producers.

Does such a rule interfere with the ability of governments to regulate? Of course it does, as it prohibits an entire category of regulation: protectionist regulations. Protectionist regulation is banned, and governments give up all rights to pursue it (subject to various exceptions and carve-outs). But most people feel such an intrusion into domestic regulation is justified, because protectionism is terrible economics and bad for international relations. As a result, an antidiscrimination rule works well as an international economic law concept, even though it interferes with domestic regulation. It only interferes slightly, and it allows any regulation that is not protectionist.

Along the same lines, some rules require transparency in domestic regulation. These rules also intrude on regulation in fairly uncontroversial ways, for example, by requiring publication of regulations.

Other rules, however, cause more concern. One example is trade rules that prohibit regulations that, while they do not discriminate, are “more trade restrictive than necessary.” This standard considers whether regulations hinder trade too much, and also the degree to which they achieve their stated goals. Another example is investment rules that require regulations to be “fair and equitable,” sometimes including an examination of whether the regulations are arbitrary. Such rules impose broad and vague constraints on how governments may act, and they do so in ways that are not very clear to regulators. Is a particular regulation protectionist? Regulators and observers generally know the answer to that question at the time the regulation is adopted. By contrast, is a regulation arbitrary? Opinions vary considerably, and we do not know for sure until an international court weighs in on the question.

More importantly, the broader international rules intrude on every category of regulation. They do not simply classify one particular policy goal (protectionism) that regulations might pursue as off limits. Rather, they hold every policy goal open to review under a standard that gives international courts a good deal of leeway in their review of the regulation.

Talk of “rights” can be unproductive when carried out with a lack of precision, and that is what is going on here. When domestic regulation intersects with international economic law, the underlying issue is the scope and extent of the constraints imposed by international law, and the allocation of power between the national and the international. International law can certainly interfere with the ability of governments to regulate; indeed, that might be the point of it. But different international law rules interfere in different ways. If narrowly drawn (anti-protectionism), they do not interfere much at all; if written broadly (non-arbitrary regulations), they interfere a lot. If we fail to distinguish between the two, we get a confused and unhelpful debate, with people talking past each other. How international economic law affects the ability of governments to regulate is an important question to deal with. Let’s not obscure it by referring vaguely to a “right to regulate,” without addressing the nuances of the issue.

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