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Article Excerpt
The Study in Brief
The potential benefits of greater regulatory convergence between Canada and the United States have been well-documented. At issue: reducing the "tyranny of small differences" in Canadian and American regulations that is frustrating businesses, adding costs, and stymieing the benefits of further economic integration.
In June 2005, the Canadian, US, and Mexican governments agreed that they would develop "a trilateral Regulatory Cooperation Framework by 2007 to support and enhance existing, as well as encourage new cooperation among regulators." Progress, however, has been glacial. The default option has been to stay on the very Canadian path that has gradually emerged: cooperation if necessary but not necessarily cooperation. This Commentary argues that the time has come for Canadians to decide whether they will stay the default course or opt for a more strategic, top-down approach of deliberately steering and determining the pace of this process.
Operating in a small, export-dependent economy next door to the world's most vibrant economy, Canadian suppliers and regulators alike have learned the benefits of Canada-US regulatory cooperation. The result has been an inexorable drift toward ever-greater convergence. This trend is unlikely to change, but Canadians can take steps to harness it and ensure that it develops in ways that bring greater benefits and more control than is currently the case.
As a first step, the two governments should change the current practice of discretionary cooperation at the federal level to a mandatory process of information exchange, consultation, and even coordination. The aim should be to advance a jointly agreed mandate to improve regulatory outcomes, eliminate duplication and redundancy, reduce regulatory differences between the two countries, and effect a North American approach to regulation. Much of this mandatory cooperation can be implemented on the basis of existing institutions and be focused on priority sectors. Its most critical results will be experience and mutual confidence.
This program of regulatory cooperation should form part of a larger vision; one in which both countries share a commitment to the creation of the necessary legal framework and institutions that will govern accelerating cross-border integration and ensure that both Canadians and Americans enjoy its benefits.
The Author of This Issue
Michael Hart holds the Simon Reisman Chair in Trade Policy in the Norman Paterson School of International Affairs, Carleton University and is a distinguished fellow of Carleton's Centre for Trade Policy and Law.
As the fledgling Conservative government in Ottawa picks its priorities for dealing with Washington, there is an important dimension to the relationship that should not be overlooked: cross-border regulatory cooperation. While the tone of Canada-US relations has been set in recent years by high-profile trade disputes, political posturing, and foreign policy differences, cross-border regulatory cooperation has emerged as a hot topic in Ottawa and, to a lesser extent, Washington policy discussions. At issue: reducing the "tyranny of small differences" in Canadian and American regulations that is frustrating businesses, adding costs, and stymieing the benefits of further economic integration.
The potential benefits of greater regulatory convergence have been well-documented on both sides of the border. (1) In September 2004, Canada's External Advisory Committee on Smart Regulation (EACSR) advised the federal government that "Canada must be more strategic in its regulatory relations with trading partners. A key irritant for industries is the proliferation of minor differences between Canadian and American regulations, given an increasingly integrated North American market." It continued, "Minimizing these differences would remove wasteful duplication and reduce costs for consumers, industry and government" (EACSR 2004, 11).
In a similar vein, the Independent Task Force on the Future of North America, sponsored by the US Council on Foreign Relations, urged governments in its May 2005 report to adopt a "North American" approach to regulation (CFR 2005). On cue, the continent's three governments agreed in June that they would develop "a trilateral Regulatory Cooperation Framework by 2007 to support and enhance existing, as well as encourage new cooperation among regulators" (Canada 2005, 15). (2)
The default option in addressing cross-border regulatory convergence has been to stay on the very Canadian path that has gradually emerged: cooperation if necessary but not necessarily cooperation. As was made evident in the discussions leading to the report of the EACSR, however, a growing number of voices argue that Canada has much to gain, and little to lose, from a much more active, comprehensive program of Canada-US regulatory cooperation. They contend that the time has come for Canadians to decide whether they will stay the default course or opt for a more strategic, top-down approach of deliberately steering and determining the pace of this process. This Commentary explores the rationale for a take-charge approach and the elements required to make it work to Canadians' benefit.
