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CONFERENCE SPONSORED BY STIFTUNG WISSENSCHAFT UND POLITIK

EBENHAUSEN, JULY 4 - 6, 1996

TOWARDS RIVAL REGIONALISM?

U.S. & EU REGIONAL ECONOMIC INTEGRATION POLICIES AND THE RISK OF A TRANSATLANTIC REGULATORY RIFT

 

 

 

THE ROLE OF REGIONAL AND GLOBAL INSTITUTIONS IN INTERNATIONAL REGULATORY INTEGRATION

 

Geza Feketekuty

 

 

The growing importance of regional trade agreements such as the European Union, NAFTA, APEC and MERCOSUR raises questions about the appropriate division of responsibilities between these regional agreements and the global institutions, and creates a risk that rival regulatory regimes at the regional level could create new trade barriers and friction. This paper analyzes the issues involved, reviews and compares past approaches to regulatory policy at the global, regional level and national levels, examines some concepts for sorting out a division of responsibilities, and proposes some guidelines that might be adopted in the World Trade Organization.

 

The Scope of Regulatory Activity

Governments regulate economic activity to promote a variety of overlapping social objectives, including 1) the promotion of health, safety, environment, consumer protection and other social objectives; 2) the establishment of standard sizes and weights of various products to facilitate commerce; 3) the establishment of conditions for the operation of interconnected networks, including distribution systems, communication systems, transportation systems, and public information systems networks; 4) the protection of consumers and downstream suppliers against exploitation by firms with excessive market power; 5) the establishment of condition for the operation of a market economy.

Governments pursue these objectives through various modes of regulation, including 1) the establishment and enforcement of standards for products, services, production processes, employers, and service providers, 2) the regulation of economic activity in particular sectors, industries, or professions; 3) the use of fiscal incentives, subsidies and taxes for the promotion of desired social goals, 4) the establishment of laws for he conduct of business, including the legal establishment, financing, governance and conduct of corporations; 5) the establishment of property laws, including laws governing commercial contracts.

The principal focus of the debate over regulatory reform, and therefore the principal focus of this paper is the regulation of economic activity in specific industries. Nevertheless much can be learned from the extensive experience in establishing international cooperation on standard-setting activities of governments, and they are therefore included in the analysis. The use of fiscal incentives and taxes often represents a superior method of achieving a desired social goal than direct regulatory control by the government, and are therefore covered in the analysis indirectly. The issue of what might or might not be considered an appropriate incentive or tax is not covered by the paper. Laws governing the conduct of business and the ownership and transfer of property are essential to the openness of national markets to global markets, but are an issue today largely with respect to transition economies and are therefore not considered in this paper.

 

The Role Of Regional and Global Organizations in Regulation

Governments have established a wide variety of mechanisms for international cooperation on regulatory issues, for the development of international standards, for the establishment of common regulations for international transactions or for the achievement of regulatory objectives requiring common action. It is beyond the scope of this paper to provide a comprehensive survey of existing modes and venues for international cooperation. A brief survey of international activity in three areas will serve to illustrate the range of international cooperation - from an exchange of information to the development of common international regulations - which currently exists. The three areas covered in this brief survey are product standards, environmental regulations, and sectoral regulations in infrastructure services.

 

Standards

The key international organizations in the product standards area are the International Standards Organization (ISO) and its regional counterparts such as the European Standards Organization (ESO). These standards making bodes establish technical specifications for commonly defined standards which individual firms or governments are free to adopt. They become compulsory only when individual governments decide to adopt to meet a specific social objective.

The World Trade Organization is responsible for administering the Standards Code, which seeks to minimize the intentional or unintentional creation of trade barriers in the form of standards. The Standards Code does not establish substantive standards on any issue, but contains principles and procedures which governments must follow in developing and implementing standards. The Code starts from a presumption that national government should have the right to establish their own objectives and levels of performance with respect to product standards, but that they should adopt the least trade distorting means of accomplishing those objectives.

The European Union in many ways has taken on the traditional role of national governments in establishing minimum standards for the achievement of various such objectives such in the health, safety, consumer protection and environmental area. More recently, however, the European Union has adopted mutual recognition as an integrative device with respect to noncritical standards.

Other regional trade organizations such as NAFTA have not assumed similar responsibilities in this area.

