Richard North, 24/03/2015  
 

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Of all the nonsense dribbled out by the London-based think-tank claque and their fellow travellers, none is quite as pernicious as the constant discussion on EU regulation and the benefits EU withdrawal might bring, especially in terms of the "deregulation" which is supposedly on offer.

Most commentary simply betrays profound ignorance, not only of how industry and trade works, but also of the practical application of regulation in today's society. We even find, in many instances, an almost total lack of appreciation of the nature of regulation – why it actually exists, and the roles it fulfils.

In that context, it is worth going back a little to a paper written in January 2013 (picked out by one of our own commenters), written by Anu Bradford, professor of law at the Columbia Law School. Entitled, "The Brussels Effect: The Rise of a Regulatory Superstate in Europe", it offers important insights into the way regulation works and – of particularly relevance – why it is that certain regulations predominate at global level, and not others.

Without putting too fine a point on it, this paper kicks into touch many of the ill-informed posturing of those who would argue that there is any immediate regulatory relief to be had from leaving the EU. But, as with many things of value in this world, the argument is relatively complex. There are no short-cuts, when it comes to trying to understand the issues.

With that in mind, summarising Anu Bradford's paper is extraordinarily difficult. It is over-long, not well structured, and repetitious. However, in attempting to sum it up, one has to say that the paper is a slow burn, with Bradford telling us that "a deeply underestimated aspect of European power that the discussion on globalisation and power politics overlooks: Europe's unilateral power to regulate global markets".

The European Union, she writes, sets the global rules across a range of areas, such as food, chemicals, competition, and the protection of privacy. EU regulations have a tangible impact on the everyday lives of citizens around the world. To her specific audience, she adds, few Americans are aware that EU regulations determine the makeup they apply in the morning: the cereal they eat for breakfast, the software they use on their computer, and the privacy settings they adjust on their Facebook page.

The EU, we learn, also sets the rules governing the interoffice phone directory they use to call a co-worker. EU regulations dictate what kind of air conditioners Americans use to cool their homes and why their children no longer find soft plastic toys in their McDonald's Happy Meals. This phenomenon, the "Brussels Effect", is the focus of her article.

From there, we begin to get an explanation of what is called "unilateral regulatory globalisation", a process that occurs when a single state is able to externalise its laws and regulations outside its borders through market mechanisms, resulting in the globalisation of standards.

En route to exploring this phenomenon, Bradford takes a look at the so-called "California Effect" where, due to its large market and preference for strict consumer and environmental regulations, California is, at times, effectively able to set the regulatory standards for all the other states.

Businesses willing to export to California must meet its standards, and the prospect of scale economies from uniform production standards gives these firms an incentive to apply this same (strict) standard to their entire production.

This effect expand to become the "Brussels effect", when firms trading internationally find that it is not legally or technically feasible, or economically viable, to maintain different standards in different markets. When trading with the EU requires foreign companies to adjust their conduct or production to EU standards - which often represent the most stringent standards - or else forgo the EU market entirely, they tend to adopt those standards uniformly throughout their entire enterprises.

We saw this in our interview Bjorn Knudtsen, Chairman of the Codex Fish and Fisheries Product Committee. He told us that, when it comes to Norway, trade in fish and fisheries products is a vital national interest, with 95 percent of products, worth €3 billion annually, being exported. And as an exporting country, he said – like other major exporters – strict regulatory standards are a necessary and acceptable price to pay for what he terms "certainty".

Companies preparing a product for export did not know from the outset the destination of any particular batch. Therefore, they wanted to be able to produce to a generic standard which would be accepted in any and every country to which the product might be despatched. They don't want to be producing different batches to different standards.

Thus, we find processors adopting the highest posted standard, as a means of ensuring that the product has access to the largest number of markets. This, Bradford elaborates on, when she argues that, while the EU regulates only its internal market, multinational corporations often have an incentive to standardise their production globally and adhere to a single rule.

It is this mechanism which converts the EU rule into a global rule - the "de facto Brussels Effect". Then, when these export-oriented firms have adjusted their business practices to meet the EU's strict standards, they often have the incentive to lobby their domestic governments to adopt these same standards in an effort to level the playing field against their domestic, non-export-oriented competitors - the "de jure Brussels Effect".

Interestingly, Bradford sees other states are lacking power to affect this process. Countries whose regulatory preferences are overridden by the EU's standards gain nothing by entering into a regulatory race with the EU. Outpacing the EU only leave them with even higher, and hence less desirable, regulatory standards.

As to international institutions, these are regarded as having only an imperfect ability to dampen the EU's regulatory ambitions, which – argues Bradford – means that the greatest check on the EU's regulatory powers comes from within the EU itself. As the EU's powers grow, internal divisions within the EU will increase. In the end, she says, the boundaries of the EU's regulatory reach will be defined by the EU's own evolving conception of the limits of its regulatory authority.

Here, we have to disagree with the Bradford script, as she fails to mention the WTO Agreement on Technical Barriers to Trade, to which the EU is bound and which is increasingly defining the regulatory agenda. Once that is factored in, one sees that international institutions have far greater influence than Anu Bradford would allow.

Nevertheless, Bradford's article is helpful in further exploring the "California Effect" and its transformation in the "Brussels Effect". Existing scholarship, she says, recognises the importance of market size and scale economies as a source of a jurisdiction's external regulatory clout. There are, she says, additional factors, which can prevent a company from producing different varieties for different markets and thereby give effect to the "Brussels Effect".

Wading through this over-long paper (running to 67 pages), the essence is that the "effect" has its greatest impact when Brussels wins the "race to the top". In other words, it is the highest, or strictest standard that wins out, at global level, and for the reasons already set out. This is summed up in one paragraph, telling us that:
… export-oriented EU firms to seek consistent and predictable regulatory frameworks. Uniform regulations have abolished obstacles for doing business within the common market - it is more complicated and costly to comply with multiple, sometimes conflicting regulations than with a harmonised regulatory scheme. And once all European firms have incurred the adjustment costs of conforming to common European standards, they have preferred that those standards are institutionalised globally. Hence, to level the playing field and ensure the competitiveness of European firms, EU corporations have sought to export these standards to third countries.
This is the crunch issue. As trade has globalised, so has regulation, and when it comes to the choice of standard, firms will always opt for the most demanding, simply because it is cheaper and more efficient to work to a single standard than it is to work to multiple standards.

Thus, anyone who thinks that leaving the EU is going to bring about the fabled bonfire of regulation is deluding themselves. Trade may be driven by the demand for goods and services, but it is facilitated by harmonised standards and, whoever produces the strictest standards gets the cream. In or out of the EU, we will continue to see the "Brussels effect" dynamic, and it will ensure that our statute book remains more or less intact.






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