December 13, 2004

Regulation and the Market

Wretchard at The Belmont Club has an interesting post regarding the way that Europe regulates things as compared to the way the USA does. Interesting differences: bq. The World Standard Mark Schapiro in a Nation article entitled "New Power for 'Old Europe'" describes the effect of the expanding European Union on American business. He argues that the formation of a large common market operating under a single regulatory regime has destroyed the American ability to "set the standard" and argues this bodes ill for American dominance.
Since the fall of the Berlin wall, the European Union has been steadily transforming itself from a facilitator of trade to a sophisticated geopolitical power with the teeth to back up its policies--an evolution that has occurred largely under the American public's radar. Over the past decade, EU member states have ceded governing and enforcement authority to Brussels in areas ranging from environmental regulation to food safety, accounting standards, telecommunications policy and oversight of corporate mergers. As a result, US companies that do business in Europe--which remains America's largest export market -- are quickly learning that "old Europe" is now wielding new world power.
Just this year, US manufacturers of such goods as chemicals, cars and cosmetics have been confronted with EU regulations that force a choice: Either conform to the EU's standards of pre-emptive screening for toxicity--far tougher than US standards--or risk sacrificing the European market, which, with 450 million people, is now larger than that of the United States. In the process, the European Union is challenging US presumptions of unilateral decision-making on issues with tremendous consequences for American companies and consumers, treading on ground that has long been considered sacred turf.
bq. The three major examples that Schapiro uses are the chemical industry, cosmetics and automobiles. In place of the American attitude of "innocent until proven guilty" towards the chemical industry, Brussels is "placing the burden of proof on manufacturers to prove chemicals are safe--what is known as the 'precautionary principle.'" In the arena of cosmetics Brussels is now seen as the patron of consumer safety advocates in America. The EU has mooted banning or more strictly regulating many of the substances traditionally used to prepare beauty products. Wretchard cites a bit more from the article comments a bit and then says this: bq. Although Europe now has a single telephone number it is ringing under a pile of paper. By mandating the strict standards described by Schapiro, Brussels may be raising the production cost of all affected items already manufactured in the EU and raising the barriers to entry for all entrants, domestic and international. The disadvantage of establishing a separate standard from products already offered on the existing markets was described by a Canadian advisory body with regard to the United States.
For companies exporting to multiple markets, the promise of "one standard, one test, accepted everywhere" has become increasingly more attractive. ... The need to produce multiple versions of the same good, for example, can increase design and production costs, and prevent firms from enjoying the economies of scale that would flow from producing to satisfy a single globally accepted standard.
Wretchard comments a bit more and then start examining how the USA handled a regulatory question - Dolphin Safe Tuna bq. For years economists have debated whether "freer trade meant lower environmental standards". With a few name changes, the scenario that Schapiro described resembles the drama played out between Mexico and the United States in the 1991 Tuna Dolphin dispute.
In 1991, the U.S. imposed trade restrictions on Mexico and several other countries because of their excessive byproduct dolphin kill by tuna fishermen, levels above those allowed by the U.S. Marine Mammal Protection Act of 1972. Mexico and its allies appealed to a GATT dispute settlement panel, claiming unfair trade practices. ... The GATT panel upheld Mexico's challenge, saying that the United States' embargo violated the GATT's non-discrimination policy among member nations, as the Mexican process of tuna fishing did not result in a differentiated product from other exporters.
bq. The European Union carefully avoids this pitfall by imposing their standards on the product and not the process. In the end the US exerted effective pressure on Mexico by careful marketing and psychic product differentiation.
In 1990, three major U.S. canneries announced that they would only sell tuna that was caught with dolphin safe methods. Labeling their products as dolphin safe became a way to differentiate the product by the process, by appealing to consumers desires to purchase dolphin safe tuna. Then in 1992, 10 countries (including the U.S. and Mexico) adopted the La Jolla agreement, which established an international limit on dolphin mortality rates among tuna fishers. From 1989 to 1993, dolphin deaths declined from nearly 100,000 to 3,600 (Christopher, Mexico's Marine Conservation Efforts. Dispatch, May 1, 1994, pg. 19), an impressive drop made possible through international negotiations.
bq. American regulators won -- but only by using the market. Ironically it was Paul Krugman who took up the intellectual argument against the "dolphin safe" campaign.
On the other side of the issue, free-traders like Paul Krugman argue that there is little reason to insist on global environmental standards, as doing so could diminish the gains from trade. Krugman correctly notes that, "international trade is really just a production technique, a way to produce importables indirectly by first producing exportables, then exchanging them". He then goes on to add, that "it does not matter from the point of view of the national gains from trade whether other countries have different relative prices because they have different resources, different technologies or different environmental standards. All that matters is that they be different then we can gain from trading with them."
bq. If Brussel's restrictive environmental regulations are seen by consumers as adding value those products may in time become the global standard. But since countries will continue to manufacture products tailored to the risk and return profiles of their consumers, Europe also runs the risk of pricing itself out of business. A "sophisticated geopolitical power with the teeth to back up its policies" must in the end succeed in the marketplace. It cannot regulate itself into success. Emphasis mine in that last paragraph. It will be interesting to see what the next five or ten years show regarding the two methods. Posted by DaveH at December 13, 2004 7:55 PM