Identifying Regulations Affecting International Trade and Investment: Better Classification Could Improve Regulatory Cooperation

Identifying Regulations Affecting International Trade and Investment: Better Classification Could Improve Regulatory Cooperation
by Daniel R. Pérez, Policy Analyst
November 10, 2015

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Abstract

Although technological and political innovations have reduced many of the traditional barriers to international trade and investment flows, regulatory differences between countries persist as lingering barriers to trade. Countries agree that notifying each other of upcoming regulations that may affect international trade and investment is an important mechanism of international regulatory cooperation, which attempts to minimize the creation of unnecessary and costly regulatory divergence. Since 2008 regulatory agencies in the United States have been required to flag regulations they intend to issue that are likely to have an effect on international trade and investment. This paper quantifies how many of the thousands of rules published every year by U.S. agencies are likely to have a significant effect on international trade and investment and analyzes how well agencies are performing at flagging these rules. The results indicate that there is much room for improvement in notifying trade partners and expanding stakeholder participation to improve the outcomes of rulemaking.

Introduction

Technological and political innovations continue to reduce barriers to international trade. As a result, trade accounts for increasingly larger portions of economic output. During the ten years from 2002 to 2012, U.S. exports and imports grew a total of $4.9 trillion – a change from 22.8% of U.S. gross domestic product (GDP) to 31.4% of GDP.[4] Within jurisdictions such as the European Union and the United States nearly a quarter of the goods and services that are available are the direct results of international trade.[5] Additionally, as the level of global market integration increases, markets are now characterized by increasingly complex supply chains[6] which expand the number of countries able to participate in international trade.[7] Although this unbundling and disaggregation of trade is largely responsible for increased competition and lower prices,[8] it also means that country-specific regulations affecting internationally traded goods have the potential to create significant costs, reducing the economic benefits generated through trade.

Innovations within financial markets are also responsible for sizeable gains in the efficient allocation of capital towards its most productive uses via foreign direct investment (FDI).[9]  Although the United States Office of Management and Budget (OMB) points out that “…more attention has been paid to issues of international competitiveness and barriers to international trade than to… impacts on cross-border investment,”[10] regulations that (intentionally or not) restrict FDI can also generate significant costs to the global economy. Within the United States alone, the Department of Commerce (DOC) estimated that as of 2013 U.S. assets of foreign affiliates totaled $3.9 trillion with an estimated yearly inflow of FDI of $166 billion.[11] The greatest portion of these FDI flows are the result of cross-border investments between the U.S. and its largest trading partners – which account for about 80% of new FDI.[12]

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[1] This comment reflects the views of the author, and does not represent an official position of the GW Regulatory Studies Center or the George Washington University. The Center’s policy on research integrity is available at http://regulatorystudies.columbian.gwu.edu/policy-research-integrity.

[2] This research is funded in part by the European Union.

[3] Daniel Pérez is a Policy Analyst at the GW Regulatory Studies Center. Daniel Pérez can be reached at [email protected] or (202) 994-2988. The author is grateful for constructive comments from Susan Dudley, Sydney Allen, and Sofie Miller.

[4]  Government Accountability Office. (2013). International Regulatory Cooperation: Agency Efforts Could Benefit from Increased Collaboration and Interagency Guidance. (GAO Publication No. 13-588). Washington, D.C.: U.S. Government Printing Office

[5]  Morrall, John., III. “Determining Compatible Regulatory Regimes between the U.S. and the EU” U.S. Chamber of Commerce. Advancing Transatlantic Business (2011): 4

[6]  Government Accountability Office (2013)

[7]  For a further discussion of the international trade landscape, including the prevalence of intra-industry trade and multinational firms see: Melitz, Marc J., and Daniel Trefler. 2012. "Gains from Trade When Firms Matter." Journal of Economic Perspectives, 26(2): 91-118.

[8]  Bollyky, Thomas J. “Better Regulation for Freer Trade” Council on Foreign Relations. Renewing America. Policy Innovation Memorandum No. 22. June 2012. http://www.cfr.org/trade/better-regulation-freer-trade/p28508 : “… global production models now dominate international commerce, with intermediate products comprising 56% of global goods trade and 73% of global services trade.”

[9]  José Guimón “Government Strategies to Attract R&D-intensive FDI” The Journal of Technology Transfer, 34(4): 364-379.

[11] U.S. Department of Commerce, President’s Council of Economic Advisers. “Foreign Direct Investment in the United States”. October 2013.

[12] Ibid.


 

This research is funded in part by the European Union.

 


Related:

Commentary, Early Notice from U.S. Agencies Could Help Avoid Creating Barriers to Trade, by Daniel R. Pérez, November 11, 2015

VIDEO: Identifying Regulations Affecting International Trade and Investment: Better Classification Could Improve Regulatory Cooperation from GW Regulatory Studies Center on Vimeo.