Leveraging opportunities through regulatory cooperation

13 July 2017

As industry has moved to integrate and consolidate manufacturing, the application of domestic-centric regulations can engender unnecessary and duplicative actions and costs across sectors. In this article, the author draws upon lessons learned from the Canada-US regulatory cooperation effort to examine the opportunity that regulatory cooperation provides to rationalise the array of overlapping international regulatory systems going forward, and the role that trade agreements can play in facilitating this occurring.

 

Without question, there has been a shift away from domestic production to one of greater regional supply chain integration and global value chains, including an increasing trend towards global products, those being manufactured to the same standards and through the same technologies throughout the world. This poses a significant challenge for domestic-centric regulations in an increasingly global production and manufacturing reality.

Applying multiple country requirements on individual integrated supply chains results in unnecessary and duplicative actions and costs. An individual supply chain is subject to each of the government’s requirements. They all intend to provide the same regulatory outcome, but they are doing it independently.

The trend toward globalisation of value chains is apparent across all sectors, albeit at different speeds and levels of evolution. Because the airline industry has been flying from one country’s air space to others for decades, airline safety regulation has approached a high degree of global alignment. Pharmaceutical drugs and their components are being produced through increasingly global supply chains, and regulators are faced with how to achieve their safety mandates in other jurisdictions. Also, as manufacturing consolidates, multiple countries are pondering their approaches on those same jurisdictions. While sectors are at different places on a continuum from domestic to global, they are all trending toward more international integration.

As industry has moved to integrate and consolidate manufacturing, there has not been a commensurate response by regulators to determine how they might deliver their regulatory mandates in partnership with other countries to address shared supply chains and common products.

In the Canada-US situation, the two countries have the most integrated economies in the world, but maintain highly independent regulatory systems, resulting in a broad range of unnecessary and duplicative requirements across sectors. The Canada–United States Regulatory Cooperation Council (RCC) seeks a mechanism to avoid the emergence of misaligned approaches into the future.

Regulatory cooperation provides an opportunity to rationalise the array of overlapping international regulatory systems going forward, and trade agreements can play a valuable role in facilitating this occurring. It is timely for trade agreements to include text on regulatory cooperation and provide for regulator-to-regulator discussions. The Canada-US regulatory cooperation effort was advanced without reference to any specific trade agreement; however, it benefited from strong specific commitments from the leaders in both countries. Regulatory cooperation is the next stage, beyond tariffs and technical barriers to trade (TBT)/sanitary and phytosanitary measures (SPS), in the evolution of removing unnecessary requirements for trade.

The Canada-US Experience

The Canada-US regulatory cooperation effort emphasised the importance of having initiatives and work-plans led by regulatory departments, differentiating it from previous exercises, which had been led through trade departments. The goal was to ensure the heads of regulatory agencies were primarily accountable for the commitments from the countries’ leaders.  In turn, the overall strategy and oversight was provided from the centre of government in both countries (Privy Council Office in Canada and the White House Executive Office Branch in the US).

Care was taken at the outset to avoid the pitfalls of some potential criticisms or misunderstandings about regulatory cooperation, including incurring a race to the bottom. To avoid this, initiatives were undertaken, which represented an improvement to the regulation as it applied to health, safety, or protection of environment by both governments. To offset concerns of a loss of sovereignty, it was made clear that the RCC provided a forum for discussion, yet final approvals would always be made in each jurisdiction. In addition, it was made clear that, while greater synchronisation of work was the goal, both countries would maintain separate regulatory systems and agencies.

Commitments were made between similarly mandated regulatory departments to meet annually specifically to discuss regulatory cooperation with a focus on the medium- and long-term to determine where cooperation might be of benefit to each going forward. As the Canada-US RCC work began, it became clear that government lacked in specialised knowledge of industry operations and the impact of regulations on them. As such, these meetings included sessions where industry was asked to outline sectoral trends and areas where regulatory systems may need to be directed and to consider what new innovations, technology, and products were on the way, so regulators could contemplate what was needed in the future. Further, they were asked to share overall manufacturing trends related to supply and value chains and to provide their thoughts on what might impact the regulatory system.

As the work began, it was immediately evident that regulators in both countries were always seeking the same desired health and safety or environmental protection outcomes. Misalignment occurred simply because regulatory systems had been worked on independently with a traditional domestic-centric predisposition from the outset.

Importantly, there had to be a willingness by regulatory departments in both countries to address an issue jointly.  This had the effect of eliminating longstanding unresolved trade irritants or one-way barriers from the scope of the regulatory cooperation effort. In these situations, there were other SPS/TBT or broader issues to be addressed first, and they were not seen as ready for regulatory cooperation discussions.

A greater awareness of the opportunities to minimise dissonance in the value chain became clear; delays in adopting the same energy efficiency standard for appliances was affecting the availability of new technologies in the Canadian market; product classification differences for lip balm led to vastly different approval processes and costs for the same products in the two markets; independent and non-synchronised standards for child safety seats in either country created a situation where individual manufacturers had to alter specifications for large retailers operating in both Canada and the US.