The Changing Face of Regulatory Cooperation
Cross-border regulatory cooperation, of course, is not new. Progress over the past 60 years in the development of international norms and disciplines has significantly reduced regulatory barriers to trade in goods and services. Nevertheless, an explosion in quality-of-life regulations has led to ever-growing demand that a wide range of products and production processes be tested and certified to exacting requirements. An equally broad range of services can only be supplied following onerous and often repetitive qualification and certification requirements.
Compliance with different national and sub-national rules, together with the repetition of redundant testing and certification of products, processes, and providers for different markets, raises costs for manufacturers and providers operating in an integrated market. Complex and lengthy product- or provider-approval procedures can slow down innovation, frustrate new product launches, operate to protect domestic producers from foreign competitors, and create a drag on competitiveness, productivity, investment, and growth.
The Fraser Institute estimates that Canadian federal and provincial governments introduce more than 4,500 new or amended regulations every year while the Canadian Federation of Independent Business estimates that Canadian business annually spends C$33 billion, or 2.6 percent of Canada's GDP, in complying with this profusion of regulatory activity. (3) Similar orders of magnitude in the United States underline the critical importance of regulations to modern life and suggest the need to consider the economic impact of subtle cross-border differences.
Canadians and Americans look to their governments to pursue largely similar goals and objectives in their regulation of the market and in managing risk. Canadians may insist that they want to remain a distinct entity north of the US border, but they also expect many of the things that Americans demand and they look to government to ensure that they get them. The differences in regulatory requirements that thus emerge are more likely to be matters of detail and implementation than of fundamental design. (See Box 1 for examples.) Nevertheless, the regulatory differences that persist and new--often small--differences that emerge in regulatory design, objectives, implementation, and compliance procedures, impose costs and maintain distortions that undermine Canada achieving its full economic potential. Box 1: The Tyranny of Small Differences Differences between Canadian and US requirements are often small and incidental to their intended effect, the result more often of history and accident than deliberate differentiation. Once in place, however, they attract powerful interests benefiting from these differences. A few examples illustrate the point: * In Canada, anti-theft immobilizers are required on all new vehicles; in the United States, lower cost entry-level vehicles are exempt. * In Canada, cheese-flavoured popcorn must contain no more than 49 percent real cheese; in the United States, no less than 53 percent. * In Canada, fortified orange juice is classified as a drug; in the United States, it is classified as food. * In Canada, deodorants containing aluminum require a Drug
Identification Number; in the United States, they do not. * In Canada, certain anti-allergy drugs are available over the counter; in the United States, they require a prescription. * In Canada, combined sleep and pain aids require a prescription; in the United States, they are available over the counter. * In Canada, notaries public must be lawyers; in most US jurisdictions, they are not. The regulatory "output" in both countries may be roughly identical, but the United States disposes of much larger regulatory resources than does Canada; as a result, its regulatory "input" is roughly 10 times that of Canada. Common sense suggests that Canada can both reduce its costs and gain superior results by aligning itself more deliberately with the United States and benefiting from the much larger US regulatory effort in selected areas, from drug approvals to environmental standards. Canada's smaller resource level also translates into higher relative enforcement costs. Hopkins (1992) and Winston (1993) estimated that, on a per capita basis, the United States spends only about half of what Canada spends on regulatory compliance. In both cases, Canadians would benefit from higher levels of cooperation and greater acceptance of the virtues of convergence. (4)
Canadian and US experience in forging cooperative regulatory strategies has generally been positive. For example, the North American food safety system, reflecting the highly integrated nature of food production in the two countries, is deeply dependent on cooperation among officials on both sides of the border. (5) It is also not difficult, however, to find examples of sectors and regimes where there is room for more cooperation. Regulatory differences in the financial services, transportation, telecommunications, securities, competition, professional accreditation, drug approval, and similar areas suggest that there is considerable scope for exploring ways and means to reduce unnecessary duplication and divergence in regulatory design and compliance requirements. (6)
