Tackling Regulatory Trade Barriers in the Transatlantic Trade and Investment Partnership

Abstract: In the recently launched Transatlantic Free Trade Agreement, also known as Transatlantic Trade and Investment Partnership (TAFTA | TTIP) negotiations between the US and the EU, President Obama has indicated that the talks will make reducing regulatory barriers a signature issue. The emphasis on tackling these barriers has generated some excitement, with large figures being thrown around as estimates of the resulting economic gains. However, a good deal of uncertainty exists as to how the US-EU trade talks can address these issues, which remain largely undefined. This paper examines the problem of regulatory barriers and offers an assessment of what can be achieved. It concludes that while some claims of potential benefits are overstated, this does not mean that facilitating regulatory cooperation is not worthwhile. Negotiators should go after the low-hanging fruit, putting aside some of the more contentious regulatory disputes, and be responsive to the needs of industry and consumers by focusing their attention on issue areas where they can have the greatest impact.

Introduction

In his 2013 State of the Union speech, President Obama announced that the US would launch negotiations on a Transatlantic Trade and Investment Partnership (TTIP) – also known as the Transatlantic Free Trade Area (TAFTA) – with the EU (C-SPAN 2013). Beyond the important news that the world’s two largest economies would be negotiating to liberalize trade, there was also a significant development in terms of the substance of the proposed talks. While past trade negotiations have dealt with domestic regulation as a trade barrier in only narrow and limited ways, these talks would make reducing regulatory barriers a signature issue (The White House 2013).

Traditional trade barriers, such as tariffs, are relatively low between the two economies, and regulatory barriers are an area that offers great potential economic gain. One widely cited study suggests some substantial benefits from addressing “non-tariff measures,” including regulatory divergence issues, within the context of US-EU trade. After noting that the “total elimination” of such barriers would amount to a 2.5 – 3.0% increase in Gross Domestic Product, the study then tries to identify those barriers that could realistically be eliminated. Doing so, the report says it would boost EU GDP by 0.7% per year, leading to an annual potential gain of US$158 billion in 2008; it would boost US GDP by 0.3% or US$53 billion per year (Berden et al. 2009).

However, a good deal of uncertainty exists as to how the US-EU trade talks can address these issues. A brief explanation is included in the report of the US-EU High Level Working Group (HLWG) that provides a framework for the talks (High Level Working Group on Jobs and Growth 2013). However, the report, as well as the study noted above, refers to many regulatory issues which cannot easily be solved. Thus, some caution and realism needs to be maintained in the face of claims of such large economic gains.

This paper examines the problem of regulatory barriers and offers an assessment of what can be achieved. It concludes that some of the simpler regulatory divergences between countries can be handled. However, more challenging regulatory issues, where there is strong policy disagreement between the US and EU, may need to be taken off the table. As a result, while there are potential gains here, they may be smaller than some hope. This does not mean that facilitating regulatory cooperation is not worthwhile, however. Removing unnecessary regulatory differences can be well worth the effort, if the focus is on aligning regulations that are arbitrarily different rather than changing the substantive nature of the regulation. In addition, this paper examines a model of successful regulatory cooperation which sheds light on a possible approach to addressing regulatory divergence.

Photo by JAXPORT (CC BY-NC 2.0)

Problems Arising from Regulatory Divergence

Regulatory divergence across countries can arise for a number of reasons. For one thing, policy objectives may vary. If countries are trying to achieve different goals, their regulations are unlikely to correspond. But even where policy objectives are similar, regulating through an isolated process, in which national agencies make decisions without thinking about what their foreign counterparts are doing, can lead to differences in regulation. These differences impose substantial costs on businesses and consumers. The following examples help illustrate the kinds of divergences that exist, how they raise costs, and the potential difficulties in resolving them:

Car Headlights

In 1968, the US implemented a regulation related to automobile headlights, requiring two settings: one for high-beams, and one for low-beams. Recently, some automakers have developed new technologies that allow for more sophisticated lighting variations, involving a gradual dimming of the lights rather than a separate “high” and “low” setting. To date, these new headlights are permitted in the EU, but have not been approved for sale in the US on the basis that gradual dimming conflicts with the requirement that there be two settings (Keane 2013 & Nelson 2013). Here, consumers are denied new and improved technology because of outdated regulations.

Vehicle Crash Tests

Individual crash tests for new vehicles can cost anywhere from US$120,000-150,000 per test (in Canada and the US), but it is rare these tests are done just once, and it is even rarer that the same test will not be replicated in another country before it is cleared for import. What does this mean? The company trying to get its car to market will have to go through the same safety tests, even though they produce the same end result. This duplicative testing not only delays the release of the product to market, but it also adds significant costs.