 

Environmental Regulation

Global cooperation on environmental issues has largely involved ad hoc agreements among groups of countries on specific issues such as conventions dealing with the preservation of species threatened with extinction, the dumping of hazardous materials (Basel Protocol), the release of certain chemicals into the atmosphere (Montreal Convention). The OECD is the venue for agreements among member governments on a number of hazardous chemicals, among other issues.

One of the most controversial issues in recent years has concerned the use of trade measures to enforce regulations on the environmental impact of process and production methods. Such trade measures are contained in a number of international agreements, and become an issue when they are applied o imports from countries that have not signed the agreement. Such measures are also contained in national laws, which in effect constitute an extension of national regulatory jurisdiction to economic activity outside the nation’s borders. Both the OECD and the WTO have been seized with this issue, but no consensus has yet emerged on the groundrules that should apply.

Environmental issues have also been an important component of regional trade agreements, including both the European Union and NAFTA.

 

Regulation of Infrastructure Services

The regulation of infrastructure services provided on a global level has been the responsibility of specialized international organizations established for that purpose, e.g. the International Telecommunications Union (ITU), the International Air transport Association (IATA), the International Postal Union (IPU), etc. The agreements administered by these organizations are supplemented in some areas by bilateral agreements on issues such as bilateral landing rights (air transport).

Major technological changes and globalization have created pressures for major regulatory reforms that would permit greater international competition in the provision of such services. The World Trade Organization is currently seized with negotiations that would establish a broad framework for international competition in a number of key sectors such as telecommunications, maritime transport, and financial services. If successful, these negotiations would not only alter domestic regulations in these sectors, but also the corresponding international agreements administered by the specialized agencies such as the ITU.

Regional trade organizations such as the EU and NAFTA have also become involved in developing regional arrangements for competition in infrastructure services. Efforts by the EU in this context involve more far-reaching efforts to establish a common regulatory framework than efforts in NAFTA. These parallel efforts at the regional and global level appear to be highly complementary.

 

The Centralization of Regulatory Activity Varies

Integration of Regulated Activities Affects Centralization

The centralization of regulatory activity varies in accordance with the activities being regulated. Centralization of regulatory activity tends to be highest with respect to product standards and lowest with respect to general laws in the economic area, with regulation of sectoral activity falling between the two. In the list of various types of regulatory activity cited above, the various categories have been rank-ordered with respect to the degree of international cooperation and harmonization.

In as much as real world outcomes usually reflect revealed preferences by society, it is instructive to search for an explanation for these observed differences with respect to international harmonization and or cooperation. The high degree of international cooperation on product standards is probably explained by the fact that international trade in products has lead the integration of international markets.

The growth of international trade has been supported by various infrastructure services, which tend to be highly regulated, and this has created the need for a degree of international cooperation and harmonization with respect to sectoral regulations in services. At the same time it is probably less costly to segregate the production of domestic services from the production of international services than it is to segregate the production of domestically sold goods from he production of internationally traded goods, and this may well explain he lower level of international cooperation in sectoral regulations. This will undoubtedly change as a result of the globalization of economic activity.

Globalization of production will also increase the need to harmonize and coordinate regulations concerning production processes.

 

Cross Border Effects Affect Centralization

The centralization of regulatory activity also differs with respect to the various social objectives, in part because of differences in the degree to which the effects of economic activity spill over borders. Where such spill-over effects occur, international (or national) cooperation have been seen as necessary to achieve the desired social objective. This is increasingly true for environmental and health regulations, for example, and fiduciary regulations governing banking. On the other hand there is less need to harmonize traffic safety regulations.

 

Political Preferences Affect Centralization

The degree of centralization in regulatory activity also varies significantly according to political preferences, and various historical and geopolitical factors which influence the willingness of one region or country to harmonize or coordinate its political activities with its neighbors, and to accept a higher level, common framework of governance in the regulatory area. Thus, for example, regulatory activity and government in general is more centralized in Europe and Asia than it is in federal states such as the United States, Canada, or Australia.

At the regional level, the European Union has centralized regulatory responsibility to a far higher degree than any other regional grouping of countries, e.g. NAFTA & APEC Nevertheless, even in the case of the EU the process of integration has been limited in many areas. The EU has made only limited progress in establishing European-level regulations to govern corporations, for example, though it has established a parallel system for regulating competition among corporations doing business at a European level.

