Abstract
This chapter addresses a potential risk of lower standards in the so-called ‘new-generation’ free trade agreements (FTAs) compared to earlier FTAs in closer geographical proximity to European Union (EU) borders. Economic models had anticipated a race-to-the-bottom effect of regulatory convergence, but in trade regulation practice, a tendency towards the adoption of higher regulatory standards has been found. The EU couples the adoption of higher standards with multilateral incentives for trade facilitation and sustainable development goals. Empirical research on the promotion of norms and standards in EU trade agreements, if controlled for the distance between the EU and third-country negotiation partners, shows a decline in the adoption of higher EU regulatory standards in a new generation of FTAs. This chapter identifies two central challenges in the promotion of regulatory cooperation for the EU. Firstly, regulatory cooperation is politically costlier than border measure trade liberalization. Regulatory cooperation is also not always linked to trade liberalization and may be associated with protectionist measures. Secondly, the bargaining power from the single market may not be as significant for geographically distant third-country trade negotiations. However, two new multilateral agreements could assist the EU in its attempt to promote its regulatory values and standards.
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Notes
- 1.
While the dominant consideration was to cut ‘red tape’, the risks of ‘under-regulation’ became increasingly apparent during the financial crisis of 2008. As the global economic integration continues to deepen, the regulatory capacity becomes increasingly important Baldwin et al. 2010.
- 2.
International Monetary Fund 2019, which estimates the Gross Domestic Product (GDP) based on Purchasing Power Parity (PPP) to be 15.79 percent with a GDP of 23.6 tn int. dollars (PPP; current prices, October 2019), compared to China 19.71 percent and the United States 14.93 percent of the global GDP.
- 3.
For example, in the widely cited definition of regulation as a “sustained and focused control exercised by a public agency over activities that are valued by a community.” Selznick and Noll 1985, p. 363.
- 4.
In the context of Europeanization, Radaelli refers to “processes of (a) construction, (b) diffusion, and (c) institutionalization of formal and informal rules, procedures, policy paradigms, styles, ‘ways of doing things,’ and shared believes and norms…” Radaelli et al. 2003, p. 30; the process of regulatory diffusion describes the regulatory response of the adopting regulator to a neighbouring, regional or global power.
- 5.
- 6.
Staeger et al. 2016, p. 221.
- 7.
New generation trade agreements denote trade agreements that go deeper than goods trade. For the EU these include Canada, Singapore, and South Korea. Here trade-related issues are of particular interest, such as rules on labour and environment.
- 8.
Young 2015, p. 1256.
- 9.
It refers to the regression of, e.g. regulatory standards, norms, and taxes to attract investment. Standards could be sacrificed for greater competitiveness. A historical reference of regulatory competition on attracting corporations was made with regards to taxation between countries in the United States. Grandy 1989, p. 677.
- 10.
See for example increasingly stringent norms in the International Labour Organization, in environmental protection such as the Paris Accord, and success in economic development in the United Nations Conference on Trade and Development.
- 11.
Young 2015, p. 1246.
- 12.
Baldwin 2014b, pp. 15–16.
- 13.
Regulatory cooperation refers to the pursuit of regulatory convergence. Regulatory divergence may stem from diverse sources, including regulatory asymmetries, path dependencies, regulatory preferences, and public choice outcomes. Chirico et al. 2013, pp. 13–16. The cost of regulatory convergence to the industry can lead to profitable outcomes but also sunk costs, societal costs if preferred policy interests are not met. Approaches to regulatory cooperation with the aim of regulatory convergence vary, as outlined by Bul et al. and may include forms of informal and formal dialogue, private standards, which can be extended to an intergovernmental basis, mutual recognition agreements, regulatory convergence in FTAs, and regulatory partnerships. Bul et al. 2015. Regulatory cooperation is included in Canada–European Union Comprehensive Economic and Trade Agreement (CETA) and the EU-South Korea FTA. The extent to which regulatory cooperation can contribute to regulate convergence is limited as parties only commit to regulatory cooperation as long as it does not limit domestic regulatory measures.
- 14.
Schwellnus 2007, p. 21.
- 15.
