Academic journal article East Asian Economic Review

'Behind-the-Border' Regulatory Policies and Trade Agreements *

Academic journal article East Asian Economic Review

'Behind-the-Border' Regulatory Policies and Trade Agreements *

Article excerpt


With the establishment of the World Trade Organization (WTO) in 1995, much of the vision of the drafters of the 1948 International Trade Organization (ITO) Charter was realized, albeit some 50 years later.1 The average level of tariffs for OECD member countries has fallen to the 3% range; for major emerging economies like China and India as well as many developing countries the average applied tariff is less than 10%. In conjunction with the abolition of most of the quantitative import restrictions to trade that were prevalent through the 1980s, policies to open markets to direct investment - including through privatization, and technological changes that greatly reduced the costs of international communications and transport, the result has been major changes in the structure of global production and trade. One illustration of this change is the increasing share of global value chains (GVCs) in international production and the associated trade in intermediate parts, components and tasks.

Policy-induced market access frictions and trade costs today are increasingly regulatory in nature. The rapidly changing composition of trade as a result of technical changes - reflected not only in supply chains that span many countries, but the growth in services trade and cross-border data flows associated with the servicification and digitization of products (the "Internet of things") is moving national regulation to center stage in trade debates. The associated agenda is not about deregulation - what is driving concerns in the business community are the trade-impeding (cost-raising) effects of differences in applicable domestic health, safety, privacy and data security standards, prudential and licensing requirements, certification and compliance assessment procedures for both products and production processes used by suppliers of goods and services.

Since its creation WTO members have found it very difficult to negotiate new rules ofthe game. Disagreements among countries regarding the benefits of committing to additional trade policy disciplines, most notably between the United States and other OECD nations on one side and emerging economies such as Brazil and India on the other, have impeded progress on the WTO's traditional market access agenda (mostly tariffs and agricultural support) and in turn blocked substantive discussion on the trade effects of domestic regulatory policies. Continued deadlock in the WTO starting in 2008 led to the focus of attention in addressing international regulatory spillovers shifting to other fora - notably preferential trade agreements (PTAs). Examples of recent initiatives with a significant focus on regulatory matters include the negotiations on a Trans Pacific Partnership (TPP) between 12 Pacific countries and the Transatlantic Trade and Investment Partnership (TTIP) between the EU and the US that were launched in 2013.

Both the TTIP and TPP initiatives illustrate that such new vintage agreements are difficult to conclude. TTIP talks were put on hold by the US at the end of 2016, and one of the first actions of the Trump Administration in early 2017 was to withdraw from TPP. However, deep PTAs that span regulatory matters continue to be pursued by major trading nations. Examples include the Comprehensive Economic and Trade Agreement (CETA) between Canada and the EU which entered into force in 2017,2 the 2018 EU-Japan Economic Partnership Agreement and the successful conclusion of talks between eleven of the original signatories of the TPP to establish a Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).

Pursuit of regulatory cooperation and related rules of the road is a second-best solution, given that the organization of production and trade into GVCs and international production networks means that end products are impacted by many regulatory jurisdictions. PTAs almost by definition will not span all the countries involved in many (most) GVCs, thus limiting the positive impact that they can have in addressing regulatory differences and uncertainty for firms and consumers, while at the same time giving rise to the possibility that PTA-based regulatory initiatives may generate trade and investment diversion. …

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