Genetically Modified Foods

Genetically modified (GM) foods face different regulatory regimes in the EU and the US. The EU relies on what it refers to as the “precautionary principle,” which in practice means that in the EU, producers have to demonstrate the safety of GM crops and food products before they can be approved for sale. By contrast, US regulators generally see GM foods as “substantially equivalent” to unmodified products, and give them no additional oversight in the absence of scientific proof that any harm is caused by their sale and consumption (Kysar, 2004: 557). EU policy is, in part, reflective of strong feelings among its citizens. With policy preferences that come into conflict in this way, it may not be possible for regulations to converge, even though the divergence can be costly.

Regulatory Cooperation

How should international cooperation work in practice? There are two common methods, both of which are referred to in the TAFTA | TTIP working group report, which have been used to deal with regulatory divergence: harmonization and mutual recognition.

Harmonization implies the alignment of regulations to a single best practice. It could be based on international standards from a standard-setting body, or simply involve coordination among nations. Countries basically agree to converge on a single standard or regulation. This is usually the most difficult way to achieve regulatory cooperation.

Mutual Recognition can be achieved through mutual recognition agreements or the acknowledgement of regulatory equivalence. Mutual recognition agreements approve testing and certification processes of other countries as acceptable for allowing sale in the importing country. This method is especially useful in eliminating duplicative testing and certification processes. Equivalence simply acknowledges that different technical regulations can still achieve the same objectives or outcomes; sometimes there are just different methods of doing the same thing, and they should be treated as equivalent.

In connecting the various divergences with the possible solutions, the reason for the regulatory difference matters. Addressing minor, unintentional differences in regulations between countries is the easiest way to improve efficiency. Others are more difficult to resolve, but can often be bridged through equivalence or mutual recognition, allowing consumers to decide which products they prefer by increasing their access to items which otherwise would not be available. However, strongly conflicting policy views – such as on GM foods – may not be solvable this way. They would nevertheless benefit from more international dialogue on the causes of the divergence.

The US-Canada Regulatory Cooperation Council

Regulatory cooperation may be a desirable objective, but there is a question about whether trade agreements are the best place to address it. Clearly these issues can affect trade, and thus could fit conceptually within the scope of trade agreements. But are trade negotiations an effective way to deal with the problem? There is a long history of trying to do so, but without much success. As a result, it may be worth looking outside the traditional trade negotiating model for answers.

Attempts at regulatory cooperation between Canada and the US have been numerous over the years. Through trial and error both countries have been able to identify ways to successfully foster cooperation. The Regulatory Cooperation Council (RCC) is the latest effort, which operates outside the context of a trade agreement. Though a complete replication of previous models may not be sufficient, or desired, in the context of US-EU trade negotiations, there are certain aspects of the RCC that may be useful to inform the TAFTA | TTIP talks.

The RCC is supported by numerous private interests, business and industry, which are often better situated to recognize the barriers that impede market access than the government. The RCC addresses regulatory issues in a non-legalistic way that seeks to find modest solutions to specific regulatory divergence problems by providing a mechanism through which “bilateral and horizontal coordination and the generation of ideas” can take place among the lead agencies in each country (Canada-US RCC Progress Report 2012, 3-4). Its main focus is on limiting inefficiencies in existing regulations, not in creating new ones.

For example, Canada and the US recently recognized each other’s zoning measures with regard to highly contagious foreign animal disease outbreaks (Canadian Food Inspection Agency 2013). Such action will help prevent substantial disruption to live animal and animal products trade, as happened during the bovine spongiform encephalopathy (BSE) or ‘mad-cow’ outbreak in 2003. The fact that this plan was developed with broad engagement from both the public and private sector should not be overlooked – in fact, it is probably the key reason for its success. Not only is this vital to provide legitimacy to the project, but it also prevents industry and special interest capture by opening up these issues to comment by as large a pool of actors as possible. Furthermore, it serves to limit the development of a top-down process, which most often results in overregulation or bureaucratic inertia.

Motor vehicle standards have also been addressed, because vehicle production is a major supply chain in North America. In November 2012, certain Canadian-certified vehicles were made eligible for importation in the US because safety standards were either harmonized or had an equivalent effect (Federal Register 70538, 2012). There is still more work to be done, as this only applies to certain recently produced vehicles, but it paves the way for a more integrated and efficient supply chain in the future, eases the burdens on businesses from having to comply with different manufacturing and safety requirements, and provides greater choice to consumers by allowing new vehicles to enter the market.

At this early stage, it is difficult to fully assess the work of the RCC, but it does seem to be making progress. The most important feature of the RCC process is the pragmatic approach to dealing with regulatory divergence, coupled with regular input from private interests. The idea is not to bridge all regulatory divergences, but rather to find practical solutions to resolvable problems in those sectors that are most vital to the trading relationship. A transparent, inclusive, and open process that involves all stakeholders, from businesses to consumers, is a good model for achieving regulatory cooperation going forward.

