Here’s hoping for a regulatory Waterloo

In the current issue of The Economist, the anonymous Charlemagne column outlines the fundamental differences between the regulatory philosophies that guide the United States vs. the European Union.

The American model turns on cost-benefit analysis, with regulators weighing the effects of new rules on jobs and growth, as well as testing the significance of any risks. Companies enjoy a presumption of innocence for their products: should this prove mistaken, punishment is provided by the market (and a barrage of lawsuits). The European model rests more on the “precautionary principle”, which underpins most environmental and health directives. This calls for pre-emptive action if scientists spot a credible hazard, even before the level of risk can be measured. Such a principle sparks many transatlantic disputes: over genetically modified organisms or climate change, for example.

In Europe corporate innocence is not assumed. Indeed, a vast slab of EU laws evaluating the safety of tens of thousands of chemicals, known as REACH, reverses the burden of proof, asking industry to demonstrate that substances are harmless. Some Eurocrats suggest that the philosophical gap reflects the American constitutional tradition that everything is allowed unless it is forbidden, against the Napoleonic tradition codifying what the state allows and banning everything else. [Emphasis added.]

Quite an admission that!

Most Americans would expect such a Bonapartist regulatory regime to be dead on arrival here, but unfortunately that no longer seems to be the case. Charlemagne notes that,

[T]he more proscriptive European vision may better suit consumer and industry demands for certainty. If you manufacture globally, it is simpler to be bound by the toughest regulatory system in your supply chain. Self-regulation is also a harder sell when it comes to global trade…

The possibility of U.S. companies seeking “regulatory certainty” through EU mandates is a worrying prospect.  A matching straitjacket for your rival should be cold comfort when you’re straitjacketed yourself.