1. Introduction
In recent years, many domestic regulations have been challenged under international trade agreements or international investment agreements, on the basis that they discriminate de facto against foreign goods, services, or investors, or that they fail to meet other standards required by international economic law, such as the ‘fair and equitable treatment’ of foreign investors. Measures that have recently been challenged under such agreements include tobacco control policies,Footnote 1 energy regulations,Footnote 2 and animal welfare protections.Footnote 3 These disputes have raised concerns that international economic law is increasingly and unjustifiably encroaching on the domestic regulatory autonomy of states.Footnote 4
Yet, in parallel with these concerns regarding regulatory autonomy, there has been a considerable push for new or additional obligations to be included in trade and investment agreements to promote ‘regulatory coherence’ or ‘regulatory cooperation’. In the search for deeper economic integration, parties to preferential trade agreements (PTAs) are seeking to reduce the burden on international trade and investment imposed by unclear, inefficient, or divergent regulations. Chapters on these topics have been proposed for inclusion as part of ‘ambitious’, ‘high-standard’ or ‘twenty-first century’ PTAs, such as the Trans-Pacific Partnership Agreement (TPP) and the Transatlantic Trade and Investment Partnership (TTIP).Footnote 5
As a result of these developments, an inherent tension arises in the treatment of regulatory barriers in new PTAs. Many states are seeking greater coherence and harmonization of domestic regulatory regimes in order to facilitate international trade and investment. This would (appear to) create more international obligations with which nations must comply when adopting domestic regulations, and could therefore be seen to further erode regulatory autonomy. In response to these concerns, states negotiating these provisions stress that cooperation on regulatory matters does not mean that each party is surrendering its right to regulate or its ability to decide on the appropriate level of protection for public goods such as the environment or public health. Moreover, it is suggested that the promotion of ‘good regulatory practices’ will lead to more transparent and efficient regulations, which will better achieve the social policy outcomes sought by the regulating state.
This article addresses one important aspect of the relationship between regulatory coherence and regulatory autonomy in PTAs, which has received little attention to date. It considers whether provisions on regulatory coherence – particularly those relating to ‘good regulatory practices’ – are likely to affect whether measures states enact for the protection of public health, the environment or other social values are consistent with their substantive trade and investment obligations. Put another away, this article examines whether complying with these ‘good regulatory practices’ may help to ensure that the measures adopted by parties to a PTA will be able withstand a challenge under core provisions of these agreements, such as non-discrimination, fair and equitable treatment, or expropriation obligations.
The article begins, in Section 2, by defining regulatory coherence and considering how it has become a prominent part of the negotiating agenda of PTAs. International organizations such as the Organization for Economic Co-operation and Development (OECD) and the Asia-Pacific Economic Cooperation (APEC) forum have been promoting regulatory reform for decades, and part of their work has included highlighting how the improvement in domestic regulatory processes can promote international trade and investment. Section 3 then examines the scope and nature of the regulatory coherence provisions that have been, or may be, included in PTAs. Much of the literature considering regulatory coherence has focused on the TTIP or the Comprehensive Economic and Trade Agreement (CETA), as these agreements are considered the most likely to include integration between the parties through institutional cooperation on regulatory matters, and harmonization or mutual recognition of standards. This article, however, focuses on the regulatory coherence provisions included in the TPP. These include novel obligations to improve domestic processes for developing regulations, such as encouraging transparency, participation, and rigorous regulatory impact assessments (RIAs) (in other words, promoting ‘good regulatory practices’).
Section 4 of the article considers, at a high level, how regulatory coherence provisions may affect regulatory autonomy. It introduces the analysis set out in Section 5, which identifies ways in which good regulatory practice, such as RIAs, may be relevant to substantive trade and investment obligations, such as non-discrimination provisions or general exceptions clauses. It considers how likely it is that compliance with optimal regulatory procedure will assist a state in defending a regulatory measure, should a dispute arise. This part examines relevant case law from the World Trade Organization (WTO) and international investment tribunals, noting that best practice for the development of regulations is relevant to, but certainly does not guarantee, compliance with substantive trade and investment obligations.
