A Financial Times article today focuses on possible negotiations for a bilateral trade agreement between the U.S. and the European Union and some of the potential sticking points in completing such a pact. Chief among these, the article notes, are “behind-the-border” domestic regulation, such as differing technical standards in areas such as pharmaceuticals, medical services, and advanced electronics, as well as “safety regimes for conventional cars” and foodstuffs.
In dealing with differing regulatory standards, the U.S. Chamber of Commerce cautioned that the parties, however, shouldn’t aim for full regulatory convergence:
“The aim in many instances is not to drive immediately for full regulatory convergence but to try to make sure that regulators on both sides of the Atlantic are making decisions with their eyes wide open,” says Sean Heather, vice-president of the chamber’s centre for global regulation.
CEI made that point strongly in its comments on February 3, 2012 to the U.S. Trade Representative on possible negotiations on a U.S.-EU trade agreement:
Often policymakers on both sides of the Atlantic, in reviewing the regulatory state’s complexity and lack of uniformity, call for “harmonization” of regulations. However, such harmonization can lead to conformity and stagnation – resulting in superior alternatives not being explored. Rather, policymakers should look to competition among regulatory regimes. This “discovery process” is a better way to reduce transaction costs and thus increase voluntary wealth creation.
Providing companies with a choice of regulatory regimes often works better than a single uniform regulatory structure or a harmonized system. Centralized regulators can suffer from limited information and pressures from special interest groups. Dispersed regulatory structures can satisfy different preferences, try varied approaches to regulating, gain information about what works and what doesn’t, and provide feedback to learn more about the cost effectiveness of specific rules. Regulatory competition provides these benefits.
The FT article also pointed to some serious philosophical differences between the U.S. and the EU approaches to regulation. Many of the EU’s “safety” regulations are based on the Precautionary Principle, which has a built-in bias against innovation, since new products have to prove a negative – that they don’t harm human health or the environment.
Again, in its February 3 comments, CEI focused on the downside of the precautionary principle in regulatory approaches:
Nothing is totally without risk, and the reason for adopting new technologies in the first place is that they often improve our well-being by protecting us from the risks of older, more established products. Even very risky new technologies may often be better than the alternatives. However, from industrial chemicals to consumer products and everything in between, advocates of precautionary regulation insist that the mere possibility of increased risk should be sufficient to take useful products off the market or prevent them from ever being used.
It’s expected that the two parties will agree soon to institute formal negotiations on a trade agreement. It’s not likely that those negotiations will proceed quickly.