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Think It's A Breeze Moving Goods Between The U.S. And Mexico?
Think again-regulatory regimes are the
hidden pitfalls in NAFTA and other free
trade agreements.
January 2005
By Susan M. Schmidt
Susan M. Schmidt is a Managing Director at
Manatt Jones Global Strategies. Prior to ManattJones, Ms. Schmidt was a member of the U.S. Foreign
Service. Her overseas postings include
Bogota, Colombia and Mexico City, Mexico.
Rules that allow Mexico's dominant
carrier to negotiate international
interconnection rates are
inconsistent with international
obligations, according to a WTO dispute
panel.
The U.S. Department of Transportation
does not need to conduct a
full environmental review before providing
Mexican trucks access to the
United States under NAFTA, the U.S.
Supreme Court rules.
New document requirements for
imports of certain alcoholic beverages
from the United States are not widely
publicized before the holiday season
by Mexico's customs authority.
Applications for required pest
assessments to export certain fruits
and vegetables to the U.S. are backlogged
at the U.S. Animal and Plant
Health Inspection Service.
What do these examples have in
common? Each demonstrates the
impact of a country's regulatory regime.
The NAFTA provides significant
market access benefits. Other countries
in the region are negotiating
agreements that will provide similar
benefits.1 But, the experience of
NAFTA, and what will be the experience
of these other countries, is that a
trade agreement is only a platform for
increased trade and investment, and
ultimately for economic development
and growth. Alone it does not guarantee
those results. Failure to take other
measures that allow companies to take
full advantage of the potential of these
agreements means that the economic
development and growth that countries
envision is less likely to occur.
This article discusses how and why
regulatory regimes matter. It also discusses
how regulatory interpretation,
which often can occur within existing
laws and regulations, can facilitate the
potential of trade agreements.
Regulations influence
every step of exporting
Most companies realize that regulations
affect the export process, but few
people in any company regularly consider
the broad range of activities that
are regulated. Regulations can affect or
even define each major decision
related to an export-from whether to
export to how to receive payment.
They can be specific to trade. Even if
not trade-specific, regulations still can
significantly affect international trade.
The proposed Air Cargo Security
Requirements2 and the US-Visit immigration
program are designed primarily
to enhance U.S. domestic security,
but also affect trade.
Regulations may define whether a
product can be exported or imported.
U.S. export regulations identify permissible
export destinations and customers.
Regulations define a prior
"approval" process for certain exports.
They also may condition otherwise
permissible exports, such as proposed
changes to increase the number of
exporter "red flags" from 12 to 23.3
Regulations may define what
exportable products can be imported
into another country. Environmental
regulations may prohibit entry of certain
products. Industrial registries can
adversely affect the ability to import
new products if they are modified
without allowing sufficient time to
register. Regulations may require
imported products to satisfy quality,
safety or technical standards. For
products that must be tested or certified,
are one country's product standards
similar to those of another?
Costs increase if a company must
undergo a regulatory review in each
country of import.4
Regulations affect how and when companies
export and import. Transportation
regulations can determine the means and
procedures for leaving or entering a country.
Customs measures define the procedures
for moving goods across borders.
Sanitary and phytosanitary inspections
that delay entry are particularly costly for
perishable products. Regulations that
establish a division of responsibilities
among persons involved in the process,
such as between customs brokers and
importers, may increase costs or decrease
efficiencies.
Once a product has entered a country,
regulations affect its distribution. Restrictive
"dealer laws" may limit an exporter's
distribution options. Regulations may
affect the ability to complete an export, for
example by permitting, delaying or denying
technical experts entry into a country
to install an exported product.
Regulations affect the ability to receive
and the means of payment. Financial systems
and services can facilitate or hinder
that process. Bankruptcy procedures can
increase or decrease the willingness of
exporters to assume risk. Legal requirements
can affect the structure of dispute
settlement provisions.
Regulations that adversely impact trade
can be changed. The process is often
lengthy, complex and politically sensitive.
However, businesses must involve themselves
in such efforts when necessary to
improve their abilities to do business, and
must commit the needed time and
resources.
How regulatory regimes
operate does matter
Regulations affect trade and thus must be
understood, but understanding the regulations
alone is not sufficient. The regulatory
regime, the application of the
regulations and the actions of regulators,
is equally, if not more, important for doing
business. Regulatory regimes that are not
transparent, consistent
and efficient are
unlikely to allow
businesses and countries
to achieve the
objectives of a trade
agreement. International
businesses
soon realize that no
two countries are the
same. They also
understand that regulatory
regimes have
broader political,
economic and administrative dynamics.
NAFTA and other trade agreements are
intended to increase both trade and investment.
