APEC Business Advisory Council(ABAC)

Liberalisation Working Group (LWG)

First Meeting 2010, Melbourne,February 2010

FTAAP concept – identifying business requirements for new generation FTAs: Regulatory Principles

Introduction

This paper builds on discussions in LWG during 2009[1] aimed at identifying, from a business perspective, new issues of commercial importance that should be reflected in new FTA negotiations particularly in the context of the proposed Free Trade Area of the Asia Pacific (FTAAP) and the Trans Pacific Partnership (TPP) now under negotiation by eight APEC member economies[2].

Background

Whether through FTAAP or TPP ABAC has a strong interest in the development of new generation agreements which set high standards for liberalisation leading to business growth and address the requirements of business in the 21st century.

Setting high standards in traditional areas of border trade should be relatively straightforward. For example, in the area of tariffs, negotiators can aspire to comprehensive tariff elimination. Setting standards in many other chapters of the agreement is likely to be more challenging as these chapters cover specific areas of domestic regulation. However, as economic and business relations are today more about market integration – and with it deeper economic security and growth – rather than the traditional approach of market access, high standards outcomes under these chapters are increasingly important to the business community. This paper argues that ABAC should promote the adoption of regulatory principles to guide such work.

Context

International trade and investment are fundamental to economic growth and development in all our economies. World trade as a proportion of world GDP has increased from 20 percent in the early 1970s to about 55 per cent in recent years.

But more broadly, facilitating the operation of business transactions across borders is a key contribution to the financial health of business in the current global environment. As global trade flows have increased, the production of both goods and services has become more fragmented. There is greater international competition, lower mark-ups available to firms and a reduction in the home bias of production, with a declining share of domestically produced inputs in many countries.[3]

This has resulted in the increasing “atomisation” of production internationally where countries specialise in varieties of particular goods rather than in industries. Features of “atomisation” include:

  • “offshoring” of production;
  • “outsourcing” of input provision;
  • “supply chaining” inputs and outputs;
  • “insourcing” of services; and
  • niche marketing using web based applications.

Collectively, these developments have coalesced into business practices that have come to be known as “global supply chains”. This kind of trade tends to occur between close neighbours and amongst developed as well as developing countries and involves concomitant flows of investment, knowledge and skilled workers. Supporting these trends has been the growing importance of Asia/Pacific countries to world trade. Many global value chains concentrate their production processes in Asia (eg manufacturing in China and services in India) or are run by major investors from the Asia/Pacific region (eg the United States and Japan). At the same time, the demands of consumers in the region are rapidly growing more sophisticated, as is their ability to compete in increasingly high human capital industries.

The comprehensive integration of the global supply chain demands free and open trade and investment. But instead of simply seeking lower border barriers to trade and investment, business is seeking to operate in regulatory environments that are fair, consistent, competitive, support innovation and involve low compliance costs. These trends have been intensified by the fact that many global consumers have become increasingly discerning about the health, safety and environmental standards of the goods and services they buy and are demanding verification that such standards are being achieved.

These developments have significant implications for business. Rather than simply lowering trade and investment barriers at the border, the private sector is looking to FTAs to generate new business by addressing areas that have previously been seen as the preserve of domestic regulation. These include such areas as TBTs, SPS, competition law and IP regimes.

Advantages of Regulatory Principles

To guide the development of chapters in future FTAs including FTAAP and TPP with a strong regulatory focus, ABAC could advocate that the partners agree on a set of principles to ensure these chapters are of a high standard. This would have a number of advantages:

  • Principles would provide a set of criteria against which “quality” could be defined. This would be particularly useful when countries have differing ideas of the factors that provide for “high quality” in regard to specific outcomes.
  • They would maximise the flexibility available to Parties in the development of these chapters. Instead of seeking the harmonisation of law and regulations, the use of principles would permit differing approaches to laws and regulations as long as such differences, through mechanisms such as mutual recognition, led to the same or similar regulatory outcomes. This approach would also be permissive of exceptions as long as they were transparent and in place for sound public policy reasons.
  • Principles could be used to gain the support of domestic business and regulators within the parties who are seeking to raise the quality of domestic regulatory frameworks,thereby strengthening reform lobbies that would be supportive of high quality outcomes under the FTA.
  • They would provide standards against which prospective additional parties could assess membership in the future. The fact that existing parties could demonstrate that regulatory chapters adhered to core principles would leave no doubt of the high standards required to join the TPP while also making it clear that there is significant flexibility in how these standards are attained.
  • They would also ensure consistency of approach to issues that cut across several chapters.