(1) The Sustainable Development Goals (SDGs), adopted in the UN Resolution A/RES/70/1, present an opportunity for the EU to point to agreed-upon international policy objectives on the multilateral level. The SDGs also identified trade regimes as an essential tool for the implementation of its norms and standards, see SDG 17.10 and the Addis Ababa Action Agenda. (2) The Trade Facilitation Agreement (TFA), annexed to the Marrakesh Agreement, could provide a tool to promote the economic integration of third-country negotiation partners into EU global supply chains and increase their willingness to make binding concessions on regulatory cooperation.
- 16.
Berlingieri et al. 2018, p. 1882.
- 17.
Rueda-Cantuche and Sousa 2016, p. 1.
- 18.
European Commission 2002, p. 4.
- 19.
European Commission 2006, p. 9.
- 20.
European Commission 2013, p. 5.
- 21.
Young 2015, p. 1255.
- 22.
Baldwin 2011, p. 3.
- 23.
See for example the EU-Singapore FTA Article 1.2, which aims to liberalize trade and investment, Chapter 14 on Electronic Commerce in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), and Trade and Sustainable Development Chapter in EU FTAs.
- 24.
Bollyky 2015, p. 10.
- 25.
Lampe 2016, p. 66.
- 26.
Transnational corporations are estimated to account for significant shares of exports and imports of the largest economies, e.g. 20 percent of exports and 28 percent of imports in the United States in 2010, 31 percent of European exports and 24 percent of European imports in 2009, and 50 percent of Chinese exports and 48 percent of Chinese imports in 2012; see United Nations Conference on Trade and Development 2013 pp. 135–136.
- 27.
Francois et al. 2015, p. 20.
- 28.
Blanchard 2007, p. 40.
- 29.
The terms-of-trade theory describes a situation of passive diffusion, in which countries are trying to improve their terms-of-trade without taking into account the trade policy reaction of the other economies. Cave and Jones 1973, p. 250.
- 30.
Baldwin 2014a, p. 261.
- 31.
Blanchard 2007, p. 7.
- 32.
Trade creation and trade diversion effects of FTAs refer to the effect the removal of barriers to trade has on the subset of countries and third countries. An implicit baseline points to the exploitation of comparative advantages prior to the FTA of all countries. It then takes into account distortions from divergences in tariffs between FTA partners and countries that are not included in the FTA. Post-FTA creation, trade diversion would argue a diversion of the most efficient rest of world exports contract, and the less efficient FTA partner exports expand. In a Vinerian tradition, exporters that receive trade preferences gain from FTAs and those exporters who do not receive them lose from the FTAs. This leads to ambiguous welfare effects for FTA partners. See Viner 1950.
- 33.
Young 2015, p. 1235.
- 34.
Baldwin based on the number of times provisions are mentioned in the WTO database in the text-as-data analysis. For this he distinguished between mentions of a provision and legally enforceable language.
Baldwin 2014b, pp. 15–16 Enforceable language here does not imply dispute settlement procedures.
- 35.
The EU initially followed the GATS approach of positive listings, but then adjusted it to a combined approach of positive and negative listings. This converges treatment between services under mode three and specific Bilateral Investment Treaty (BITs) provisions. Combined approaches between positive and negative listing try to limit divergences between services and goods treatment. Roy 2007, p. 63.
- 36.
Roy et al. 2007, p. 63.
- 37.
Sauvé et al. 2009, p. 137.
- 38.
The resulting Economic Partnership Agreements (EPA) include the EU-Pacific, EU-Cariforum, EU-Eastern and Southern Africa (ESA) sub-region, EU-Central Africa EPA, EU-Southern African Development Community (SADC) EPA, EU-Ghana EPA and the EU-Côte d’Ivoire EPA.
- 39.
- 40.
Dee 2013, p. 158.
- 41.
Levi-Faur 2005, p. 24.
- 42.
European Commission 2004, p. 5.
- 43.
European Commission 2004, p. 6.
- 44.
Young 2015, p. 1234.
- 45.
Malmström 2015, p. 3.
- 46.
Bradford 2013, p. 40.
- 47.
Anderson and Wincoop 2004, p. 691.
- 48.
Ilzkovitz et al. 2007, pp. 77–78.
- 49.
Mavroidis 2016, p. 7.
- 50.
While the notion of regulatory convergence in the broader sense is widely used and understood concept in FTAs, it is still currently evolving. See: OECD 2013, pp. 19–70. The OECD defined 11 modes of regulatory cooperation, varying in institutionalization and substantive scope - one of them is regulatory convergence under FTAs. Their applied scale reaches from exchanges of Information to discuss on an ad-hoc basis to supranational institutions with clear mandates. The OECD typology also includes FTAs with regulatory provisions. Regulatory convergence is relatively new in FTAs. The OECD also noted an international trend of “a shift away from complete harmonization” in regulation to more significant efforts of “more flexible cooperation” instead.