2. Regulatory coherence and its relationship to international trade and investment
With the decline of tariffs, quotas, and other obvious barriers to international trade, attention has shifted to ‘behind the border’ measures and regulations that may burden the exchange of goods or services.Footnote 6 These include technical barriers to trade, such as labelling requirements and product standards, as well as other domestic regulations that may incidentally affect imported goods or services. Similarly, as examples of overt discrimination against foreign investors or nationalization of their property have become rarer,Footnote 7 more international investment cases have related to regulations or administrative actions by government, and whether these can amount to an ‘indirect expropriation’ or fall short of the requirement of ‘fair and equitable treatment’.
Reflecting this shift in focus to regulatory barriers to trade and investment, a number of recent PTAs have included obligations relating to the development of domestic regulations. The CETA between Canada and the European Union (EU) and the TPP, both of which are currently being finalized, contain chapters on regulatory cooperation or coherence (respectively),Footnote 8 while ‘regulatory coherence’ is one of the key ‘cross cutting’ elements of the TTIP negotiating agenda.Footnote 9 Yet, while the term ‘regulatory coherence’ is frequently being used in discussions of PTAs, it is not often clearly defined.Footnote 10 In the context of the TTIP, regulatory coherence has been included within the theme of ‘regulatory issues and non-tariff barriers to trade’ and explained in the following terms:
The Agreement will include cross-cutting disciplines on regulatory coherence and transparency for the development and implementation of efficient, cost-effective, and more compatible regulations for goods and services, including early consultations on significant regulations, use of impact assessments, evaluations, periodic review of existing regulatory measures, and application of good regulatory practices.Footnote 11
Early documents relating to the TPP referred to ‘regulatory coherence’ simply as ‘[c]ommitments [that] will promote trade between the countries by making trade among them more seamless and efficient’.Footnote 12 The text of the TPP at the conclusion of negotiations describes regulatory coherence as ‘the use of good regulatory practices in the process of planning, designing, issuing, implementing and reviewing regulatory measures in order to facilitate achievement of domestic policy objectives, and in efforts across governments to enhance regulatory cooperation in order to further those objectives and promote international trade and investment, economic growth and employment’.Footnote 13
This broad notion of ‘regulatory coherence’ builds on the ‘regulatory reform’ movement, which has been encouraged by bodies such as APEC and the OECD.Footnote 14 ‘Regulatory reform’ includes ‘changes that improve regulatory quality to enhance the economic performance, cost-effectiveness, or legal quality of regulations and related government formalities’.Footnote 15 While the benefits of these goals may appear self-evident, it is worth drawing out how they link to international trade and investment, and, as a result, how they have come to be seen as within scope of PTAs. As Thomas Bollyky has succinctly explained, in a globalized economy:
Unclear, excessive, or duplicative regulatory requirements can impede new global production. In unbundled global supply chains, intermediate services and parts crisscross borders multiple times. As the number of countries and transactions multiply, so do the costs of inefficient and divergent regulations.Footnote 16
This statement reveals three means by which regulatory requirements, even if they are non-discriminatory, may affect international trade and investment:Footnote 17
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1. lack of transparency or clarity regarding the measures applicable to exports, imports, or foreign investments;
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2. excessive, inefficient, or ineffective regulations, which impose costs on business that are not commensurate with their purpose or benefits; and
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3. differences between the regulatory regimes of jurisdictions, which increase compliance costs and may deter businesses from entering new markets or increase the prices of their goods/services when they do enter a market.
