Archived — Occasional Paper Number 18: Reducing Regulatory Barriers to Trade: Lessons for Canada from the European Experience

by Ramesh Chaitoo and Michael Hart, Center for Trade Policy and Law, Carleton University, February 1998


Summary

The modern nation-state involves a pervasive role for government. Over the past century, as national economies have become more integrated, governments have established a range of regulations and institutional structures to achieve various social, economic and other goals. Until recently, national regulatory structures operated on the assumption that most economic activity took place within the confines of the nation-state, and that the limited activity across national frontiers could be addressed adequately through border regimes.

The balance between domestic and international regimes has shifted. The forces of globalization have made it possible to breach the territorial, economic, social and cultural integrity of the nation-state on a daily basis. An increasing share of national economic activity is conditioned by extra-national transactions and influences; few goods and services and little capital and technology are still produced and consumed wholly within a single national economy. The result is that the national regulatory structures so painfully built up over the past century may now serve more as an impediment to harmonious economic development than as an adjunct or facilitator.

Revolutionary changes in communication and information technologies have made economic production a global rather than national process as firms can now disperse economic activity geographically and bring it together electronically. Advances in information-processing technologies, coupled with remarkable progress in bringing down barriers to cross-border trade and investment, have also led to a quantum leap in the internationalization of the economy. Production is steadily being re-organized on a global or regional basis and the nature of extra-national transactions reflects this change. This new reality is also reflected in progressive trade liberalization through successive rounds of multilateral negotiations and regional free trade agreements. These factors have put significant pressures on national firms to become more efficient in order to compete in the global market.

Canada first responded to the competitive challenge of globalization by entering into a free trade agreement (Canada-U.S. Free Trade Agreement (FTA)) with the United States in 1988. The Agreement has resulted in a significant restructuring of domestic production that in aggregate terms is believed to have boosted efficiency and made Canadian firms more competitive as they produce for a larger market. Previously, most production was segmented in small factories or branch plants of U.S. firms that served the Canadian market only, inside high protective tariff walls. The North American Free Trade Agreement (NAFTA) exposed Canadian companies to further competition, but they were able to adjust and benefit from integrated production at the North American level. Over time, most barriers to trade and production will be phased out and all firms will compete in an integrated North American market.

In addition, the completion of the Uruguay Round of multilateral trade negotiations in 1994 and the creation of the World Trade Organization (WTO) have led to further liberalization of international commerce. Canada was a very active participant in this process and continues to play a significant role in the Organisation for Economic Co-operation and Development (OECD) where intellectual effort is now focusing on extending the rules to new areas such as investment.

Nevertheless, while most of these changes occurred at the border and were initiated at the federal level, barriers to interprovincial trade have persisted in the domestic market. This discrepancy has added to inefficiencies in the internal market because Canadian producers cannot benefit from economies of scale in many sectors. It has also affected the competitiveness of Canadian manufacturers. The problem is especially evident in 10 areas and an attempt was made to address them in the Agreement on Internal Trade in 1995. This paper focuses on regulatory and standards-related barriers to trade and examines the European approach in this area with a view to inform and perhaps improve the Canadian initiatives. The study first reviews the European Union's (EU) program and institutions for the removal of regulatory barriers to trade, then analyzes their relevance to Canadian attempts to promote the freer flow of goods and services across all provinces and territories. Finally, the paper explores policy options for the Canadian context.

For the purpose of discussion, regulatory barriers will refer to impediments to trade caused by differences in regulations as well as impediments created by differences in technical standards. Although the former is usually obligatory or mandatory, and the latter is generally voluntary, they often both have similar trade effects in the real world because once a standard becomes the de facto norm, most manufacturers adhere to the standard.

A regulation is any document that stipulates product characteristics or their related processes and production methods including administrative requirements. A regulation involves mandatory compliance; it is normally imposed by some level of government and is enforceable by law. Regulations might deal with terminology, symbols, packaging or labeling requirements regarding a product, process or production method. A standard is considered a technical specification involving rules, guidelines or characteristics for products or related processes and production methods that has been approved by a recognized standards body for repeated or continuous application. Compliance is not compulsory for a standard.

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