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54.The specific case of EU-US MRA negotiations combined with the general lessons drawn from other instances of adoption of mutual recognition suggest a number of recommendations for the design of MRAs. We need to ask what are the possible problems connected to the implementation of MRAs and how can they be pre-empted. In other words, how to design more effective and sustainable MRAs. In the discussion, I distinguish between core elements that need to be present in any MRA and areas where choices must be made between alternative options.
55.We can gain some analytical leverage by analysing MRAs as "insecure" contracts as defined in economic theory. Mutual recognition agreements are typical contracts under conditions of uncertainty and ambiguity negotiated between national governments. These are incomplete contracts in that they cannot spelled out all the situations that may emerge during their implementations. The contracts are signed between countries that act simultaneously as home and host countries. Under MR contracts, host countries commit to granting some pre-defined degree of market access. In turn, home countries commit to adequate supervision of economic actors in exchange for such market access. The mutual commitments form an 'insecure contracts' since these are just promises or expectation of effective access in the host state and sound regulatory supervision in the home state. This conceptual framework puts in sharper light four main mechanisms by which mutual recognition contracts can be made more sustainable.
56.First, contracts are obviously more sustainable when all parties are confident that the others abide by the letter and spirit of the contract. In the case of MRAs, such confidence is based on the initial familiarisation and continue involvement with the foreign system, including through: obligations of transparency of regulatory systems, decision making process, and change in such system through the continued exchange of information between regulators; mutual monitoring that allows for the continued assessment of technical competence, capabilities, and efficiency as well as the foreign industries overall state of the art in its capability to comply with the importing country's requirements (host country "accreditation inspectors must have a permanent right of access in the exporting country); and finally, since there will always remain some information asymmetry, there needs to be trust that the foreign authorities will continue to have adequate regard for public health, safety and environmental concern.
57.A second way in which mutual recognition contracts can be made more sustainable is to have parties commit to help each other abide by the terms and spirit of the contract. In this sense, MRAs should be seen more as framework for mutual technical assistance than for regulatory competition. Host countries can help home country enforce compliance, by readily transferring to the country of origin information about regulated actors obtained in the territory of sale (e.g.. financial sector). More generally, parties can think of MRAs as a means of reallocating rights of control to ensure an optimal division of labour between regulators across jurisdiction. Ceteris paribus, quality control is better done by local authorities/inspectors who can come more often, know local conditions better, etc. A common culture of certification quality needs to be created through co-operation between labs. MRAs between private actors to supplement government to government MRAs and conditional on mutual confidence help increase incentives for the quality reputation of individual registration, licensing, certification or testing bodies. Collective guarantees of quality control backed up by peer enforcement in turn increase the confidence of the buyers in the soundness of control.
58.Third, there may be cases when even these two types of mechanisms are not sufficient to ensure compliance on the part of home regulators. The theory points out that the sustainability of contracts are highly affected by whether parties can convincingly threaten to "walk out" of an agreement if contractual terms cease to be respected. The advice is : when contracts are insecure, make contingency explicit and specify walk away conditions. This is why mutual recognition agreements must be designed more explicitly as contingent agreements that can be terminated should the situation change in a country that fails to produce the required regulatory results. At one extreme, MRAs could even include trial periods. Such overall reversibility of MRAs depends both on the rights --safeguard clauses- and capacities of parties to do so. Conditions for adequate reversibility include: 1) the possibility to observe "the state of the world" that is the soundness of home regulation, e.g. transparency clauses as well as a format to interpret data on foreign regulations. 2) the existence of fair arbitration mechanisms available in cases of alleged non compliance. These may be instances of temporary regulatory dumping. Safeguards act like anti-regulatory dumping measures and must be applied under commonly agreed circumstances. 3) the capacity of parties to reverse their initial concession in case of non-compliance. This last point is the most tricky since information asymmetries may develop to such an extent between host country regulators and foreign producers that reasserting control may become almost problematic. Technology may also make it increasingly impossible to cut off imports in such instances where such imports are beamed through satellite or carried by communication networks. Thus, reversibility itself must be the object of co-operation between regulators including under conditions of crisis.
59.Fourth, and as a quid pro quo for their safeguard clause, host countries must refrain from arbitrary behaviour or compensation mechanisms as well as commit to dealing with external factors that might emerge that would unduly nullify contract. For example, there is a real tension in the use of labelling in mutual recognition contexts. While labels can be thought of as mechanisms to minimise government intervention and make acceptable mutual recognition, officially sanctioned labelling (such as eco-labelling) can itself turn out to be a means to protect in more sophisticated ways against mutually recognised products. In terms of contestability, labels with a "local connotation" imply that importers do not have access to same input. More generally, the access provided by mutual recognition may be incomplete as private anti-competitive behaviour replaces previous requirements. Professional registration bodies may refuse to abide, distribution centres may refuse to distribute a product without a given mark of conformity or insurances may refuse to insure it. In the spirit of MRAs, co-operation in competition law must act as a supplementary lever on market openness where market forces would not take care of these problems alone. Finally, if the host country is granted the right to make acceptance of products conditional on additional requirements in light of additional knowledge, any amendment to market access awarded must be proportional to the need. In order to make such commitment acceptable to public opinion, political and regulatory accountability must be explicitly and publicly shared between home and host countries.
60.Beyond these general prescriptions, the characteristics of MRAs are bound to vary with the requirements of each negotiation context. On a number of fundamental choices there can be no general prescription, except for the fact that there exists alternative available options as well as trade-offs that can be exploited among the features of an MRA. A fundamental tension is that between judicial and political mutual recognition. The fact that even in the EU judicial activism has created resistance and that WTO's dispute settlement mechanism is a main target for the political exploitation of the "sovereignty argument against trade liberalisation ought to suggest caution. It would seem to be wiser to specify criteria for non compliance to the greatest extent possible in the MRAs themselves and even to resolve emerging dispute through renewed political negotiations. This point also suggests that obligation of unilateral recognition that may emerge from policed national treatment should not be carried too far. Mutual recognition needs to remain a political contract.
61.Second, some parties may prefer to pursue a path to MR through unilateral regulatory reform rather than regulatory co-operation. Unilateral recognition can be far reaching if conducted in a broader context of domestic regulatory reform where recognition is seen as a lever. Moreover, it can be more acceptable to certain regulatory cultures. Countries can also pre-empt the need for mutual recognition when they develop regulatory systems from scratch by systematically incorporating foreign and international standards and including direct provisions for recognition of foreign accreditors. The unilateral approach can also be seen as a first step to latter negotiations of MRAs that will minimise the need for mutual adaptation.
62.Third, parties must decide whether the regulatory co-operation that must necessarily accompany mutual recognition needs to bare fruits before the agreement is actually implemented. The resort to a shift from mandatory and extensive ex-ante co-operation to on-going ex-post co-operation (with reference to the implementation of MR) is one of the central "twists" that allowed Europeans to respect (more or less) their 1993 deadline for the internal market. This does not mean that the scheme ought be reproduced everywhere, especially where there exist no prior culture of regulatory co-operation.
63.A fourth area of tension -also an illustration of the need to chose between regulatory assurances before or after liberalisation- is that between the negotiation of an immediate full scope MR and the incremental extension of regulatory scope of MR conditional on increased confidence. To some extent, greater initial regulatory scope of MR can be achieved in exchange of more liberal rights of ad-hoc reversibility (e.g. the 1989 mutual recognition of diplomas in the EU). But the progressive extension of regulatory scope is certainly a less conflict prone approach adopted by the EU itself in a number of sectors. Exhibit 6 (see separate annex) provides a summary of some of these recommendations for a model MRA.
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