A slew of new EU environmental and digital regulations intend to make a global impact. It’s time to start assessing if they will in fact have their desired effect.
After an extended period in which concerns about the costs of European Union regulation seemed almost forgotten, the issue is returning to prominence.
Malaysia and Indonesia said they would delay FTA talks because of the impact of the deforestation regulation, particularly on their smaller companies. Meanwhile, ahead of a critical vote in the European Parliament there were attempts to reduce the burdens imposed by the corporate due diligence regulation.
Complaints about the costs of complying with EU regulations are of course nothing new. Warnings of major negative impacts have however so often turned out to be exaggerated that they may have lost their political salience.
This time may be different, because the underlying purpose of the policy is no longer the same.
EU spreads the costs
Given the EU’s current ‘strategic autonomy agenda’, regulations are designed to be onerous: they aim to leverage EU market power to further the global good.
Where previous regulatory activity with a global ‘Brussels effect’ was typically focused inwards, aimed at for example consumer or environmental protection, or at creating or deepening the single market, today it is more about achieving far-reaching policy goals such as the net-zero transition and creating a level playing field for EU companies.
Sitting behind these measures is a regulatory approach that seeks to tackle policy issues globally while not putting EU-based companies at a disadvantage. That means in effect the hope is that costs are raised equally across the world.
There is thus a greater element of risk that these regulations backfire.
If new regulations prove so onerous that companies choose not to do business in the EU, then they will have failed.
Under the new EU deforestation regulation, companies will only be able to sell agricultural commodities or products into the EU if they vouch that certain EU-determined conditions have been met with regard to land use, the laws of the country concerned, and human rights.
The coming corporate sustainability due diligence directive will require that large companies operating in the EU to monitor global operations in their supply chains regarding human rights, labour laws, and environmental commitments and make directors liable if they fail to take remedial action.
The Digital Services Act applies to companies based outside the EU whose services are consumed within.
Visualising how this way of regulating could go wrong is thus not difficult.
If large numbers of companies decide to avoid the EU, either as part of value chains or for final products, then neither objective will be met.
EU companies as the only ones faced with higher costs will instead be uncompetitive when seeking to export.
MEPs have often voted to make regulations tougher, possibly because domestic companies believe this will help them avoid import competition. This however adds to the overall risk, for the higher the cost of doing business with the EU, the more companies from outside may choose not to bother.
SMEs disadvantaged
Regulations impose proportionately more costs per sale on smaller companies. In the case of extra-territorial measures, this adds to the existing advantages of scale for those already trading.
All these extra production costs and regulatory requirements can act as a disincentive to SME growth, making economies less successful.
Tackling the disproportionate regulatory costs on SMEs has been a reason for a number of trade initiatives including technical standard conformity assessment mutual recognition agreements and free trade agreement chapters dedicated to SMEs.
There isn’t however much evidence that these make a significant difference on the ground.
What has boosted SME trade participation is the EU’s single market, involving outright regulatory harmonisation.
Having the same global rules for products which may be linked to deforestation or to use another example, carbon border adjustment, would in many ways be preferable.
As yet there are few signs that the EU’s global regulations will be directly copied by others, though there are lots of discussions about for example on carbon pricing approaches. Even discussion with friendly countries about how measures will be implemented and whether they might be a basis for their own regulations appears to have been limited.
Without replication of extra-territorial EU measures, further question marks are raised about their implications.
The need to monitor regulation’s impacts
The EU has introduced an elaborate monitoring regime for the functioning of its free trade agreements. And there is a sustainability impact assessment process during FTA negotiations.
In the field of EU regulation, implementation is rolled out in phases. Contrary to FTAs, it is less clear how their success or failure will be measured. And just like for FTAs, their impacts may take many years to materialise.
Difficulties in measuring regulatory impacts are hardly unique to the EU. Across all developed countries there is a challenge in understanding the cumulative effect of government action, which few policy-makers have fully grasped.
To pursue global goals through domestic regulation, as the EU is doing, is another matter.
While it is reasonable to argue that the global nature of the climate emergency and of the internet requires this type of regulation, it should therefore also require an equal commitment to monitor the impacts very carefully.
Policy approaches may need to change in response to what is found. It is unclear the extent to which such flexibility will be possible.
Indonesia and Malaysia have issued a timely warning. Businesses are warning about the potential risks of the EU’s approach.
Public debates about EU unilateral trade measures such as the deforestation regulation and corporate due diligence have been exercises in showing concern about important issues.
What is needed now is to focus on whether they will meet their objectives.
At the very least, just like for FTAs, there needs to be dedicated monitoring of their impacts. Discussions with other countries to avoid multiple clashing regulations should also become a priority for Brussels.
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.
