Choosing among Options for Regulatory Cooperation.

Author:Winslett, Gary

1 Introduction

US and European Union (EU) competition officials have different sets of regulatory criteria by which they evaluate potential mergers between firms. (1) Given that many of the firms attempting to merge have operations in both jurisdictions, these differing regulations can affect commerce between them. One challenge these officials face is that if they arrive at divergent decisions, political principals are brought in, which is something those regulators would rather avoid. Therefore, one mechanism they have created is the EU-US Mergers Working Group, where regulators exchange information and ideas about procedures to help them reach convergent decisions so that they can mitigate the negative commercial and political implications of reaching divergent decisions while also reducing the likelihood of principal involvement. This is a good example of a cross-national regulatory difference that could abrade commerce, which the political actors involved responded to via networked governance.

In the 1970s, as European states were seeking greater economic integration, they found that the regulatory differences in product standards were making it difficult for firms to sell their wares across borders. The solution they arrived at was mutual recognition, whereby goods considered legally compliant in one state were considered compliant in all European Community (EC) countries. The states were effectively recognizing the validity of each other's regulatory approaches, which is how this policy option became known as mutual recognition.

Beginning in the late 1990s, the United States and the EU took vastly different approaches to regulating genetically modified organisms (GMOs) and this created regulatory barriers to the trade in GMOs. Despite repeated efforts, they never found a way to resolve their differences and so there was no agreement, which in turn led to a dispute that ultimately went before the World Trade Organization (WTO).

In each of these cases, states were faced with regulatory differences that were driving up trade costs, but the states involved ultimately chose different pathways by which to deal with those regulatory barriers. Why? That is, why did they choose mutual recognition in one instance, select networked governance in another case, and find no path toward cooperation in yet another?

This question is not limited to these three cases nor to these three policy options. On the contrary, given that trade and regulation increasingly intersect, states are finding trade to be more difficult and more expensive due to regulatory differences. Much analysis of trade and regulation speaks of harmonization or convergence; that is, states choosing to make their regulations identical or at least similar enough to smoothen commerce. But trade-abrading regulatory differences can be massaged in a variety of ways, of which convergence is only one, and even when convergence does occur, it can take a number of forms. What I am saying is that convergence is a regulatory cooperation outcome; this article, though obviously concerned with convergence or no convergence as an outcome, is principally aimed at elucidating the various drivers and implications of those different processes by which convergence may or may not take place.

When states face a regulatory trade barrier, they have seven basic options to choose from in dealing with that barrier: (1) unilateralism; (2) binding international agreements; (3) mutual recognition; (4) network governance; (5) private standards; (6) self-regulation; or (7) no cooperation. The choice of pathway can have big implications for the industries and interest groups involved and, thus, it is of more than academic interest.

In this article, I ask the following question: When are states most likely to choose each of these pathways, and why? My central argument is that this choice can best be explained by the domestic configurations of interest groups around the issue of regulatory convergence in each of the relevant states. Within each state, groups supporting convergence may be active or inactive, and groups opposing regulatory convergence may also be active or inactive. The specific combination of activated and inactivated groups in the two states each comes with a particular negotiating logic between the two states that drives them toward different options for handling regulatory trade barriers between them.

In this article, I proceed as follows. First, I review the seven main pathways by which states may respond to regulatory barriers and discuss the implications that each of these pathways has. Then, I engage with key scholarly works in regulation, trade, and lobbying to build a foundation for my argument. Finally, I analyze how domestic interest groups may be aligned with regard to regulatory convergence and explain how the combination of these alignments drives states toward particular pathways.

2 The Seven Pathways and Their Implications

2.1 Unilateralism

A state's first option is to regulate business as it sees fit and attempt to force foreign producers to meet their standards come what may in terms of trade costs. Unilateralism's central benefit is that it allows states to react quickly to new challenges. Its central drawback is that it may raise the cost of international commerce. If this cost is small, the regulation may not provoke much reaction from other states. If it is large, however, those who bear that cost will push for some form of regulatory convergence or cooperation. Either they can fight the state that issued the regulation (as the Mexican government, on behalf of fishermen, did against US tuna fishing regulations), or they can promote the regulation that was originally unilateral as a new multilateral standard (as Mercedes did through the German government with regard to US--and especially California's--car emissions regulations). (2)

2.2 Binding International Agreements

States' second option is to pursue a binding agreement. Binding agreements have significant benefits, but also serious costs. (3) Their primary advantage is that they create greater policy certainty and a level playing field. This can benefit participants who have a stake in reducing regulatory barriers, but do not trust others to implement a proposed regulation unless compelled to do so. Similarly, they can benefit constituencies, such as environmentalists or free traders, who want to tie their own states' hands. They can help governments institute and maintain necessary, but unpopular, reforms. Binding harmonization may also reduce regulatory barriers without encouraging a race to the bottom. (4)

Conversely, weak and strong states may be wary of binding agreements. Weak states may fear that they will lock in strong states' preferences and require extensive legal expertise. (5) Strong states may fear that binding agreements will constrain their ability to deploy their ample resources. Weak and strong states may worry that it will prevent them from flexibly responding to changing circumstances. This may be an especially prevalent fear in rapidly evolving areas such as internet governance. The binding agreement may require some states to significantly change their domestic regulations. Given that a state's regulations are the product of its political equilibrium, changing them may have implications for domestic constituencies and, thus, may be politically perilous.

These factors combined with other concerns, such as a reluctance to cede sovereignty, mean that negotiating binding agreements can be difficult. Governments can include escape clauses that make these agreements easier to negotiate, but those escape clauses dilute the benefits associated with policy certainty. (6) Even if states agree that a binding agreement is desirable, they are still left with the arduous tasks of determining the level of obligation that states will be subject to, how precise the rules will be, and the extent to which dispute settlement and other adjudicative functions will be delegated to third-party institutions. (7)

2.3 Mutual Recognition

States may choose to establish mutual recognition, whereby they recognize each other's regulatory effectiveness and thus any product in the agreed on industry that is legally sold in one jurisdiction may be sold in the other. Such an arrangement does not require a state to change its domestically agreed-on law and so avoids a protracted domestic policy fight. Thus, mutual recognition may obviate the need for an international struggle over whose regulations become the accepted standards. Given that the need to alter domestic regulations is often the largest hurdle in reducing regulatory barriers to commerce, this is a powerful advantage. This is one of the reasons why mutual recognition is often perceived to be easier to achieve than a binding agreement. (8)

One difficulty of mutual recognition is that, in many instances, full harmonization is necessary; products ranging from DVDs to railway gauges need to be the same for traded products to be compatible. Furthermore, some International Political Economy (IPE) scholars worry that the greatest threat to the multilateral trading system is not a return of Smoot-Hawley tariff levels, but instead increasing regional fragmentation. If this is the case, then mutual recognition may be the regulatory equivalent of regional free-trade agreements in that it creates deeper regional integration while erecting trade barriers between regions.

Another dilemma of mutual recognition is that it requires significant trust in the regulatory effectiveness of the other states. It is because of this issue that mutual recognition is often accompanied by a regulatory minimum standard. Without that floor, trust is frequently lacking, especially if there are significant development level differences. Even when there are not large development-level differences, cultural differences can lead citizens to trust their regulations more...

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