The first and second of these issues – transparency and efficiency of regulations – relate to the quality of design and implementation of regulations. The actions needed to address these problems are largely procedural and include comprehensive RIA processes, public consultation, periodic review of existing administrative requirements, and timely publication of regulations.Footnote 18 The OECD defines RIA as ‘a process of systematically identifying and assessing the expected effects of regulatory proposals, using a consistent analytical method’.Footnote 19 A key emphasis of the OECD, and other bodies promoting regulatory reform, is the need for science or evidence-based decision-making, particularly in relation to public health, safety, and environmental protection.Footnote 20 These elements of regulatory reform are likely to benefit a state's economy generally, in addition to promoting foreign trade and investment. However, as lack of transparency and poorly designed regulations may be ‘particularly burdensome for “outsiders”’,Footnote 21 these subjects can be seen as being relevant in the negotiation of PTAs.Footnote 22
The third issue identified above – differences between the regulatory regimes of different jurisdictions – is clearly related to prospects for international trade and investment. The importance to trade of removing divergence between regulatory regimes has been recognized for some time, and several of the agreements of the WTO include provisions that are designed to promote harmonization of regulations.Footnote 23 This is particularly visible in relation to sanitary and phytosanitary (SPS) measures and technical barriers to trade (TBT). Article 3.1 of the SPS Agreement requires WTO Members to base relevant measures on international standards or guidelines (although Members may choose to adopt a higher level of protection in certain circumstances),Footnote 24 while Article 2.4 of the TBT Agreement promotes the use of international standards as a basis for technical regulations, such as mandatory product labelling schemes or content requirements.Footnote 25 Building on these obligations, many states have recognized the potential benefits for international trade of encouraging harmonization of regulations.Footnote 26 Harmonization can occur through the adoption of particular standards that have been agreed internationally, as is promoted by the SPS and TBT Agreements, or through similar regional or bilateral efforts.Footnote 27 If harmonization of standards is not politically or technically feasible, mutual recognition arrangements for certification or licensing requirements could be used as an alternative approach.Footnote 28
Thus, ‘regulatory coherence’ in the context of a PTA could involve several different aspects: transparency, the efficiency and quality of regulations, and harmonization of regulatory standards across jurisdictions.Footnote 29 In the following section, we consider how these different elements of regulatory coherence may be incorporated into PTAs, with a particular focus on the ‘good regulatory practices’ that have been incorporated in the TPP.
3. Regulatory coherence and the promotion of ‘good regulatory practices’
Elements of regulatory coherence in PTAs
Chapters on regulatory coherence have not usually existed in PTAs to date, although some elements of the concept have been present. In particular, transparency obligations have a long history in international trade agreements and are increasingly featured in investment agreements.Footnote 30 The General Agreements on Tariffs and Trade (GATT) agreed in 1947 and now incorporated in the GATT 1994 includes notable transparency requirements in Articles X:1 and X:2, while the more recent WTO Agreements include similar obligations to publish relevant measures in a timely fashion.Footnote 31 Transparency has received even greater attention in recent PTAs, with chapters being devoted to establishing how states are expected to ensure that importers, exporters, and investors understand relevant aspects of the regulatory environment in which they are operating. For example, Chapter 21 of the Korea – United States Free Trade Agreement includes provisions requiring measures of general application to be published in advance, with an allowance for public comment, and for such measures to be administered impartially, with adequate review and appeal mechanisms.Footnote 32 Similar chapters are found in a range of other PTAs, including the ‘P4 Agreement’ (the precursor to the TPP).Footnote 33
In addition to transparency provisions, another element of regulatory coherence that can be found in some existing PTAs is mutual recognition arrangements.Footnote 34 A leading example is the 1983 Australia – New Zealand Closer Economic Relations Trade Agreement (ANZCERTA).Footnote 35 In 1996, the parties created a mutual recognition arrangement for product standards and occupational qualifications.Footnote 36 With limited exceptions, this mutual recognition arrangement provides that goods that may be sold legally in Australia may also be sold in New Zealand (and vice versa), while the professional qualifications earned in one jurisdiction are also automatically recognized in the other.Footnote 37 In some areas, these two nations have gone even further towards harmonization of the substance of regulations. In 1995, they created a joint regulatory agency for food standards, and in 1999 they adopted the Australia–New Zealand Food Standards Code.Footnote 38 The Association of Southeast Asian Nations (ASEAN) has also established significant avenues for regulatory cooperation, based on the 1998 Framework Agreement on Mutual Recognition Arrangements.Footnote 39 Under that framework, the ASEAN nations have reached mutual recognition arrangements relating to medical services, tourism professionals, architecture, accountancy, and other areas. These arrangements have been complemented by efforts to harmonize standards and conformity assessment procedures through the ASEAN Consultative Committee on Standards and Quality.Footnote 40 While these two examples illustrate that harmonization of standards and the adoption of mutual recognition arrangements are not entirely new or novel for PTAs, they also demonstrate that this is most likely to occur where a high degree of economic and political integration already exists between the parties.
