How to make domestic trade regulation more uniform

Anyone involved with services exports will be well aware of the fact that the elimination of quantitative restrictions and discriminatory measures is a necessary but insufficient condition to secure effective market access. Typically, a foreign supplier will still have to comply with a range of non-discriminatory regulations that vary across countries in order to reach local consumers. The greater the disparity of such regulations among jurisdictions, the stronger their trade restrictive impact will be. The need to respond to regulatory failures exposed by the financial crisis or to protect consumers, personal data and national security interests in an increasingly digital environment suggest that regulatory disparities are likely to increase. Empirical research illustrates the trade costs of regulatory disparities.

Trade diplomats have struggled to find an effective way to deal with non-discriminatory restrictions. In the General Agreement on Trade in Services (GATS) context, proposals for adopting a necessity standard for domestic regulations have been met with fierce resistance. When does a regulation cease to be necessary to ensure the quality of the service to become a restriction on the supply of the service? Not many governments are prepared to leave open the door for an adjudicatory body to answer this question for them, particularly when grounds for regulatory action are growing and regulatory options expanding.

One alternative to minimise regulatory disparities that remains underused is for trade disciplines on domestic regulation to incorporate international standards by reference. The intangibility of services and the idiosyncratic character of service transactions appears to be at odds with standardisation. In fact, standards are deep-rooted in specific sectors such as maritime transport, aviation, telecommunications, or tourism. More recently, there has been an explosion of standards for new ICT-enabled services and e-infrastructure. And given the unabated forces of technological innovation, the international fragmentation of production, and more demanding consumer behaviour, it is reasonable to expect the number of international standards on services to continue growing.

GATS references to international standards are minimal, particularly when compared with those included in the Technical Barriers to Trade (TBT) and Sanitary and Phytosanitary Measures (SPS) Agreements. Yet, the mandate to develop disciplines for domestic regulation offers an opportunity to further specify the criteria for the eligibility of “relevant” international standards and expand the role of such standards in disciplining domestic regulation without the need for treaty reform.

First, the GATS refers to “internationally recognized standards of relevant international organizations.” The latter are defined as “international bodies whose membership is open to the relevant bodies of at least all Members of the WTO.” A strict interpretation of the meaning of “standard” could fail to capture a growing body of principles, guidelines or recommendations which are not “standards” strictu sensu, but international regulatory benchmarks (e.g., Basel Committee’s Core Principles for Effective Banking Supervision or the OECD Guidelines on the Protection of Privacy and Transborder Flows of Personal Data). Similarly, placing too much emphasis on the degree of formality of the standard setting body, could exclude a growing body of relevant standards developed by non-state actors outside formal international organisations (e.g., standards developed by the World Wide Web Consortium (W3C) or Internet Engineering Task Force). To avoid these interpretative pitfalls, the disciplines on domestic regulation could identify ex ante some of these standards and set up sectoral committees tasked with the job to review their relevance on a regular basis.

Second, the role assigned to international standards in disciplining domestic regulations is negligible. Paragraph VI.5 (b) simply offers a weak incentive to apply such standards and only with respect to the application of licensing and qualification requirements and technical standards. Other domestic regulations such as prudential measures, data protection measures, and so forth remain off the hook. This extremely restrained use of international standards differs sharply from the TBT and SPS approaches, which impose an obligation on Members to use them as a basis for their technical regulations and sanitary or phytosanitary measures. They also include a rebuttable presumption of compliance with the necessity test for those measures, which conform to international standards, guidelines, or recommendations.

True, at the moment there is no political appetite for change. Proposals to enhance the role of international standards have failed to garner support, such as the Communication from Mexico and Switzerland, S/WPDR/W/32/Rev.1, 28/10/05. Yet, treaty making trends beyond the GATS show a different picture. Recent association agreements signed by the EU with Moldova and Georgia include a “best endeavour” commitment to apply internationally agreed standards for regulation and supervision in the financial services sector. The Japan and Australia FTA includes an obligation to take into account relevant international standards and criteria of relevant international bodies when adopting measures to protect the personal data of electronic commerce users. The Switzerland-China FTA offers an incentive to apply relevant international standards when adopting licensing requirements, qualification requirements and procedures and technical standards. Moreover, leaked drafts of the Trade in Services Agreement (TISA) Annexes on financial services, international maritime transport, telecommunications, electronic commerce, and domestic regulation include specific references to international standards.

At a time when traditional rule-making is stagnated, it makes sense to give international standards greater influence in disciplining Members’ right to regulate. It allows to tap into flourishing alternative regulatory machinery that can deliver regulatory outputs more responsive to market needs, adapt quicker to market changes and, ultimately, deal more efficiently and effectively with the regulatory challenges arising from the internationalisation of services transactions. It will place the GATS in a better position both to facilitate trade and be a conduit for high regulatory standards concerned with a wide range of public policy issues.

This article is published in collaboration with ICTSD. Publication does not imply endorsement of views by the World Economic Forum.

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Author: Gabriel Gari is a Senior Lecturer at Queen Mary University of London and a member of the E15 Expert Group on Services. 

Image: A container ship departs Burrard Inlet in Vancouver, British Columbia March 6, 2009. REUTERS/Andy Clark