The EU sees opportunity in global regulatory leadership through the so-called Brussels Effect. But the attempt to deliberately control what has hitherto been largely market-driven is far from guaranteed to be a success.
The EU trade policy toolbox is growing under this Commission. The previous focus was primarily on liberalisation through new free trade agreements and market access, with protection via trade defence instruments. Now the emphasis is changing.
Already protection has been supplemented by Denis Redonnet’s new role as Chief Trade Enforcement Officer in the European Commission. Agreement on the International Procurement Instrument seems to be getting closer. The text for the proposed Carbon Border Adjustment Mechanism was published in July, and that for the new anti-coercion instrument is expected in the coming months.
Meanwhile little is happening in terms of traditional trade liberalisation. But the EU has discovered something it hopes will help, in the form of the so-called ‘Brussels Effect’.
First propounded by academic Anu Bradford in a 2012 article, and expanded to a book last year, this suggests that EU regulations become de facto global norms due to a combination of market size and strict regulation.
Of late, increasing numbers in Brussels have seen this as an opportunity – and indeed a justification – that they can regulate extensively in the knowledge that there will be no adverse effects. Indeed EU business will benefit as they recoup extra costs through foreign expansion when other countries regulate in similar ways.
Last week’s Strategic Foresight Report suggested that the EU was “in competition for ‘first mover’ advantage in standard setting” and in a good position because of the Brussels Effect.
But the attempt to deliberately control what has hitherto been largely market driven is far from guaranteed to be a success, and could even unwind some of the effect.
The Brussels Effect: market-led and not universal
Those EU regulations that are nowadays cited most often as having global impact, REACH and GDPR, were the subject of considerable discussion before being adopted. They were seen as too onerous and expensive to implement.
However, their breadth and depth also made them something of a gold standard, particularly given no comparable US regulations. Once compliance costs were incurred for the EU market there were strong grounds for believing other countries should accept it was not necessary to have significantly different requirements.
The concept of data adequacy helped enshrine the status of the GDPR, but the Brussels Effect predominantly operated according to market logic. It was clearly in the interests of major companies to lobby for similar approaches in other countries.
This has not been universally seen in different sectors. Regulations around food safety continue to differ around the world, partly because major exporters are more easily able to differentiate production by market.
Meanwhile for major industrial products such as cars there continue to be multilateral standard-setting bodies like UNECE, combined with differentiated local application. Some of this local divergence has been addressed in EU free trade agreements.
Future aims are unclear between regulations and standards
The aforementioned Strategic Foresight Report mentions the Brussels Effect in the context of standard setting particularly in emerging areas such as artificial intelligence of green technologies. However, the Brussels Effect primarily applied to regulations rather than to voluntary standards.
Indeed, the setting of voluntary standards, as opposed to mandatory regulations, is not handled by the European Commission but by European standardisation bodies. These have been relatively successful in seeing the resulting standards adopted by the International Standardisation Organisation, but this isn’t really the Brussels Effect. It also doesn’t necessarily advantage companies in the same way.
It is important to be clear about what the EU is trying to achieve in the area of standardisation. There seems to be a broad belief that the aim is to have European rather than Chinese standards adopted at global level – but this says little about the regulations that will reference the standards. It is not clear that the EU will be disadvantaged by Chinese standards.
It may be that what the EU is seeking to do is ensure that its future regulations in such emerging areas are adopted by other countries. If this is the case, then being the main trading partner of other countries and being open to trade is likely to be more important.
Deliberate extra-territorial intent will face resistance
In 2008 the EU set out to include aviation within the Emissions Trading Scheme, with a 2012 commencement date for foreign airlines to buy aviation permits. Yet an effective campaign by third countries, using commercial pressure, in effect prevented implementation. The issue was passed on to the International Civil Aviation Organization to craft an international scheme.
This illustrates likely resistance to explicit extra-territorial regulation. The Brussels Effect seems to work most effectively for large scale regulation where compliance costs to sell into the EU market create an incentive for companies to seek similar in other markets.
It is not obvious that the future regulation of artificial intelligence will offer the same opportunity.
Even the suspicion that future EU regulation has extra-territorial intent is liable to create tension, or an incentive on the part of others to seek to move ahead of the EU. There is a risk that future EU regulations prove to be expensive and not globally transferrable, reducing competitiveness. Alternately we may see regulations follow regional trade areas, with those from the EU distinct to US and China-led alternatives.
At the very least Brussels cannot assume that the Brussels Effect is a magic weapon for all circumstances. As the warning goes: past results are no guarantee of future performance.
David Henig runs the column ‘Perspectives’ on the politics of global trade for Borderlex. He is also a UK director at the think tank ECIPE.