The provisions contained in regulatory coherence or cooperation chapters that have been negotiated or are currently under consideration in contemporary PTAs broadly fall into three categories:
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1. requirements relating to domestic processes for the adoption, enactment, and administration of regulatory measures (in other words, good regulatory practices);
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2. the establishment of procedural or institutional frameworks to promote cooperation on regulatory matters, such as making information used in risk assessment available to the other PTA parties or the establishment of regulatory councils to provide an ongoing forum for cooperation (these provisions have been characterized as ‘loose’ or shallow forms of regulatory cooperation); and
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3. substantive harmonization of standards, creation of mutual recognition arrangements or similar requirements to recognize equivalency of regulations (a deeper form of regulatory cooperation).Footnote 41
In the following sections, we examine which of these categories of regulatory coherence provisions have been or are likely to be included in each of CETA, TTIP, and TPP. While all of these agreements will contain some requirements relating to domestic regulatory processes (the first category of measures) and ‘loose’ or shallow forms of regulatory cooperation (the second category of measures), the inclusion within ‘good regulatory practices’ of broad requirements relating to RIA appears to be a relatively unique element of the TPP.
Regulatory coherence and cooperation in CETA and TTIP
Much of the attention given to the concept of ‘regulatory coherence’ in PTAs to date has focused on the inclusion of shallow or deep forms of cooperation – the second and third categories identified above – in agreements such as CETA and TTIP. In the EU's relations with each of Canada and the United States (US), unnecessary divergences between regulatory regimes are seen as a significant impediment to international trade.Footnote 42 As a result, in both CETA and TTIP there has been a focus on mechanisms to promote substantive harmonization of standards where possible, or at least greater cooperation in the development and implementation of regulations. For example, the regulatory cooperation chapter of CETA includes provisions relating to consultation and information exchange, promoting compatibility of regulations, the establishment of a ‘Regulatory Cooperation Forum’, and the mutual acceptance of the results of conformity assessment procedures.Footnote 43 While TTIP is still under negotiation, a textual proposal for the regulatory cooperation chapter, made public by the EU in May 2015, includes the establishment of a regulatory cooperation body, as well as information and regulatory exchanges and the promotion of regulatory compatibility.Footnote 44 Thus, establishing at least some ‘loose’ mechanisms to promote regulatory cooperation, with deeper integration where possible, is likely to be an important goal in both CETA and TTIP.
With regard to domestic regulatory processes, the emphasis of both CETA and TTIP is likely to be on procedural requirements, such as ensuring transparency and notice and comment periods for proposed measures. Perhaps because of the important procedural and substantive differences that exist between the regulatory regimes in the EU and North America, it is unlikely that either CETA or TTIP will contain many provisions relating to the content of domestic RIA and decision-making.Footnote 45 Unsurprisingly, given that it was the first PTA to include a chapter on regulatory coherence or cooperation, the CETA does not contain any provisions referring to good regulatory practices. It does, however, include ‘promot[ing] transparency and predictability in the development and establishment of regulations’ as well as ‘enhanc[ing] the efficacy of regulations’ as objectives of the regulatory cooperation provisions.Footnote 46
The EU's textual proposal for the TTIP contains two requirements under the heading of ‘good regulatory practices’, which focus on ensuring transparency early in the process of developing regulations and providing opportunities for stakeholder consultation.Footnote 47 More interestingly for present purposes, the following sub-section of the EU's proposal for TTIP includes some limited obligations relating to domestic RIA processes. The EU and US would affirm their intention to carry out RIA in accordance with their respective rules and procedures, but with the added requirement that when evaluating options under consideration the parties will examine ‘relevant international instruments’, the ‘regulatory approaches of the other Party’, and the ‘impact on international trade and investment’.Footnote 48 Notably, each of these requirements for RIA explicitly relate to international cooperation. While the TTIP is yet to be finalized, the EU proposal provides a strong indication that its provisions relating to RIA and domestic decision-making on regulations will go well beyond what is in CETA, but will still be limited to requiring consideration of relevant comparable measures and international impacts. As will be shown in the following section, neither the TTIP nor CETA contains the same broad requirements for ‘good regulatory practices’ as the TPP.