 

Centralization of Regulation Creates Benefits

Regulatory Benefits

Some degree of harmonization and/or coordination of regulations across borders is required because the effects of economic activity on desired social objectives often spill over borders. Where such spill-over effects exist, local authorities are not able to achieve conditions desired by their citizens without obtaining the cooperation of authorities in neighboring jurisdictions, or alternatively delegating regulatory authority to a higher level of governance covering all relevant jurisdictions. For example, the protection of the atmosphere against the harmful effects of cfcs on the ozone layer requires global cooperation to curb the production and use of cfcs because atmospheric winds carry cfc emissions around the world.

 

Economic Benefits

The centralization of regulations across city, county, provincial, state, national, or continental borders has the economic advantage of facilitating and reducing the cost of trade across such borders. Obviously, producers would not be able to obtain the economic benefits of the larger production runs which trade makes possible, if each city, county, or country set different standards and this forced producers to design and produce a different product for each city, county or country.

Some degree of centralization of regulations is also required to permit certain international transactions. For example, where a product or a service is simultaneously regulated both in the jurisdiction where it is produced and in the jurisdiction where it is consumed, either one of the regulatory authorities has to give way or they have to reach agreement. Also, in the case of many international infrastructure services, the services are simultaneously produced in at least two countries and simultaneously consumed in at least two countries, and this requires the establishment of a common set of rules for the provision of such services. Moreover, where production has become globalized, i.e. where different parts of the production process are carried out in different countries, the regulations governing production technologies have to be compatible. Any differences in regulations can introduce added costs which make such integrated production less advantageous, and ultimately prohibitive.

Developing regulations at a higher level of governance also has the added economic advantage of reducing the development cost by removing unnecessary duplication of developmental efforts, including research into regulatory issues, and reducing compliance costs, by removing duplication in testing.

 

Political Benefits

Centralization of regulations also helps maintain the consent of producers to the removal and the avoidance of new barriers to cross border transactions. The level playing field is a popular slogan with producers who are concerned if their foreign competitors face lower regulatory costs. The more deeply markets become integrated, the higher the political preference for regulatory harmonization.

 

The Costs of Centralizing Regulation

Loss of Regulatory Effectiveness

It is often difficult to write regulations that are equally effective in achieving desired social goals under widely different conditions. Regulations effective in densely populated areas may be ineffective in less densely populated areas, or vice versa. Regulations effective in low-lying areas might be ineffective in the mountains, or vice versa. Regulations effective in cool climates may be ineffective in tropical climates, or vice versa. To some extent regulations can be written to take account of these differences, but it becomes increasingly difficult to do that and to keep the regulations comprehensible the wider the area covered and the variation of conditions found in such area.

Centralization also makes it more difficult to change regulations as conditions change over time because a much larger number of people have to be consulted and have to agree. Centralization also removes the benefits that comes from different jurisdictions trying out different approaches, thus providing experimental evidence about the relative effectiveness of alternative forms of regulation.

 

Economic Costs

There is some tendency for centralization of rule-making to result in over-regulation, thus creating unnecessary costs for society. Over-regulation may arise in part because regulators may need to assure that the regulations will achieve a minimum level of outcome with respect to a desired social objective under a wide range of demographic, ecological, environmental, and cultural conditions. Over-regulation may also result from a the wider range of social preferences that is likely to be found when one moves to a higher level of governance. Social objectives by definition are objectives set by society through political processes, and citizens and governments in different regions or countries may wish to choose different outcomes. While levels of regulatory performance are established through political compromise, there tends to be an upward bias because centralization removes potential competition from regions with lower standards and those not satisfied with a lower standard are likely to be more active politically.

The tendency of centralization to slow the adaptation of regulations to changing circumstances can result not only in a reduced effectiveness of regulations, but also in unnecessary costs of over-regulation where the changing conditions call for reduced regulation. This has been demonstrated in recent years with respect to sectoral regulations in infrastructure services, where new technologies have increased the scope for effective competition and reduced the need for regulatory supervision. There is also always the risk that regulations are written in light of existing technologies, with the result that firms are prevented from adopting more efficient technologies by regulations that are out of date.

The centralization of regulation also carriers with it the cost of increased risk that regulatory decisions made for the world as a whole, or a regional grouping as a whole, might be wrong. Keeping regulatory decisions at the national or subnational level allows and encourages experimentation with different regulatory approaches, giving everyone ultimately the benefit of the results achieved by different approaches with respect to both the effective and the costs and benefits associated with each approach.

