Trade

Still time to reconnect trade policy and SDGs

In 2002, “trade for development” was a core topic of the Millennium Development Goals. Fifteen years later, trade is at the periphery of the Sustainable Development Goals (SDGs). Three main reasons explain this rapid decline. First, trade negotiators did their best to obscure the Doha Round and bilateral trade negotiations in byzantine and sterile debates. Second, business stopped to pay attention to trade policy because firms turned to a form of liberalization tailor-made for their own global value chains: they traded tariff cuts of interest to them in exchange of investments in the opening countries. Third, governments lost the key vision on trade policy: it is not a stand-alone policy, but one—only one, though powerful—element of the domestic reform package that is needed for making domestic markets of goods and services more efficient. Most governments also focused on the flexibility of domestic labor markets, while forgetting the adjustment policies needed for facilitating the transition of those left behind by liberalization.

It is still time to reconnect trade and the SDGs because they share a huge common regulatory agenda: norms for products and production processes, and regulations for shaping services markets. What the trade aspect could bring to the SDGs is the realization of how a well-designed trade policy (in the wider sense of the term) can improve domestic regulations. In a nutshell, designing the best regulations—the best norms, the best regulations—and enforcing, certifying and monitoring them is a very difficult task that can greatly benefit from international cooperation among the concerned agencies.

International “harmonization” of norms or regulations is no longer the most desirable goal. Modern economies are torn between two economic drivers: the desire for harmonization associated with economies of scale and the desire for diversity and varieties fueled by economies of scope. Until the 1990s, the first force was the most powerful—hence the systematic quest for international harmonization of norms in goods (it has never been an attractive option in services). However, the huge technological progress of the two last decades has fostered an endless diversity in goods and services at increasingly lower costs. In such a context, harmonization becomes a costly constraint. This is well illustrated by a recent debate in the EU car sector, with Daimler (interestingly backed by Greenpeace) unwilling to enforce a new, less polluting harmonized norm for coolant because it would make its cars more flammable. This case reveals the increasing difficulty of defining a norm unambiguously better than any alternative from all the conceivable criteria (pollution vs. safety).

This lesson has led to the much more attractive concept of “mutual equivalence”, in which two countries decide—or not—that their norms or regulations are “different, but equivalent”. Their decisions are prepared by a joint evaluation of their existing norms or regulations by the partners’ relevant regulatory bodies—not the trade negotiators. This process can be made at the level of the definition of the norms or regulations, or at the level of the corresponding certification processes, or both. The preliminary step of mutual evaluation is essential, since, beyond its technical aspect, it is a political process to the extent that it requires and creates trust among the regulatory agencies—hence the countries—that is so badly needed when dealing with issues as complex and subtle as norms or regulations. If—and only if—mutual equivalence is granted, the goods or services in question may be produced under the regulations of their origin country and sold to the consumers of the other country without any other formality (or with lighter formality).

Mutual equivalence offers three key advantages. First, it allows a deeper integration of the two economies by decreasing trade barriers without generating the costs that harmonization imposes inevitably.

Second, it induces each regulator to better enforce the norms or regulations of its partner—as recently illustrated by US regulators whistle-blowing bad practices of some EU car-makers.

Third, mutual equivalence is a thorough process that requires time. An ambitious agreement dealing with regulatory matters that could be concluded quickly is an oxymoron in 21st century economies. Ultimately, it is doomed to generate anxiety among the public opinion and possibly to be self-defeating, as shown by the Trans-Pacific Partnership or the Transatlantic Trade and Investment Partnership. In sharp contrast, mutual equivalence fits the concept of bilateral trade agreements as evolving—“living”—agreements.

Finally, mutual equivalence provides a robust solution to the widespread fear of trade agreements generating a “race to the bottom” in regulatory matters. If a mutual equivalence signatory decides to change its regulation for some reason, the regulatory body of the partner could, if needed, evaluate it. If it does not find the new regulation equivalent, then it can suspend the existing agreement, possibly conditional to some measures being taken by its partner. In such a context, no regulator has an interest to a race to the bottom. The only option left is a race to the top.

Photo: By Pedro Ribeiro Simões from Lisboa, Portugal (Smarting) [CC BY 2.0], via Wikimedia Commons

Patrick Messerlin

About the Author

Patrick Messerlin is professor emeritus of economics at Sciences Po Paris, and serves as Chairman of the Steering Committee of the European Centre for International Political Economy (ECIPE, Brussels).
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