Regulatory coherence in TPP and ‘good regulatory practices’
On 5 November 2015, the TPP negotiating parties released the full text of the agreement, although the treaty is yet to be signed and the text is subject to legal review.Footnote 49 While the full text of the agreement occupies thousands of pages, the regulatory coherence chapter is brief. Its key elements are: (i) the establishment of domestic coordination and review processes;Footnote 50 (ii) implementation of good regulatory practices (particularly RIA);Footnote 51 (iii) the creation of a committee to provide an institutional framework to oversee implementation of the chapter;Footnote 52 and (iv) cooperation activities among the parties.Footnote 53 The text also makes repeat mention of the need to provide opportunities for the involvement of ‘interested persons’ of other TPP parties.Footnote 54 The scope of measures that will be subject to the regulatory coherence obligations is flexible, and may be chosen by each TPP party, subject to the proviso that ‘each Party should aim to achieve significant coverage’.Footnote 55
The creation of a Committee on Regulatory Coherence, and requiring the parties to cooperate to implement the chapter, are either ‘loose’ or shallow forms of regulatory cooperation. While these provisions may provide a framework for future integration and the reduction of regulatory divergence among TPP parties, in their current form they are very general provisions, which provide little specificity or concrete vision for what that future cooperation might entail. For example, the TPP chapter makes no mention of even the possibility of mutual recognition of regulatory measures.Footnote 56 Thus, while the TPP contains some regulatory cooperation elements, these provisions are not particularly innovative or far-reaching, when compared with those expected to be incorporated in CETA and TTIP.
In contrast, we suggest that the novel requirements of the TPP relating to ‘good regulatory practices’ are the more significant element of the regulatory coherence chapter, at least in relation to the regulatory autonomy of states.Footnote 57 All TPP parties are also members of APEC, and in that forum had previously agreed on the importance of improving regulatory processes. The 2011 APEC Leaders’ Declaration included a commitment from members to implement internal coordination mechanisms for regulatory policy, develop or strengthen mechanisms for assessing the impacts of regulations, and adopt transparency requirements, but did not put forward plans for the harmonization of standards or even to promote further cooperation in this area.Footnote 58 In light of this, it is perhaps unsurprising that the regulatory coherence chapter of the agreement emphasizes ‘intra-governmental regulatory reform’, by improving transparency and processes for developing and implementing measures.Footnote 59
The obligation for each TPP party to ‘endeavour to ensure’ that it has coordination or review processes was apparently put forward by the United States, which is encouraging other parties to create an agency modeled on its Office of Information and Regulatory Affairs (OIRA).Footnote 60 While the details of the particular process or mechanism adopted are left to each TPP party, it should provide ‘effective interagency coordination’, and ‘review proposed covered regulatory measures to determine the extent to which the development of such measures adheres to good regulatory practices’.Footnote 61 These ‘good regulatory practices’, which are explained in Article 25.5, focus on the conduct of RIA processes ‘to assist in designing a measure to best achieve the Party's [regulatory] objective’.Footnote 62 The detail of how RIA should be conducted is set out in paragraph two:
2. Recognizing that differences in the Parties’ institutional, social, cultural, legal and developmental circumstances may result in specific regulatory approaches, regulatory impact assessments conducted by a Party should, among other things:
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(a) assess the need for a regulatory proposal, including a description of the nature and significance of the problem;
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(b) examine feasible alternatives, including, to the extent feasible and consistent with laws and regulations, their costs and benefits, such as risks involved as well as distributive impacts, recognizing that some costs and benefits are difficult to quantify and monetize;
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(c) explain the grounds for concluding that the selected alternative achieves the policy objectives in an efficient manner, including, if appropriate, reference to the costs and benefits and the potential for managing risks; and
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(d) rely on the best reasonably obtainable existing information including relevant scientific, technical, economic or other information, within the boundaries of the authorities, mandates and resources of the particular regulatory agency.Footnote 63
While Article 25.5(2) of the TPP text sets out regulatory practices expected of TPP parties in some degree of detail, it leaves states discretion to determine their preferred methodology for RIA.Footnote 64 An unauthenticated, leaked, draft text provided more guidance, by referring to OECD and APEC documents elaborating on how states can implement ‘good regulatory practices’.Footnote 65 While these references were removed from the final text, these documents may still provide an indication of the sort of RIA that TPP parties had in mind when negotiating the chapter. The most common methodology for RIA, which is often referred to as best practice, is cost–benefit analysis (CBA).Footnote 66 Most methodologies for conducting RIA are, on some level, an analysis of costs and benefits. However, a full CBA is an ex ante evaluation that seeks to quantify all costs and benefits of a proposed regulation, in monetary terms and over an appropriate period of time.Footnote 67 The OECD suggests that CBA is therefore the preferable tool for evaluating a regulation and its alternatives in an RIA.Footnote 68 While Article 25.5 of the TPP does not require states to use a full CBA methodology for all RIAs, it does require parties to consider the costs and benefits of each proposal ‘to the extent feasible’.Footnote 69 The Article recognizes that quantification of costs and benefits may not always be possible.Footnote 70 In these circumstances, an alternative methodology may be used, such as cost-efficiency analysis or partial CBA.Footnote 71