 

Political Costs

Centralization of regulatory activity creates a number of political costs. Imposing the same objectives on people who would otherwise choose different objectives creates one kind of political cost. Regions who would prefer a lower standard and regions who would prefer a higher standard are likely to be equally unhappy with any compromise. Centralization also creates a political cost in terms of a loss of citizen participation. The more removed a level of government is from an individual citizen, the more difficult it becomes for an individual to maintain a direct involvement in the process by which regulatory standards are set. This weakens both public understanding of the issues at stake and public acceptance of the regulation itself. It also weakens the foundations of democratic governance.

 

Establishing the Optimal Level for Regulation

It should be possible to establish the optimal level of governance for any particular type of regulatory activity by reviewing the costs and benefits associated with each level of governance - in terms of regulatory effectiveness, in terms of economic efficiency and in terms of political legitimacy. There are several difficulties in putting such a recommendation into practice. First, there are inevitable trade offs between regulatory effectiveness, economic efficiency and political legitimacy. Second, the costs and benefits are difficult to quantify and to weigh against each other.

Nevertheless, a systematic evaluation of how the level of governance affects the regulatory effectiveness, economic efficiency, and political legitimacy of regulation in any particular area can contribute to the public debate and result in more informed judgments. It is not within the scope of this paper to carry out such an analysis with respect to any area of regulation. However, this paper can focus on some principles that can aid the decision-making process.

This paper will also analyze possible distribution of roles among different levels of government in the regulatory area, with the objective of minimizing the costs and maximizing the benefits. In the review of the issues earlier in this paper, the issue has been posed in terms of mutually exclusive allocations of responsibility among different levels of governance, this need not be the case. In fact, an examination of the real world indicates that in most areas regulatory responsibility is shared by different levels of governance.

It is instructive, for example, to look at the degree to which the various types of regulatory activity have been centralized at the national level in countries with federal systems. Many of the regulatory activities in such countries are either left to the states making up the federation, or are carried out by both the federal and state governments. Where parallel regulations apply, federal regulation can either preempt the state regulations in matters addressed by the federal regulation, or they can coexists, giving the regulated parties the option of choosing either state or federal regulation. In many of the areas of regulation where the States have jurisdiction in the United States, the States have nevertheless established mechanisms for cooperation such as national associations of the state regulatory agencies involved, bilateral agreements and joint governing bodies for particular activities such as the operation of regional ports and airports, bridges etc..

Another kind of example can be taken from the treatment of standards in the GATT/WTO. The GATT Standards Code does not seek to address itself to the substantive issues involved in setting standards in various areas. Rather, it seeks to establish a set of procedural and substantive principles designed to assure that standards-making activities at national levels do not create unnecessary barriers to trade.

Another set of choices with respect to the allocation of responsibilities for regulations concerns the choice between organizations with broad responsibilities as against organizations with specialized responsibilities in specific areas of regulation. Here too, the issue comes down to a distribution of responsibilities between the two types of organizations, rather than as a choice between the two.

 

The Subsidiarity Principle

 

One of the key principles in seeking to allocate responsibility for regulation is the subsidiarity principle. In general, the principle of subsidiarity holds that any particular form of regulation should be carried out at the lowest level of governance consistent with the achievement of various social goals. In effect, this principle establishes a downward bias in favor of keeping regulation at the lowest level of governance consistent with the achievement of various social goals, including regulatory effectiveness, economic efficiency and political legitimacy.

There are, however, two different ways this term has been applied to regulatory activity. In one application of this term, resting on the principle of national sovereignty, the reference point or lowest level of government considered relevant is the nation state, followed by regional groupings such as the EU or NAFTA, and finally international bodies such as the WTO. In an alternative application of this term, the reference point or lowest level of governance is the individual citizen, followed by the family, the local community, the county, the state, the nation, the regional grouping and finally international organizations. To some extent, whether one chooses to adopt the first or the second interpretation of the word depends on whether one thinks of economic and political power emanating from the sovereign nation state, or the individual economic and political actors in society. The historical origin of the word, which can be traced to a papal encyclical by Pope Leo, favors the second interpretation. The centrality of the nation state in the development of regional groupings and international organizations favors the second interpretation.

This author favors an interpretation based on the individual for both economic and political reasons. Politically, the legitimacy of regulations in a democratic society ultimately rests on the acceptance of such regulations by the majority of individual voters. The higher the involvement and understanding of individual citizens in the formulation of regulations, the higher will be the public acceptance and effectiveness of the regulations involved. At the same time, economic efficiency in a market economy is determined by the actions of individual consumers and producers, acting either as individuals or as enterprises. The better adapted regulations are to the conditions facing individual economic actors, and the preferences of such actors as either consumers or producers, the more such regulations are likely to be economically efficient.

