Annex A. Synthesis of advantages and disadvantages of various forms of IRC

The OECD analytical work has identified a number of advantages and disadvantages that may materialise when countries make use of the different approaches to IRC. In particular (OECD, 2013[1]) identified four potential benefits (economic gains; progress in managing risks and externalities across borders; administrative efficiency; and knowledge flow) and four potential costs or obstacles to IRC (the costs of maintaining the co-operation, the flexibility to co-operate, the real or perceived loss of sovereignty; and the implementation bottlenecks). This annex summarises these benefits and challenges as in (OECD, 2013[1]), acknowledging that they do not take place systematically.

The benefits of IRC (OECD 2013)

The literature generally supports the view that regulatory co-operation leads to economic gains through reduced transaction costs and economies of scale. Regulatory convergence is expected to permit firms to “utilize standardized contracts, documents and procedures to achieve economies of scale, reduce search and transaction costs, and simplify bargaining” (Lazer, 2001[2]). Identical regulations should help reduce the cost of production by allowing companies to maintain single production processes, rather than multiple processes to accommodate for multiple standards regimes (Drezner, 2008[3]). The decrease in marginal costs for firms resulting from increased regulatory co-operation will in turn generate an increase in consumer surplus and social welfare (e.g. through greater product choice, lower prices, faster access to new products) (Abbott and Snidal, 2000[4]). Similarly, increased information sharing allowed by greater co-operation should lead to a decrease in domestic funds spent on duplicative scientific and policy research, freeing resources that in turn could be allocated to more efficient uses. Regulatory co-operation can improve market access and increase trade and investment flows. As noted by (Drezner, 2008[3]), “uncoordinated, disparate regulatory structures function as implicit barriers to trade”.

Where externalities are of a global nature, regulators will not be able to address them from a pure domestic angle. Typically, the ability to adequately regulate industrial pollution, trade in hazardous chemicals, infectious diseases, climate change and effectively manage cross-border risks will require co-ordination across neighbouring countries to ensure effectiveness of regulatory measures. If not, the regulatory measures risk being misdirected, inefficient or not adapted. Without even mentioning the management of global goods, in today’s global world, policies adopted in one jurisdiction are likely to have strong extra-territorial implications, to the extent that it may become almost impossible for certain national policy objectives to be achieved without careful consideration of the international context. According to (Esty and Geradin, 2000[5]), if regulators ignore impacts beyond their own jurisdiction the standards they set will be systematically suboptimal (too low if they overlook transboundary regulatory benefits and too high if they disregard transboundary regulatory costs). This may prompt regulators to co-operate in order to achieve national regulatory objectives that are strongly affected by freer movement of goods, services and people. In addition, regulatory co-operation may enhance compliance and reduce the risks of a race to the bottom, overall amplifying the impact of domestic regulation.

Work-sharing across governments and public authorities, in which countries co-operate to address similar problems, including at bilateral, regional and multilateral levels may lead to important administrative cost savings that allow countries to rationalise the context of their own regulatory programmes and reallocate scarce public resources to areas of higher priority. Regulatory co-operation “may exploit the commonality of issues facing regulators at all levels of government, reduce the “learning curve” with respect to new or emerging concerns, increase the speed and effectiveness of regulatory action on cross-border issues, and permit efficient use of scarce information and analytical resources” (OECD, 1994[6]). Greater transparency may also provide opportunities for more efficient administrative relations with other countries, for instance, through simplification and harmonisation of administrative procedures. The gains may be specific and measurable, or they may be achieved less directly, for instance, through better understanding of the complex interplay between multiple policy goals, which may facilitate national decision-making and policy co-ordination.

Transferring good regulatory practices is an important benefit of IRC. IRC facilitates the exchange of information on regulatory practices between countries with different policy experience the access to good practices, making it a capacity building tool. This result reflects the findings in the literature. (Meuwese, 2009[7]) for instance finds a convergence on norms of standard-setting and regulatory impact assessment through enhanced dialogue between the EU Commission and the US Office of Management and Budget. The horizontal dialogue has both learning (exchange of best practices) and facilitative (reducing trade obstacles and improve sector-specific regulation) aspects. Similarly, according to (Raustiala, 2002[8]), transgovernmental networks allow “regulatory export”, i.e. the export of regulatory rules and practices, which promotes regulatory convergence across states through “network effects”. This effect can help build bureaucratic capacity in weaker states, which, in turn, can improve domestic regulation and support regulatory co-operation.