Historically, regulatory cooperation between Canada and the United States has been driven by natural forces, similar to the market forces that have deepened and accelerated integration between the two countries. In most instances, it is the natural result of officials with similar responsibilities and shared outlooks seeking support and validating relationships to pursue them. As a result, they have developed a dense network of informal cooperative arrangements to share information, experience, data, and expertise with a view to improving regulatory outcomes, reducing costs, solving cross-border problems, implementing mutual recognition arrangements, establishing joint reviews and common testing protocols, and more. (7)
Virtually all such regulatory cooperation takes place below the political radar screen. The issue that has now arisen is whether this piecemeal, incremental approach best serves Canada's regulatory and economic development interests. As George Haynal, a former senior Canadian diplomat, observes: "a process of policy convergence is already well in train ... The question is less whether we need to negotiate new instruments to further the process, but whether the public realm is capable of keeping up with emerging forces pushing us into deeper integration" (Hart 2000, 6). The European Union (EU) determined in the mid-1980s that it had to adopt a comprehensive, top-down approach to reducing regulatory divergence among its member states in order to gain the full benefits of a single, integrated market. Is it time for Canada to consider a similar effort to get more out of cross-border regulatory convergence with the United States?
Deepening Cross-Border Integration
Discussion of cross-border regulatory cooperation is taking place against the background of accelerating and deepening integration of the Canadian and US markets. Proximity, history, technology, opportunity, and policy have combined to create deep and irreversible ties between Canadians and Americans. Despite occasional bursts of anti-American sentiment, Canadians, in their daily choices of what to buy and consume, prefer goods and services produced in North America. The result is a total of some $1.9 billion in goods and services traded across the border on a typical day, adding up to nearly $680 billion in 2004. On a per capita basis, every Canadian bought about $9,150 worth of US-exported goods and services, while every American bought about $1,340 worth of Canadian-exported goods and services. By 2004, US firms had a $239 billion stake in Canada and Canadian firms had about $191 billion invested in the United States (International Trade Canada 2005). In 2003--the latest year for which comparable figures are available--Canadian-owned firms in the United States sold about $324 billion in goods and services; American-owned firms in Canada reported sales of $555 billion (Cardillo 2002, Marth 2003, Statistics Canada 2005, and US Bureau of Economic Analysis). Not surprisingly, a growing share of the trade between Canada and the United States now takes place wholly within a firm or between related firms that are part of integrated networks. As US business economist Stephen Blank notes: Ottawa and Washington talk about the world's largest bilateral trading relationship. But we really don't trade with each other, not in the classic sense of one independent company sending finished goods to another. Instead we make stuff together; ... [we] share integrated energy markets; dip into the same capital markets; service the same customers with an array of financial services; use the same roads and railroads to transport jointly made products to market; fly on the same integrated airline networks; and increasingly meet the same or similar standards of professional practice. (Blank 2005.) This deepening bilateral integration is a subset of global integration: an ongoing process that has accelerated in recent years due to both technological breakthroughs and policy developments. The direction has been the same for many years and is neither threatening nor undesirable. It is driven by the day-today decisions of Canadians and Americans about what to buy, where to invest, how to organize production, where to vacation, and more.
Governments have little control over the pace and direction of this integration, but they do have an important influence on its shape through their regulatory and other decisions. The challenge is to manage this integrative process on a mutually beneficial basis. In effect, regulatory cooperation is the next frontier for crossborder economic negotiations and the key to reducing the continuing negative impact of border administration on Canada's economic development. Its success will make a critical contribution to securing the prosperity and well-being of Canadians and to ensuring that they can enjoy the full benefits of an integrated North American economy.
Cross-Border Regulatory Convergence, Differences, and Economic Impacts
In any well-functioning modern industrial economy, regulations are ubiquitous. (8) They serve...
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