The consequences of choosing one interpretation of subsidiarity over another goes beyond whether one chooses to vest all residual regulatory authority in the nation state. It has major implications for the design of the international institutions given responsibility for coordinating or harmonizing regulations at supranational levels. If one chooses the nation state as the reference point, the nation state can be considered the only relevant actor in those supranational institutions. If one chooses the individual as the reference point, one has to consider the relationship of the individual to those supra national institutions. This has a direct bearing on a number of issues currently being debated in the EU, the WTO and elsewhere. One such issue concerns the degree of public transparency that should be provided to decision-making and dispute settlement processes in the WTO, and the extent to which individual interest groups or corporations should be given direct access to dispute settlement procedures.

 

Principles Designed to Facilitate Subsidiarity

It is possible to establish various principles that will tend to reduce the cost of carrying out regulatory activity at lower levels of governance, and thus preserving the various other benefits that can be derived from carrying out regulatory activity at lower levels of governance. Put another way, these principles can be viewed as principles designed to facilitate the application of the subsidiarity principle. In general, these principles serve to assure 1) access to information necessary for making sound judgments, 2) participation by all parties likely to be affected by a regulation, 3) elimination of unnecessary costs due to over-regulation or ineffective regulation, 4) reduction of involvement by higher levels of governance to the minimum necessary for meeting regulatory objectives, 5)development of alternative mechanisms for obtaining economies of scale in the development and implementation of regulations.

These principles are presented here in considering the allocation of responsibility among national, regional and global levels of governance. Many of the principles that can serve to achieve these objectives are embedded in existing agreements, while others might be added to such agreements. While the central issue in this paper concerns the allocation of responsibilities at the national level and above, many of the same kind of principles could be applied to a division of responsibilities at the subnational level. In fact, where applicable, examples will be drawn from similar principles being applied by federal states in practice.

 

 

 

Principles Embedded in the GATT/WTO

The existing rules of the World Trade Organization provide a number of principles which might assist efforts to remove regulatory barriers to international trade and investment. Some of these principles are incorporated in the basic GATT Articles, while others are incorporated in the Standards Code or the GATS Agreement. These principles are as follows:

Transparency - Everyone should be given full information about all rules and regulations governing economic transactions so all potential competitors can base their decisions on an accurate assessment of potential costs and market opportunities.

Due Process - Everyone affected by proposed standards should be given the opportunity to comment and the right to pursue issues related to their implementation with appropriate officials.

Proportionality - The cost of standards should be proportional to the regulatory benefit expected from their implementation.

Minimizing Distortions of Trade - Governments should adopt the least trade distorting method of achieving legitimate social objectives and to use international standards where such standards meet the desired level of performance with respect to that objective.

National Treatment - Regulations should be applied to domestic and foreign products on an equivalent basis.

Mutual Recognition of Testing Results - Governments are encouraged to negotiate agreements for the mutual recognition of testing results with respect to the certification of technical standards and for the mutual recognition of applicable educational and professional experience with respect to the certification of professional experience.

 

OECD Principles of Good Governance

The OECD Council on March 9, 1995 adopted a series of "Recommendations on Improving the Quality of Government Regulation." The Recommendations contain a "Reference Checklist for Regulatory Decision-Making", which is designed to assist governments in designing regulations that are effective from a regulatory point of view, efficient from an economic point of view and legitimate from a political point of view. The Checklist contains the following ten questions which governments are urged to consider when evaluating proposed regulations:

  1. Is the problem correctly defined?
  2. Is government action justified?
  3. Is regulation the best form of government action?
  4. Is there a legal basis for regulation?
  5. What is the appropriate level (or levels) of government for this action?
  6. Do the benefits of regulation justify the costs?
  7. Is the distribution of effects across society transparent?
  8. Is the regulation clear, consistent, comprehensible, and accessible to users?
  9. Have all interested parties had the opportunity to present their views?
  10. How will compliance be achieved?

 

Current OECD Effort to Define Principles for Regulatory Reform

In 1995 the Japanese government proposed that various OECD Committees analyze the issues related to domestic regulation, with the objective of seeking to crystallize principles for the reform of such regulations. The Japanese government believed that such an effort might assist governments in designing more effective and economically efficient regulations, while also reducing potential barriers to trade. Work in response to this initiative is currently under way. No results from this work is yet available.

