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1.Mutual recognition agreements (MRAs) will likely be at the heart of trade diplomacy in the coming decade.[1] Not only do they represent a most effective approach to addressing the impact of differences in national regulatory systems as barriers to trade, but they also constitute a powerful impetus for improving such systems through regulatory co-operation.[2] Since the mid-1980s, the principle of mutual recognition (MR) has been widely hailed as the hallmark of "Europe 1992" and has served to ensure the successful completion of the European single market in a wide array of sectors, ranging from toys, machine tools, telecommunication equipment and pharmaceuticals to banks, insurance, professionals, or broadcasting. At the global level, the signatories of the Uruguay Round called for the bilateral or plurilateral negotiation of MRAs both in the agreement on Technical Barriers to Trade (TBT) and in the General Agreement on Trade in Services (GATS). A decade after its rise to fame in the European context, and notwithstanding fundamental differences in its scope of application, mutual recognition has proven contagious. MRAs are being negotiated or considered bilaterally (e.g. between the United States and the European Union, Australia and New Zealand), plurilaterally (the Quad countries) and regionally (within APEC, ASEAN, NAFTA and the FTAA). The results of the current US-EU negotiations in particular are awaited by many as a possible model in this regard.
2.But the negotiation and implementation of these agreements are bound to be a source of tension and even conflict between states as differences of view arise on their desirable characteristics and boundaries and on the best ways in which they can accommodate disparate regulatory traditions. This paper asks how can we best capture joint gains from trade through MRAs, what are the preconditions for negotiating MRAs and how MRAs can most effectively be designed to minimise such potential conflicts. In particular, it stresses the importance of taking into account MRAs -even if not yet negotiated- while implementing regulatory reform and the potential synergies that can be exploited between the two processes.
3.Mutual recognition can be defined as a contractual norm between governments whereby they agree to the transfer of regulatory authority from the host country (or jurisdiction) where a transaction takes place, to the home country (or jurisdiction) from which a product, a person, a service or a firm originate (jurisdictions are generally sovereign states but they can also be sub-national units in federal entities). This in turn embodies the general principle that if a product can be sold lawfully in one jurisdiction, it can be sold freely in any other participating jurisdiction, without having to comply with the regulations of these other jurisdictions.[3] The "recognition" involved here is of the "equivalence", "compatibility" or at least "acceptability" of the counterpart's regulatory system; the "mutual" part indicates that the reallocation of authority is reciprocal and simultaneous. Finally, mutual recognition agreements are specific instances of application of this general principle, between specific parties, applying to specific goods and services and including more or less restrictive constraints and caveats.
4.Assessing the basis for MRAs constitutes a variation on the broader question of how to reconcile trade and regulatory objectives, that is how to reduce or eliminate the trade impact of differences in national regulation without sacrificing legitimate regulatory objectives. As highlighted by the OECD's current review of regulatory reform in its member states, cross-border providers of goods and services face two core trends. On one hand, an ever growing range of products need to comply with different regulatory requirements or be certified to different national standards, from cars to machinery, drugs, chemicals, telecommunication equipment or data transfers. This trend is not only due to the rise of living standards in the last two decades but also to a growing awareness of the need for regulations to protect human health and safety, the environment and other concerns. At the same time, regulatory reform -a more appropriate term than deregulation- has been under way in many sectors to remedy the more cumbersome and sub-optimal aspects of regulatory intervention, and decrease its complexity, opaqueness and rent seeking nature.
5.It is in this context that new methods are currently being devised to ensure effective market access, or -in current OECD parlance- international openness of markets, that focus on the impact of disparities of regulations on actual and potential competition rather than only on their discriminatory character. To be sure, technical barriers to trade have been the focus of attention under bilateral, regional and multilateral agreements since the 1970s through the refinement of the principle of national treatment to include various forms of latent discrimination. But there is a growing recognition of the need to address the "hard cases" of regulatory barriers that reflect "legitimate differences" between countries in taste, income distribution, market culture, geography, risk aversion and more generally, prevailing patterns of state-society relationships. At a first level of analysis, we need to ask whether the costs of regulatory heterogeneity are so substantial as to outweigh its benefits.[4] But given both the practical limits to harmonization and the political imperative of subsidiarity at a world level, the fundamental choice is not between regulatory heterogeneity and regulatory homogeneity across states. The central question ought to be: given regulatory heterogeneity to what extent should mutual recognition be introduced? In other words, to what extent should a decentralised approach to regulation be accompanied by a reallocation of jurisdictional authority?
6.MR-based laws in the EU or currently negotiated bilateral MRAs do not generally apply mutual recognition in its "pure" form: full unhindered rights of access reflecting full reallocation of authority from the host to the home jurisdiction. Instead they vary in their regulatory scope and usually leave residual powers to the host state; they involve mutual monitoring between regulatory authorities as well as enhanced co-operation; and they require stringent ex-ante and ex-post conditions. In short, what I will refer to here as "managed mutual recognition."
7.This paper is organised as follows. First, I will argue that the world of commercial diplomacy is changing faster than our conceptual lenses to apprehend it: we need to move from a view of mutual recognition as a "residual" alternative to national treatment and harmonization to a central paradigm. I will then suggest how the basic arguments for and against the adoption of mutual recognition need to be used in this light and in doing so present the case for managed mutual recognition. Section III turns from a normative to a positive approach and draws on the current US-EU MRA negotiations to show how managed mutual recognition is being designed in practice. Section IV suggests ways of anticipating future implementation problems and magnifying liberalisation dynamics. Finally, section V explores the prospect for world-wide mutual recognition of regulatory regimes.
[1] MRAs will be used in this paper to refer to any inter-state agreement involving mutual recognition although the current common use of the term is more narrow.
[2] Throughout this paper I will use the terms national regulatory system or regime to refer to the overall range of national requirements for the sale of goods and services. While recognizing the technical use of the terms regulation to refer to mandatory requirements and standards to voluntary ones, I will sometimes use standards to mean mandatory requirements as is often done in the litterature on standards and international trade.
[3] The formula was originally stated by the European Court of Justice in its Cassis de Dijon ruling of 1979. It is usually used to descibe mutual recognition. See for instance "A proposal for the Trans-Tasman mutual recognition of standards for goods and occupation," 1995.
[4] For a recent overview of these issues see Alan O. Sykes (1995), and comments by NicolaÔdis and Pelkmans therein.
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