The costs and challenges of IRC

Costs involve the direct costs of the co-ordination infrastructure, i.e. of the IGO, of the secretariat established to manage treaties, of the institution managing the network and of the co-ordinated action. In addition, there is a number of direct and indirect costs related to the development of the co-operation and any change in the domestic status quo that co-operation with other jurisdictions may require. The costs for the governments include the time and resources that must be invested in the necessary political capital to make legal and administrative reforms happen, to mobilise bureaucratic actors, to lobby legislatures, and to mollify interest groups. The indirect costs relate to private actors having to retool their operations in order to comply with new regulations.

Differences between countries in their regulatory procedures and/or legal systems or traditions may significantly complicate efforts to overcome regulatory divergence. In some cases, regulatory paths are already deeply entrenched making rapprochement difficult. If not insurmountable, lack of regulatory flexibility can be a substantial impediment to IRC. This can take several forms, ranging from differences in approaches to key regulatory concepts and issues, to variations in institutional set up that make the relationships unbalanced. Legal obstacles to information sharing are presented as recurrent obstacles to co-operation. Closely related, the confidentiality of business information remains an important bottleneck, with firms often reluctant to see their product information shared between governments at the pre-market review stage.

Significant hurdles often arise in cases where regulatory co-operation is seen as compromising the principle of regulatory sovereignty or as insufficiently tailored to the needs of a given State or region. Even the application of usually non-controversial procedures can in some cases become sensitive, if they are interpreted as compromising key national interests or values. A number of scholars focus on the impact of delegation of regulatory powers on accountability. (Howse, 2012[9]) for example highlights inherent issues of democratic deficits arising from a delegation of powers, which takes place when co-operative regulatory activity is authorised by constitutional representative institutions. Making regulatory co-operation more transparent would help solve this dilemma. However, this may come at the price of reduced effectiveness of regulatory co-operation because the common advantage of informal give-and-take in a climate of trust would be restricted. In practice, the debate on national preferences and the preservation of sovereignty can be a lively one. At the same time, in a number of IRC experiences, some loss of sovereignty and/or sharing of competences is perceived as being balanced by a stronger international position, i.e. the Nordic Cooperation, the Australia-New Zealand co-operation and the Benelux Union.

The political economy of regulatory co-operation like any co-operation agreement across states and other stakeholders is complex. A number of factors combine. According to (Lazer, 2001[2]), States may not harmonise because 1) they are battling over the gains of harmonisation; ii) the actual transaction of reaching a compromise is complex, or iii) political elites gain political rents from non-harmonisation. In some cases, the co-operation may collapse because it is deemed captured by specific interest and it loses its credibility. Co-operation will not be sustainable if it is not perceived as mutually beneficial to all participating countries. However, the costs and benefits of IRC may not be spread equally across countries, giving different incentives to partners to co-operate. Some of the benefits may also not be easily appropriable by countries and while IRC may be beneficial overall, countries may not factor in the global good. In addition, when countries work together, there is always the possibility of “free-riding”, i.e. that some countries derive the benefits without incurring the cost of co-operating. This may typically happen in a number of environmental issues, including climate change for which the temptation of free-riding is significant and the burden of action does not fall equally on all, prompting discussions of compensation mechanisms.

Beyond the signing of agreements and the high level commitment to regulatory co-operation, concretely implementing IRC may be strewn with obstacles. This is an area where case studies are helpful to identify the concrete challenges that implementing IRC may generate. Challenges may be related to a difficult enforcement of the IRC agreement or to a lack of effectiveness of the agreement to achieve its objectives. According to (Levy, 2016[10]), the effectiveness of co-operative arrangements is in turn affected by two factors: on the one hand the comprehensiveness of coverage and, on the other hand, rule credibility. Rule credibility can be further broken down into: i) rule process legitimacy; ii) monitoring quality; iii) enforcement quality; and iv) monitoring and enforcement legitimacy.

The strengths and weaknesses of various IRC approaches

Beyond the generic benefits and challenges of IRC highlighted in the literature and identified above, each specific approach to IRC has strengths and weaknesses (Table A A.1).