The development of a set of guidelines for regulatory reform might represent an optimal kind of soft law which helps minimize the cost of national regulation, without unnecessarily intruding into the substantive rule-making responsibilities at the national level. Such guidelines could assist national decision-makers by giving them an external authority they could appeal to in the context of national debate over regulatory reform issues, and provide an impartial reference point in bilateral trade disputes centered around regulatory issues. Such guidelines might also assist negotiators in the World Trade Organization as they seek to negotiate more concrete international commitments on liberalization of trade barriers and new competition rules for previously heavily regulated sectors in services, negotiations which have proven difficult to conclude.

It is conceivable that some of these principles might find application at some future time in a WTO code on regulatory activity which could subsume both the Standards Code and the provisions in the GATS Agreement on regulation.

 

Possible Principles for Domestic Regulatory Reform

The following principles for regulatory reform might complement or augment the principles discussed above. The objective of these guidelines or principles would be to minimize barriers to international trade, investment and production decisions. By doing so, they would not only help remove distortions to international competition, but also help reduce pressures for global regulation.

The statement of each principle is followed by a short commentary by the author outlining the reason for the principle, how the principle facilitates the application of the subsidiarity principle, and current operational examples of how governments are applying the principle in practice.

 

Analysis of Costs and Benefits - Governments should undertake a full analysis of the costs and benefits of proposed regulations, and make the results of their analysis public.

Comment: This principle could help assure that governments and all interested parties have the information necessary for a rational decision to the optimal design of regulations being considered at any level of governance.

Use of Market Mechanisms - Whenever possible governments should use market mechanisms to promote desired social objectives. The use of across the board economic incentives and disincentives should be considered preferable to detailed regulations which give officials a high degree of discretionary authority.

The allocation of scarce resources should be auctioned whenever possible to enable the most efficient firms to gain access to such resources.

Comment: Where regulations give existing producers or sellers preferential treatment in the allocation of scarce resources, they not only create domestic economic inefficiencies by discriminating against potentially more economically efficient new suppliers, they also distort international trade and competition. Similarly, regulations that seek to allocate scarce resources or to regulate controlled activities through discretionary decisions by bureaucrats are likely to be both economically inefficient and trade distorting. Moreover, there is a significant risk that the economic inefficiencies and trade distortions are magnified by political/interest group pressures, and campaign finance related political corruption.

Minimizing the Scope of Regulations - Governments should only regulate activities directly related to the achievement of the regulatory objective. Where the distribution network constitutes a natural monopoly, as is often true in infrastructure services such as water, gas, electricity, telecommunications and rail transportation, the government should seek to provide nondiscriminatory access to the network by all potential suppliers.

Comment: As has been shown by the deregulation and privatization of infrastructure services by a number of countries, over-regulation, which allows network monopolies to control the flow of resources over their networks increases consumer prices, reduces consumer choice and retards innovation. More generally, efforts to minimize the scope of regulations to the minimum necessary to achieve the desired social objective helps to minimize the economic cost of such regulations and the potential distortion of international trade and competition.

International Cooperation - Governments should seek to establish and avail themselves of mechanisms for the exchange of information on national experiences with respect to various regulatory approaches and for carrying out joint research on regulatory issues of common interest.

Comment: By exchanging information about the relative effectiveness and the costs and benefits of alternative regulatory approaches, governments can learn from each other and reduce the development costs associated with national regulation. Similarly, joint research efforts allows governments to share and thus to reduce further their cost of developing regulations. The OECD has played this role effectively for developed countries. Similar contributions have come from he various UN specialized agencies.

Such voluntary forms of cooperation among national regulatory authorities over time leads to the convergence of national regulations, thus providing an alternative means for minimizing the costs associated with national regulation, while avoiding or minimizing the need and the associated costs of global regulation.

Role of Voluntary Private Regulatory Activities - Governments should encourage their industries to work with each other and with their foreign counterparts to develop technologies and voluntary standards that will meet public concerns about the impact of their activities on various social objectives.

Comment: Where private industry responds to public concerns about the impact of production activities or products on legitimate social objectives, it can help meet societal objectives at less cost and with less international political friction than if governments do it. To the extent that voluntary adherence to such industry-developed standards remains adequate to meet public objectives, it has the added advantage of remaining open to adaptation to new technologies or new economic conditions. The ISO and many regional and national standards making organizations play this intermediary role admirably, as do many national and international industry associations. The semi-conductor industry, for example, organizes international conferences to exchange information about best practices in the environmental area.