What Would Regulatory Principles Look Like?

Principles would need to be agreed between all negotiating partners at the beginning of the FTA negotiating process. It could be useful to build on principles already agreed on in international fora. For example, the APEC Principles to Promote Competition and Regulatory Reform[4] have already been agreed between APEC members to promote regulatory integration and a competitive business environment within the APEC region. These consist of four core principles:

  • Non-discrimination – which calls for “application of competition and regulatory principles in a manner that does not discriminate between economic entities in like circumstances, whether these entities are foreign or domestic”;
  • Comprehensiveness – which calls for “broad application of competition and regulatory principles to economic activity including goods and services and private and public business activities”? The principle also recognises that “competitive markets require a good overall legal framework, clear property rights and non-discriminatory, efficient and effective enforcement”;
  • Transparency – which calls for “transparency in policies and rules, and their implementation”; and
  • Accountability – which calls for “clear responsibility within domestic administrations for the implementation of the competition and efficiency dimensions in the development of policies and rules and their implementation”.

A fifth principle could be added – least efficiency distorting –which is not necessarily covered by any of the four principles listed above. This would encompass the normal trade principle of “least trade distorting” when examining regulations in areas such as health, safety and the environment. It would also drive for improved efficiency outcomes when FTA members are considering regulations that are not necessarily trade distorting.

A limited number of additional and/or elaborated principles could be developed to cover specific regulatory areas. A good deal of work has already been done on these in APEC and other areas. Some of these are mentioned below. Many of the APEC “model measures” chapters for FTAs also point to the desirability of making use of regulatory principles.

What Chapters of the Agreement would the Principles Cover?

Essentially principles would appear to make sense for those chapters of FTAs where regulatory alignment is an objective. As such, the principles could be applied to the following chapters:

  • Rules of Origin - where we have mounting evidence that the efficient operation of global value chains can be impeded by complex, protectionist and/or inconsistent rules of origin;
  • Technical Barriers to Trade – where more advanced agreements are increasingly adopting a flexible, principles based approach to the development of chapters. These chapters often seek to allow negotiating parties to regulate for health, safety and environment but to ensure that such regulations minimise the impact on trade and efficiency;
  • Sanitary and Phytosanitary Barriers – like TBT chapters, high quality SPS chapters increasingly employ flexible, principles based approaches while at the same time putting in frameworks that seek to ensure that any regulations are based on sound science and minimise distortions to trade and efficiency;
  • Trade in Services – agreement on regulatory principles would be useful to developing high quality outcomes for many service sectors under the Agreement. The WTO’s own work programme has recognised the importance of developing such principles;
  • Investment – the use of core regulatory principles have long been recognised as useful to assist the negotiation of international investment agreements, both in terms of investor protection and market access for investors. APEC has endorsed a set of such principles in the form of 1994 APEC Non-Binding Investment Principles.
  • Intellectual Property – this is a challenging area of both trade and domestic regulatory policy that calls for a careful balance between innovation and competition objectives;
  • Competition Policy – core competition principles are now well accepted both by competition regulators and by many FTA negotiators;
  • Government Procurement – again, the use of regulatory principles has been recognised as useful in the development of government procurement regimes and in the negotiation of FTA chapters. APEC has endorsed “APEC Non-Binding Principles on Government Procurement”[5] for these purposes.

Conclusion

Given the increasing integration of business in the Asia/Pacific region, there is a strong desire on the part of business for achieving high quality outcomes in future FTA chapters that cover domestic regulation. Agreement on regulatory principles would assist in achieving such high quality outcomes. A number of models are already in place which could guide the development of such principles, both at the high level and under specific chapter headings, helping to achieve the business vision of the APEC community where a transparent and predictable operating environment underpinned by effective and legal regulatory systems exists.

Recommendation

It is recommended that ABAC agree to promote the concept of regulatory principles as outlined in this paper in the context of FTAAP and TPP and that this view be conveyed in the appropriate manner to APEC senior officials and incorporated in ABAC’s annual recommendations to APEC Economic Leaders.

ABAC New Zealand

February 2010

967400

[1]LWG 2009-003 and LWG 2009-007 both refer

[2] Brunei Darussalam, Australia, Chile, New Zealand, Peru, Singapore, United States and Viet Nam (as observer)

[3] World bank 2005 review of globalisation

[4]Endorsed by APEC Leaders at their meeting in Auckland, 1999

[5]Last updated in September 2006