A final point worth noting from the TPP text is that dispute settlement mechanisms under the TPP do not apply to the regulatory coherence chapter.Footnote 72 In other words, requirements relating to good regulatory practices and RIA would not be subject to dispute settlement under the agreement. Arguably, exempting the obligations from dispute settlement provisions is necessary to encourage greater participation by states, and the inclusion of a broad range of domestic regulatory measures within the scope of the regulatory coherence chapter.Footnote 73
Given the diversity of parties to the TPP, it would be unreasonable to expect far-reaching harmonization of the substance of regulations and mutual recognition arrangements to have been possible, and even the more detailed information exchange and cooperation requirements of CETA and TTIP may have been unrealistic. As noted above, it is therefore unsurprising that the focus of regulatory coherence in the TPP is on promoting good regulatory practices, consistent with earlier work of APEC. The core of these provisions under the TPP are the detailed requirements for RIA, particularly (i) identification of the purpose of regulations; (ii) identification of feasible alternatives to regulation; and (iii) an assessment of the costs and benefits of the proposed regulation, as well as its alternatives, using science and evidence based decision-making. As discussed in the following sections of this article, these requirements could have important implications for the consistency of regulatory measures with substantive trade and investment obligations.
4. The relationship between regulatory coherence and regulatory autonomy
As noted above, many governments are keen to demonstrate that their new PTAs will not adversely affect their sovereignty or ability to implement policies for the protection of public health or the environment. Typically, the need to safeguard regulatory autonomy is addressed separately from the question of regulatory coherence in PTAs. Proponents of regulatory reform are quick to note that its purpose is not to discourage regulation:
In a changing world, government action remains essential to protect and promote important social objectives, such as safety, health, and environmental quality, and the international community has taken commitments to several social and environmental agreements in the past decade. Indeed, as economies develop, public expectations in such areas tend to increase. More efficient and dynamic economies will help governments serve these public interests. Experience shows that [regulatory] reform, if properly carried out, should not adversely affect, and can often promote, such objectives.Footnote 74
Similarly, the second article of the TPP chapter on regulatory coherence ‘affirms the importance’ of, inter alia, ‘each Party's sovereign right to identify its regulatory priorities and establish and implement regulatory measures’ and ‘the role that regulation plays in achieving public policy objectives’.Footnote 75
In spite of these statements, concerns have been raised regarding the potential impact of regulatory coherence obligations on states’ regulatory autonomy. The harmonization of regulatory standards may, to some extent, diminish the autonomy of states by limiting their choices about how to pursue a chosen public policy objective. Certainly, the fear that these provisions will impact upon the ability of states to regulate in the public interest is often cited by opponents of PTAs.Footnote 76 Even simple mechanisms for cooperation, such as the establishment of bilateral councils or procedures for information exchange, need to be balanced against the importance of regulatory autonomy.Footnote 77 As Alberto Alemanno has put it, regulatory cooperation through the TTIP ‘will inevitably entail some limitations of the respective regulatory autonomy’ of the EU and US, even if it does not involve the adoption of joint standards or substantive harmonization.Footnote 78
Thus, the potential impacts of regulatory coherence provisions on the autonomy of states are not limited to those provisions that require harmonization of the substance of regulations or procedural cooperation to reduce regulatory divergence. Perhaps most obviously, if any PTA imposes requirements for states in terms of the development of regulations, failure to comply with those requirements may expose the state to international liability.Footnote 79 However, as noted above, the TPP regulatory coherence chapter makes it clear that it is not subject to dispute settlement – thus, failure to comply with good regulatory practices would not necessarily have any negative consequences for a TPP party.Footnote 80
In our view, however, even if the relevant provisions are not subject to dispute settlement, this does not dismiss the question of how regulatory coherence obligations may affect regulatory autonomy. While requirements relating to good regulatory practices or regulatory process may be ‘more respectful of national sovereignty’ than harmonizing substantive standards,Footnote 81 the former are by no means irrelevant to the question of regulatory autonomy. By improving domestic processes for making regulations, parties to the TPP hope to improve the quality of the measures that are enacted.Footnote 82 The issue of how to distinguish legitimate social policy measures from barriers to trade or infringements of the rights of foreign investors has long been a vexing problem for international economic law. The conundrum, as described by Mattoo and Subramanian, lies in the difficulty in distinguishing between a situation where ‘a non-protectionist government cannot prevent certain domestic policies from incidentally discriminating against foreign competitors’ and a situation in which ‘a protectionist government uses a legitimate objective as an excuse to … inhibit foreign competition’.Footnote 83 The OECD and APEC have noted that the adoption of good regulatory practices should promote market openness and reduce the likelihood of discriminatory regulations.Footnote 84 In other words, good regulatory practices are seen as a key tool for ensuring that states engage in legitimate regulation, rather than disguised protectionism.
