Regulatory Spillovers and the Trading System: From Coherence to Cooperation

Ever since the creation of the World Trade Organization (WTO), its Members have found it very difficult to negotiate new commitments to liberalise access to markets for goods and services, let alone cooperate on “new” policy issues to address the spillover effects of domestic regulation on international trade and investment, or agree on trade-related policy disciplines to address collective action problems such as safeguarding biodiversity or combating climate change. Disagreements among large players, most notably the United States (US) and other Organisation for Economic Co-operation and Development (OECD) nations on one side and emerging economies such as Brazil, China, and India on the other, have impeded progress on the traditional market-access agenda (mostly tariffs and agricultural support), precluding efforts to move onto new issues. Many of the latter are regulatory in nature, with the “problem” being that differences across countries in the substance of regulation of a product or production process and/or national conformity assessment processes create negative international spillovers and/or waste (since they represent excess costs for firms).

Instead of deliberation in the WTO, the focus of attention in addressing such spillovers has been shifting to regional and plurilateral fora. Indeed, even on traditional market access issues attention has moved away from the WTO and towards preferential trade agreements (PTAs). But PTAs are now also venues where the trade effects of (differences in) regulatory policies are the subject of discussion, often building on bilateral or regional regulatory cooperation that has developed independently of—or in the absence of—trade agreements.

One reason for the use of PTA-centered trade strategies to discuss regulatory spillovers is that the traditional market-access agenda has become less important to OECD members. Average tariffs of these countries are very low and quotas have largely disappeared. The policy spillover agenda spans health and safety norms, certification requirements for services providers, policies pertaining to data security and privacy, and so forth. The rapidly changing composition of trade as a result of technical changes (for example, the increase in trade in services and associated cross-border flows of data and services suppliers) is also making regulatory policies more of a trade concern for high-income countries (although it is equally a matter of concern for many developing nations). As products are more integrated with value-added services and connected to each other (the “Internet of things”), national regulation—whether driven by security, privacy, intellectual property, consumer protection, or industrial policy motivations—is moving centre stage. Because products are increasingly connected to the Internet/“cloud” and embody a variety of value-added services that involve cross-border data flows, policies that limit or raise the cost of digital trade and data flows are rapidly becoming more important.

There is a vast literature regarding the potential rationales and motivations for government regulation of producers and products. Regulation has a critical role to play in addressing domestic market failures and to achieve societal objectives. There is also an extensive literature on the pros and cons of international standards and standardisation. National standards and regulatory measures may act as barriers to trade, either deliberately or inadvertently. This is because while standards setting often reflects a “genuine” need to regulate to address a market failure of some kind, it can also be influenced by political economy forces, and, consequently, there is a risk of capture of the process. The political economy literature on product standards shows that these are often beneficial for economic actors, but that they can also be used for protectionist purposes. The same applies to domestic regulation, which can be captured to “raise rivals costs” or used as an instrument to discriminate against foreign suppliers.

The organisation of an increasing share of production and trade into international value chains/networks means that end products are impacted by an ever greater number of regulatory jurisdictions. For example, World Economic Forum (2013) notes a case involving a chemical company that imports acetyl (used in aspirin and paracetamol) into the US. On average, the company had to comply with similar regulations from five different agencies that often did not coordinate and communicate effectively with one another, resulting in delays for one out of three shipments, with each day of delay costing it US$60,000. Empirical research has also shown that the costs for firms associated with differences in services regulation across countries are significant.

This paper focuses on dimensions of the interface between domestic regulation and the trading system; the implications for trade of differences in regulatory regimes across markets; and approaches that have been/could be taken to reduce the impact of regulatory barriers to trade globally. Each section has some illustrative questions and potential topics for deliberation in the E15 Task Force on Regulatory Systems Coherence and for possible further research.

Tag: Commercial Frictions & Uncertainties, Compliance and Transparency, Functioning of the WTO, Global Value Chains, Industrial Policy, Monitoring, Regional Trade Agreements, Regional/Bilateral/Plurilateral, Regulation, Regulatory Systems Coherence, Standards, System Legitimacy, TBT/SPS