International Regulatory Cooperation in the TAFTA | TTIP and Beyond

Although resolution of regulatory differences between the United States and the EU is likely to be more difficult than for Canada and the US, the RCC nonetheless provides useful insights into how regulatory cooperation can be addressed in the TAFTA | TTIP. The early successes of the RCC make clear that promoting regulatory cooperation does not need an extensive legal framework or dispute process. At the most basic level, it simply provides a mechanism for the two countries to address regulatory divergence through input from business and consumer groups, and cooperation between government agencies.

The best approach for the US and EU would be to focus attention on the views of the private sector, which faces the responsibility of meeting multiple government requirements, and which is in the best position to identify the costs and inefficiencies of regulatory divergences for trade. One of the main goals of the regulatory cooperation process should be to facilitate the involvement of producers, distributors and consumers in a process which provides for direct contact with the relevant government agencies.

Private sector involvement could come at two stages. First, during the initial rule-making process for new regulations; this could be helpful in preventing new regulations from diverging to begin with. Second, with regard to existing regulations, it is essential to have private sector input on how divergent rules hamper trade so that a discussion can even begin. Since regulatory convergence will be a long-term process, there needs to be a permanent forum where the private sector – businesses, consumers and other groups – can raise concerns with both existing and potential divergence.

While the TAFTA | TTIP offers a good starting point, regulatory cooperation should eventually be done on a multilateral basis. The need for this is amplified by the growing trend of “21st Century trade agreements” that include issues outside the traditional scope of trade negotiations. This simply means that if regulatory cooperation is included in multiple trade agreements with different participants, the risk of creating more layers of contradiction and confusion greatly increases.

Multilateralizing regulatory cooperation may not be possible at the moment, but since the US and EU make up almost half of world GDP and 30% of total goods and services trade, any agreement both sides can come to on regulatory issues could help set the tone and trajectory of future regulatory cooperation efforts involving other parties. The greater the number of countries involved in eliminating costly and duplicative regulatory processes, the greater the potential gains for consumers and producers alike. The TAFTA | TTIP negotiations can play an important role in leading the way on regulatory cooperation efforts, and their success or failure will determine how this issue is addressed in the future.

References

Berden KG et. al. (2009): Non-Tariff Measures in EU-US Trade and Investment – An Economic Analysis, European Commission, Directorate-General for Trade OJ 2007/S 180-219493. Available online: http://trade.ec.europa.eu/doclib/docs/2009/december/tradoc_145613.pdf

Canada-United States Regulatory Cooperation Council (2012): Progress Report to Leaders. Available online: http://actionplan.gc.ca/en/blog/regulatory-cooperation-council-progress-report

Canadian Food Inspection Agency (2013): Canada and the United States sign agreement on animal disease zoning. Available online: http://www.cfia-acia.agr.ca/about-the-cfia/newsroom/news-releases/2013-01-16/eng/1358284644570/1358284687351

C-SPAN (2013): Remarks of President Barack Obama – As Prepared for Delivery, State of the Union Address. Available online: http://www.c-span.org/uploadedFiles/Content/Documents/State-of-the-Union-2013.pdf

Europa (2013): Summaries of EU Legislation, Precautionary Principle. Available online: http://europa.eu/legislation_summaries/consumers/consumer_safety/l32042_en.htm

European Commission, DG Health and Consumers (2013): Rules on GMOs in the EU-Labeling. Available online: http://ec.europa.eu/food/food/biotechnology/gmo_labelling_en.htm

Federal Register (2012): Final Decision That Certain Canadian-Certified Vehicles Are Eligible for Importation, vol. 77(227) November 26, 2012, at 70538.

Keane AG (2013): Audi Headlights Seeing Around Corners Banned by US Rule. Bloomberg, 20 March. Available online: http://www.bloomberg.com/news/2013-03-20/audi-headlights-seeing-around-corners-banned-by-u-s-rule.html

Kysar DA (2004): Preferences for Processes: The Process/Product Distinction and the Regulation of Consumer Choice, Harvard Law Review, 188(2): pp. 525-642.

Nelson G (2013): Toyota Puts High Beams on Headlight Regulation. Automotive News, 20 May. Available online: http://www.autonews.com/article/20130513/OEM11/305139967#axzz2aAoST9yD

The White House (2013): Remarks by the President at Meeting with the President’s Export Council. Available online: http://www.whitehouse.gov/the-press-office/2013/03/12/remarks-president-meeting-presidents-export-council

US-EU High Level Working Group on Jobs and Growth (2013): Final Report. Available online: http://www.ustr.gov/about-us/press-office/reports-and-publications/2013/final-report-us-eu-hlwg