As is true with respect to international cooperation by governments on regulatory issues, private voluntary efforts constitute a method for international convergence of regulatory standards without the cost of centralizing regulatory responsibility at the international level.

Open Access to Private Regulatory Activities - Governments should assure that private regulatory activities at the national, regional and international level are open to participation to all interested parties, and they do not become inadvertently barriers to entry into the industry or barriers to international trade and production.

Commentary: Voluntary efforts by private parties to establish regulatory standards at a national or regional basis creates a risk that such efforts because mechanisms for protecting members from competition by outsiders. Barriers to international trade and commerce created by private standards-making activities are some of the more difficult barriers to deal with because the division of responsibility between such bodies and the relevant national or regional supervisory authorities is often not very clear. This remains an important source for barriers to trade and an area where additional international rule-making may

be necessary.

Mutual Recognition of Testing Results - Governments should establish procedures for the mutual recognition of testing results, certification of educational and professional experience, and similar reviews of compliance with particular regulatory criteria.

Comment: An important cost to industry of national regulation is the duplication of efforts required to prove that various products, production processes or services meet required regulatory standards, or that various professional practitioners meet particular educational or professional standards. By negotiating agreements for the mutual recognition of organizations granted authority to certify that various products, production processes or services meet required regulatory standards, or that professional practitioners have satisfied various educational or professional standards, national governments can remove an important cost national as against international regulation.

Mutual Recognition of Non Critical Standards - Governments should provide mechanisms for the mutual recognition of national standards which are designed to facilitate trade and commerce, and are not essential for the achievement of critical social objectives.

Comment: Mutual recognition of non-critical standards represents one way of eliminating the economic cost of traders and global producers facing different national standards. It allows each country to establish regulatory standards for goods and services produced in its own country, while allowing goods and services produced in other countries to be sold as long as they meet the regulatory standards established by their home government. This rule would not apply to regulations critical to the protection of a country’s own health, safety. Environment or protection of noncorporate consumers. This rule has been adopted by the European Union, in combination with the adoption of minimum harmonized standard for critical health, safety, environment and consumer protection objectives.

 

Regional Trade Agreements and the WTO

Building Blocks Rather than Stumbling Blocks?

The emergence of regional cooperation efforts in the regulatory area has raised the question what should be done to assure such regional cooperation establishes building blocks rather than stumbling blocks for world commerce and for future efforts to build cooperation on the global level. To the extent regulations covered by regional agreements are not covered by existing global disciplines, the negotiation of such regional agreements does not raise any legal issues. Nevertheless, it is appropriate to ask whether they create new obstacles at the global level, and how the world community might ensure that they facilitate rather than hinder world trade and investment flows, and the future negotiation of new agreements in the future on cooperation at the global level.

The Role of Regional Trade Organizations

Regional trade organizations occupy a role between national governments and global institutions. Where global levels of cooperation in a regulatory area are inadequate or nonexistent regional agreements provide a basis for minimizing the barriers to trade and investment flows that can result from national regulations. The members of a regional agreement might alternatively decide to harmonize their regulations or to shift regulatory responsibility to the regional level in a particular area of regulation because of a high degree of integration among their economies and the high costs and high trade barriers created by divergent national regulations.

Regional cooperation can be in the best interest of countries outside of the region. By removing obstacles to trade and investment flows within the region, such agreements give outside firms access to a larger integrated market with the attendant economies of scale. At the same time, such agreements can be become instruments of regional protection if the regional agreement introduces new elements of discrimination against firms or products originating from nonmember countries.

Regional agreements can also be useful building blocks for future global agreements. They can ease future negotiations by reducing the divergence of national regulations in one region in the world, and they can provide models for future global agreements, or at a minimum a laboratory for testing approaches to international cooperation on particular regulatory issues. Such agreements, however, can also become stumbling blocks to the negotiation of future global agreements, if the regulatory approach that is adopted unnecessarily diverges from a global norm, or if the regional agreement is later treated as a sacrosanct agreement that cannot be altered through subsequent global negotiations.

 

Possible WTO Provisions on Regional Regulatory Activities

Some basic principles that might be incorporated into WTO rules in the future might help assure that regional agreements on regulatory issues remain building blocks rather than stumbling blocks. Four such principles or guidelines are suggested here as follows:

Transparency - Regional Trade Organizations, or countries proposing to negotiate regional agreements on regulatory issues, should make public proposed provisions of any regional agreements on regulatory issues, including alternative formulations of such provisions.