- 51.
Polanco Lazo and Sauvé 2018, p. 575. Chapter 21 of the CETA on ‘regulatory cooperation’ does not contain a clear definition of the term; Regulatory convergence provisions for example in the Trans-Pacific Partnership Agreement (TPP) and the Chile–Colombia– Mexico–Peru Pacific Alliance Protocol (PAAP) have included a definition of ‘good regulatory practices’ (Chapter 25 of TPP) and ‘good international regulatory practices’ in Annex 4 of the PAAP. Additionally, the private sector also has its understanding of regulatory cooperation. For example, the U.S. Chamber of Commerce published its definition of Regulatory Coherence and Cooperation for TTIP. It makes a point of regulatory practices within the country and between countries, adding another stakeholder in regulatory processes: Regulatory coherence: Regulatory practices in the domestic regulatory process; Regulatory cooperation: Regulatory practices between U.S. and EU.
- 52.
Deardorff and Frankel 1998, p. 9; he discusses a “standard gravity equation”,
$$ T_{i,j} = A\frac{{Y_{i} Y_{j} }}{{D_{i,j} }} $$in which the total value of exports and imports T between countries i and j are determined by both their national GDPs Yi and Yj, and the distance between them, with A as a constant.
- 53.
See Tinbergen 1962.
- 54.
Disdier and Head 2008, p. 37.
- 55.
The border effect is a strong and persistent effect of country borders on international trade even after the complete removal of trade barriers with protectionist intent and technological barriers. It can be especially narrowed down to two sources of impediments to trade: firstly, non-tariff measures from domestic regulatory and policy traditions, and secondly, barriers from linguistic, cultural, and business network effects.
- 56.
Chirico et al. 2013, pp. 13–16.
- 57.
As a principle, the Marrakesh Agreement Establishing the World Trade Organization, opened for signature 15 April 1994, 1867 U.N.T.S. 187, 33 I.L.M. 1153 (entered into force 01 January 1995), recognizes legitimate public policies as long as they are applied in a non-discriminatory way.
- 58.
Hoekman 2015, pp. 2–4.
- 59.
Baldwin 2014b.
- 60.
Path-dependency emphasizes the effects of intentional or arbitrary historical decisions. Resulting increasing returns and sunk costs have a tendency to lead to inertia.
- 61.
Bull et al. 2015, p. 1.
- 62.
Coremans et al. 2017, p. 227.
- 63.
Vogel 1997, p. 556.
- 64.
Chan and Ross 2003, p. 1011.
- 65.
Holzinger and Sommerer 2011, p. 315.
- 66.
Häberli 2012, p. 287.
- 67.
In a scenario of race-to-the-bottom effect through deregulation the expectation is that the pursuit of increased competitiveness will lead to externalities of environmental degradation, less sustainable development and lower labour standards will occur. Singling out issues by sector over an increased period of time will more likely see an increase in regulatory standards, even if some outliers will be lower. Holzinger and Sommerer 2011, p. 315.
- 68.
Of the Singapore Issues, the EU was mainly promoting the regulation of investment, competition, and government procurement practices, but only the Trade Facilitation Agreement (TFA) was concluded. Conversely, the flexibility mechanisms in the AfT linked to conditionality may be motivated by the prospect of enhancing key country-centred goals linked to foreign policy, such as improving linkages with humanitarian, political, economic, and even military objectives. Economic efficiency, a good investment climate, and improving infrastructure are among the considerations, along with securing poverty targets, reducing the risk of the terrorist threat, and ideological indoctrination.
- 69.
United Nations 2015, pp. 37–42.
- 70.
Ibid., pp. 4–5.
- 71.
Cattaneo 2015, p. 18.
- 72.
Arruñada and Manzanares 2016, p. 217.
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Theisinger, M. (2021). New Approaches in the Promotion of EU Standards. In: Douma, W.T., Eckes, C., Van Elsuwege, P., Kassoti, E., Ott, A., Wessel, R.A. (eds) The Evolving Nature of EU External Relations Law. T.M.C. Asser Press, The Hague. https://doi.org/10.1007/978-94-6265-423-5_2
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