Table A A.1. Advantages and disadvantages of various IRC forms
Type of mechanism	Advantages	Disadvantages
Integration / harmonisation	The rules are the same for all. Compliance is the greatest. Supranational modes of governance are less likely to regulatory capture than networked forms.	Long process. Costs of the structure and of enforcement. Extensive delegation may be perceived as threatening the popular legitimacy of the mechanism.
Regulatory partnerships between countries	High-level engagement provides a strong signal that supports greater co-operation at lower levels (between regulators). Evidence that such partnerships avoid race to the bottom type of effects. Co-operative agreement that provides a flexible mechanism to address necessary evolution in the partnership.	The federal-only nature of the regulatory initiatives may generate difficulty to address regulations at different levels of jurisdiction.
Intergovernmental organisations	Provide platforms to promote continuous dialogue and anticipate emerging issues. Laboratory of co-operation experiments, laying the groundwork for broader and legally binding international agreements.	May be perceived as talk shops where progress is slow to materialise. Some weaknesses in enforcement and compliance.
Regional agreements with regulatory provisions	Legal force and direct connection to trade and economic integration. Regional agreements offer deeper levels of integration and a higher degree of co-operation than bilateral agreements. They offer economies of scale in enforcement.	May lead to a proliferation of provisions with limited consistency.
Area-specific legally binding agreements	Legal force	Lack of enforcement in some cases. Bilateral agreements may not be sufficient to ensure proper co-operation where multilateral co-ordination is needed (tax matters).
MRA (mutual recognition agreements)	Preserve State sovereignty in rule making and induces minimal adjustment costs. Reduce duplication efforts. May constitute a useful precursor to harmonisation.	The time and cost required to negotiate MR agreements can be high. MRAs require broadly similar regimes and extensive trust between parties and discussions every time changes occur in regulations in one of the co-operating party. Lack of enforcement (some MRAs between the EU and the United States are not enforced). Robust mechanisms need to be established and maintained to deal with disputes.
Transgovernmental networks	Low-cost, flexible and adaptable / scalable structures, which foster experimentation and innovation. Network regulation supports trust building, technical approaches and may help avoid race to the bottom issues.	Enforcement and monitoring may be limited owing to a lack of legal basis – mainly based on reputational aspects. The informal nature of regulatory networks is likely to mask unequal power relationships and may strengthen the already powerful regulatory powers. May facilitate exclusion and make monitoring and participation by other officials and non-state actors difficult. Technocratic governance risks supporting the development of a regime with little or no public check on administrative action.
Transnational private regulation	International standardisation can lead to standards and references that are globally accepted by all stakeholders. Enforcement based on contracts and market/reputation pressure is effective in global value chains that extend to countries in which the rule of law is not entirely complied with. Allow heavy reliance on private expertise, which is relevant in markets where the pace of technological change is fast and highly technical information is needed for the definition of implementing measures and technical specifications; and private actors are the most informed parties or the best positioned players to solve a given failure.	Proliferation and fragmentation of private schemes (despite the consolidation under way). The standardisation process tends to be slow and to enshrine existing technical practice. Uncertainty on the performance and on the conditions under which private schemes can constitute a suitable solution to achieve public goals. Lack of accountability mechanisms and under use of better regulation instruments. In some instances, private schemes may fail to achieve comprehensiveness and become clubs of specific interest.
Soft law: guidelines, peer review mechanisms	Flexible tools that can be adapted easily to new and emerging areas / issues.	Compliance and enforcement may be difficult. Countries may feel free to adopt parts of the international instruments and ignore others.
Informal exchange of information	Low-cost mode of IRC, allowing the sharing of practices and to establish common understanding and language on issues. It can help build trust among regulators and provides early warning systems. It fosters regulatory transparency and may help reduce compliance and administrative costs. It is especially effective at bringing regulators together in new fields of regulation where common terminology and approaches need building from the onset.	There is a risk that the co-operation never becomes operational and remains a high-level discussion. The lack of implementation and compliance mechanisms may make this co-operation slow moving and frustrated parties may drop off.
Source: (OECD, 2013[1]).

References

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[9] Howse, R. (2012), “Transatlantic regulatory cooperation and the problem of democracy”, in Bermann, G., M. Herdegen and P. Lindseth (eds.), Transatlantic Regulatory Cooperation: Legal Problems and Political Prospects, Oxford University Press, https://doi.org/10.1093/acprof:oso/9780198298922.003.0027.

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