According to the Economist, Europe is beating the US in setting standards for products and services, because firms prefer rules that are certain, even if they are burdensome, to having to conform to different rules for different markets. Until now British liberals and multinational firms had argued that the eurocrats were unduly imposing costly overregulation, but they now seem to be swimming against the tide.
Perhaps it was this summer's massive Chinese toy recall (because they were hazardous to children) that made change their minds on both sides of the Atlantic. In times of international outsourcing and globalization of production, global brands cannot allow cheap products to become synonymous with unsafe products. If this happens, it's because rules do not apply to all in the same measure and monitoring is found wanting. A global competition driven by the race to the bottom on standards is as distorting as dumping in international markets. That's why the American approach, based on few standards and ex post sanctions by consumers in the form of class action suits, no longer seems satisfactory.
Who sets standards and makes sure they are respected? Coalitions of consumer countries? International organizations such as FAO or the WTO? Or the market, i.e. firms themselves, monitored by national authorities? All these solutions are being pursued today, with significant confusion. But a unilateral standard set by a major economy has a chain-reaction effect: also firms that are external to its jurisdiction find convenient submitting to that standard, as the Economist was reporting. As for market self-discipline, it doesn't currently enjoy good press, after the financial crisis triggered by defaults on subprime mortgages. As for environmental standards, international organizations are probably best equipped to establish those.
A similar line of reasoning can be made for market rules, such as antitrust regulations and accounting standards, as well as norms on corporate governance, such as the ones introduced in the US by the Sarbanes-Oxley Act, in the aftermath of the Enron scandal. In this case, it's Europe having to align itself to norms on corporate transparency and ethical rigor being adopted on the other side of the Atlantic. However, several European corporations have decided to stop being listed at Wall Street, because conforming to SEC standards was considered too onerous. A turning point could be the proposal made by Chancellor Merkel, which calls for EU-US harmonization of rules industry by industry. If this occurred, nobody would be able to resist the standards momentum set in motion by the two world's biggest markets. The idea sounds good, especially if firms will be involved in the process. They will appreciate the effort toward legal convergence and reciprocity, which brings uniform and efficient market standards and regulations. After an initial favorable response on the American side, the idea seems to have vanished from the international agenda. But the need for it remains all the same.
by Giorgio Sacerdoti,
Full Professor of International Law, Università Bocconi,
and President of Appeal Court, World Trade Organization