Investment, in particular, can be
deterred when the regulatory regime lacks
clear rules of the game or coherence. Capital
is fungible, and it seeks regularity and
stability. Investors avoid situations with
unacceptable risks to profits or reputation.
If uncertainty in a regulatory regime
means that only trade (and not investment)
occurs, trade agreements also may
be seen as political liabilities and blamed
for social disruptions.
A regulatory regime that allows for or
creates ambiguity and the opportunity for
misuse will deter trade and investment.
That can occur if a regulatory agency lacks
personnel and resources to manage its
workload, a regulator lacks technical
expertise to make and justify decisions, or
regulatory management and resources fail
to ensure consistency over time or in
application (e.g., among ports of entry). A
lack of independence risks the application
of political criteria in regulatory decisions,
perhaps to benefit partisan interests or
favor national industries. It allows regulatory
delay (non-action) to become de facto
action that could undermine the value of
the export or protect domestic competitive
advantages.
An inadequate regulatory regime also
may generate broader credibility issues for
a country. Credibility perceptions may be
created by systemic inconsistencies, lack
of accountability, or by corruption. Binding
arbitration for dispute resolution is not
credible if only judgments that favor nonnational
entities are enforced. Unchecked
enforcement discretion can create incentives
for improper personal gain, especially
if no deterrent penalties exist. Potential
civil and criminal liability and damage to
corporate reputations are constraints on
improper actions, but are not substitutes
for regulatory credibility.
Regulatory regimes
are complex, and
involve various actors
and interests. In the
long term, transparent,
consistent and
independent regulatory
regimes provide
assurances that businesses
can regularly
conduct the activities
contemplated by a
trade agreement. In
their absence, businesses
must work to obtain those conditions,
but institutional changes generally
do not happen quickly.
Regulatory interpretations
can facilitate trade
The discussion of regulations and regulatory
regimes points to an area in which
the private sector can convince and
impel governments to utilize regulatory
systems to facilitate trade and investment
as envisioned by trade agreements. A
country's regulatory systems establish
certain obligations, but flexibility often
exists in the policies adopted to guide
their implementation. The interpretation
may be restrictive or may, to the extent
possible, accommodate the interests of
businesses within that framework. The
private sector can work with an agency
so that the agency exercises its legitimate
discretion in a manner that satisfies regulatory
responsibilities, recognizes
resource constraints, and makes sense
for business. For example, customs
authorities can allow inspections in nongovernment
facilities under controlled
conditions if businesses provide additional
resources to cover costs incurred
by the arrangement.
Broader coordination among trading
partners in regulatory interpretation also
is contemplated in the "aspirational"
goals of trade agreements. For example,
NAFTA states that the countries shall
cooperate "to the extent possible and for
purposes of facilitating the flow of trade
between them" in the harmonization of
documentation used in trade and standardization
of data elements. It does not
define the documentation or data elements.
Coordination among governments,
with substantial input from the
private sector, can promote efforts, such
as electronic data interchanges with a
uniform, electronic submission for a
common set of data elements for international
trade transactions. That coordination
can increase efficiency, minimize
discretion and enhance enforcement
tools, and thus offer a means to some
remove impediments to trade within
existing domestic legal structures.
Regulatory coordination, unlike changing
regulations or reorienting regulatory
regimes, does not necessarily require a
change to domestic laws or policies. It
already occurs in some areas. The challenge
to the private sector is to identify
areas where additional efforts would benefit
their businesses, to commit technical
and other support to the effort, and to
energize governments to undertake these
efforts.
Conclusions and directions
The question is not whether regulatory
regimes are necessary-they are. The content
of regulations, their implementation
and the approach to their implementation
can facilitate or obstruct the potential of
a trade agreement. Poor regulatory
regimes can defeat even the best negotiated
agreements. Some changes to regulatory
regimes may be easier to achieve
than others. To realize the opportunities
of a trade agreement, governments and
the private sector must engage among
themselves and with each other in sustained
efforts on the range of "regulatory"
activities.
Endnotes
1. This article uses examples from the NAFTA. Other U.S. free
trade agreements have substantially similar provisions.
2. 69 Fed.Reg. 65257 (November 10, 2004).
3. 69 Fed.Reg. 60,829 (October 13, 2004).
4. Mutual Recognition Agreements (MRA) are designed to facilitate
trade and reduce costs as countries accept the test results
and/or product approvals performed by entities in another
country. For example, NAFTA states that the countries shall
seek to promote compatibility of conformity assessments
processes. For a MRA to achieve that objective, countries must
actually recognize another country's certification bodies.
Reprinted from World Trade Magazine, January 2005 . www.worldtrademag.com |
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