Comment: By making public regulatory provisions being considered for negotiation, the members of a regional agreement will give other parties an opportunity to raise potential issues before the agreement is set in concrete.

Global Consultations - Regional Trade Organizations, or countries proposing to negotiate regional agreements on regulatory issues, should give nonmember countries and interested parties from such nonmember countries an opportunity to express their views regarding proposed regulations being considered. They should also canvas nonmember countries and international organizations on regulatory standards they have adopted or are considering for adoption.

Comment: Giving nonmember countries, and enterprises and nongovernmental organizations in such countries, an opportunity to comment on the proposed provisions of a regional agreement on regulatory issues will give the parties , the parties to such agreement can help assure that they are fully informed about the concerns and interests of nonmember countries. A review of regulatory standards in force or under consideration elsewhere should help provide information about possible areas of convergence on a global level.

Non Discrimination - The parties to a regional agreement on regulatory issues should seek to avoid provisions which create new forms of discrimination, and whenever consistent with the regulatory objectives being pursued, should extend the benefits of such an agreement to parties from nonmember countries, or goods and services produced in nonmember countries.

Comment: Adoption of this principle would help assure that regional agreements do not introduce new forms of discrimination, and to the extent possible contribute to the removal of barriers to global commerce.

Due Process and Open Procedures - Countries negotiating regional agreements on regulatory issues should include provisions for public consultations before new regulations adopted, and extend such public access to parties from nonmember countries. Such agreements should also include provisions under which affected parties, including parties from nonmember countries, can raise problems experienced in the implementation of the regulations after they are adopted, and the parties involved should have a right to receive a response that addresses the problems that were raised. Where a problem cannot be resolved through such procedures, the parties involved should be able to raise the issue under an appropriate dispute resolution procedure.

Comment: Such provisions for consultation and dispute resolution should help assure that decisions made are not arbitrary, that the economic effects of regional regulations on all affected parties, including parties from nonmember countries, are fully taken into account, and that unexpected burdens on economic activity are removed through appropriate changes in the regulations.

 

The Role of the WTO

The principal role of the WTO in the regulatory area should be to assure that regulations developed and enforced at either the national level or regional level do not create unnecessary barriers to trade and unnecessary distortions of international competition. Unless necessary to assure that particular regulations do not become hidden barriers to trade, the WTO should avoid becoming involved in the substantive aspects of national or regional regulations and standards.

Many of the WTO agreements that deal with regulatory issues, including the Standards Code, the Agreement on Sanitary and Phytosanitary issues, and the Customs Valuation Code build on the substantive expertise and the provisions of specialized international organizations such as the International Standards Organization, and the Customs Cooperation Council.

The only area where the WTO has become involved in substantive provisions on regulatory issues is in services. The Telecommunications Annex to the GATS Agreement includes a number of substantive provisions, and the same can be expected from the sectoral agreements in services under negotiation.

 

WTO Principles To Guide WTO’s Own Involvement in Regulatory Issues

The following principles might help shape and focus the WTO’s own involvement in regulatory issues. They are designed not only to keep the WTO focused on the areas where it can make the best contribution, but to assure the political legitimacy of its role, not only with national governments, but also with individual citizens.

Transparency of Procedures - Governments should make decision-making and dispute-settlement procedures in regional and global institutions dealing with regulatory issues transparent to the public at large, allowing interested citizens to follow the arguments presented on all sides, and thus to achieve a full understanding of the basis for the outcome of negotiations and dispute settlement procedures.

Citizen Participation - Governments should enable individual citizens to give public testimony regarding regulatory issues being debated in international fora, and being considered in dispute settlement procedures.

Comment: Transparency and citizen participation will help assure better public understanding and support for role of the WTO in regulatory issues, and reduce concerns that decisions are made in an arbitrary fashion by faceless bureaucrats behind closed doors. Public concerns along these lines can quickly undermine the political support for international institutions such as the WTO and their mission.

 

Conclusion

Regulatory issues will increasingly be at the heart of trade liberalization efforts at both the regional and global level. Efforts to remove regulatory barriers at either level can be highly complementary, but it could also be the source of future frictions if certain principles are not followed in devising regional and global trade agreements in this area. A number of such principles have been proposed in this paper.

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