The issue of bringing in other countries, primarily Mexico, in the case of the Canada-US RCC was often raised. There was a formal invitation to Mexican officials to attend meetings of the council and the planning plenary sessions for annual planning. While this was not intended to create tri-national plans, it was thought to be helpful in raising awareness about what Canada and the US were contemplating and encourage consideration of directions for their own regulatory regimes.

Beyond this, in the supply chains that Mexico participates in, alignment between Canada and the US is of some benefit, as it provides a uniform production opportunity for Mexico, and the creation of a domestic regulatory regime is not a prerequisite for benefiting from regulatory cooperation.

For example, Mexico is a full participant in automobile manufacturing in North America. Aligning a standard for the construction of a vehicle between Canada and the US facilitates Mexico’s participation in that production. Importantly, Mexico does not need to put a regulatory system in place that is aligned to Canada and the US, it simply needs to produce to that standard for the Canada/US market. In this scenario, the regulatory system does not need to exist within Mexico, and in fact it may be easier for Mexico to adjust to new Canada/US standards, as no regulatory change would be required in that country. Countries with the most robust, complex, and long-standing regulatory systems face greater challenges in moving off the status quo and aligning standards between themselves.

The opportunity for regulatory cooperation in each country is unique, driven by specific situations of manufacturing integration and cross-border relationships that are product-category specific in most cases. Regulatory departments will need to develop their own internal regulatory cooperation strategies, deciding on what, with whom, and when to align or partner.

Trade Agreement Implications and Policy Options

Regulatory cooperation is ideally suited to be applied once the tariffs and TBT/SPS issues have been cleared away and markets have been established. Considered this way, the WTO is clearing the way for trade, and regulatory cooperation can optimise the efficiency of the trade flow with respect to regulatory matters. These next steps in facilitating trade are through the removal of unnecessary or duplicative requirements and their associated costs. It works best where market access is well underway, overall risk mitigation has been successful, and the nature of the opportunity merits the time and effort for its pursuit.

While the Canada-US RCC was initiated absent a North American Free-Trade Agreement (NAFTA) clause, it did benefit from a specific commitment and renewal of that commitment between the Canadian and US leaders over the last six years. The issue of what would be the nature of any inclusion in future trade agreements, regional or otherwise, even at a multilateral level, should entail consideration of the following:

  • Regulatory department leadership
  • Stakeholder input in identifying short-, medium-, and long-term opportunities
  • Using an “optimising existing trade” and not an “irritant” lens
  • Willingness and opportunity as the driver, not rights and obligations
  • Regulatory cooperation opportunities will be most apparent in integrated supply chains (upstream) and for global products entering markets (downstream). Given this, regulatory cooperation activities will neither be limited to parties within a trade agreement nor necessarily be inclusive of all parties within one, and will vary across subsectors.

The inclusion of regulatory cooperation in trade agreements should institutionalise regulatory cooperation discussions and planning between regulators. As the goal is discussion between willing partners, a requirement that would bring similarly-mandated regulatory departments together to identify opportunities, including sessions with industry stakeholders, would be essential. Importantly, it should recognise that non-signatories to any specific agreement may be included in the development and implementation of regulatory cooperation work plans depending on the nature of the opportunity.

Both the Canadian and US governments have installed in their policies a requirement for regulatory departments to consider trade obligations and international trading partners when developing regulations. The Canada-US regulatory systems were not aligned despite this requirement having been in place for some time. However, this was before regulatory cooperation in the manner explored by the RCC was even anticipated. As awareness of the regulatory cooperation effort and expectations of it grew within regulatory departments and with stakeholders, there was a new dialogue concerning what was expected by those involved in or implicated by regulatory systems. Simply put, a deeper form of cooperation had never been contemplated and the policy instruments could not have been expected to drive that nature of alignment. As regulatory cooperation is advanced, more robust and specific policy instruments and interpretations will be needed to establish a path for regulatory departments.

Regulatory departments embrace their health, safety, and environmental protection mandates and are focused on achieving the best results for their countries’ citizens. Globalisation in its various iterations, where manufacturers between countries are integrating production and where global products are seeking equal access to multiple countries, is making a domestic-centric execution of these mandates less and less viable. Partnership between regulators is an ideal means to extend reach through value chains, and regulatory cooperation discussions provide an opportunity to chart a path forward. Trade agreements can provide the necessary impetus for these discussions to take place, but the primary lead should be the regulatory departments, who will need to see the opportunity to more efficiently deliver their mandates.

 

 
Robert Carberry is Founder of Carberry Insights and Associates, Inc. and former Assistant Secretary at the Regulatory Cooperation Council Secretariat (RCC).
 

In March 2017, ICTSD and the Inter-American Development Bank (IDB) organised a dialogue on regulatory coherence as part of the RTA Exchange project.