When tribunals adjudicate disputes that require them to determine whether a regulatory measure is legitimate or protectionist, many of the questions that they examine are the same as those that are addressed during RIA.Footnote 85 Consequently, where a state implements good regulatory practices, such as RIA, it may theoretically be expected that the regulatory measures they enact are more likely to comply with obligations such as non-discrimination or fair and equitable treatment.Footnote 86 Yet, many social policies that have been the subject of trade or investment disputes are measures that were implemented following a RIA process.Footnote 87 This indicates that, in reality, good regulatory practices may not always ensure that the measures will withstand challenge under trade or investment norms.
In the following section, we consider three core elements of the good regulatory practice requirements set out in the TPP chapter on regulatory coherence: (i) identification of regulatory purpose; (ii) identification of feasible alternatives to regulation; and (iii) analysis of costs and benefits, with a view to justifying the decision to regulate and the measure chosen based on the best obtainable evidence/information. We identify where each of these mirrors aspects of other key provisions of international trade and investment law, and then turn to the case law on those provisions, examining disputes both in the WTO and before international investment arbitral tribunals.Footnote 88 This survey seeks to offer insights into whether the use of RIA processes is likely to help ensure that regulatory measures enacted by states are consistent with their international obligations, and thus help to strengthen their regulatory autonomy.
5. Good regulatory practices and the consistency of regulatory measures with substantive obligations of international economic law
Identification of regulatory purpose/objective
The first key step in the practice of RIA is to identify the purpose of the regulation under consideration. As set out in Article 25.5 of the TPP, parties should ‘assess the need for a regulatory proposal’, including ‘the nature and significance of the problem’.Footnote 89 Determining the purpose of a measure is also a crucial step for determining whether it is a legitimate regulation or a violation of international trade rules. The applicability of the general exceptions clauses, Article XX of GATT 1994 and Article XIV of the General Agreement on Trade in Services (GATS),Footnote 90 depends upon a respondent being able to demonstrate that their measure falls within the scope of one of the identified purposes, such as the protection of human, plant, or animal life or health.Footnote 91 Regulatory purpose is also a paramount consideration under the SPS Agreement, which defines the appropriate level of protection against SPS risks as ‘the level of protection deemed appropriate’ by the Member adopting the regulatory measure.Footnote 92 The purpose of a regulation may also be relevant to determining compliance with non-discrimination requirements, even where this is not immediately apparent from the text of the provision. For example, Article 2.1 of the TBT Agreement simply requires that WTO Members ensure that imported products are ‘accorded treatment no less favourable than that accorded to like products of national origin’ or those originating in any other country.Footnote 93 In applying this requirement, however, the WTO Appellate Body has determined that differential treatment that stems exclusively from a ‘legitimate regulatory distinction’ will not be inconsistent with Article 2.1.Footnote 94 Thus, whether or not a measure has a legitimate purpose is relevant to whether or not it is considered discriminatory for the purposes of Article 2.1 of the TBT Agreement.Footnote 95
The purpose of a measure is also relevant to its consistency with some of the core obligations typically found in the investment chapters of PTAs. The purpose of a regulation is often now a mandatory consideration when determining whether an indirect expropriation has occurred.Footnote 96 Even without this consideration being explicitly required by the treaty, most arbitral tribunals that have examined cases of (alleged) indirect expropriation have included within their analysis the regulatory purpose of the measure at issue.Footnote 97 The purpose of a measure has also been held by some tribunals to be relevant to whether or not it breaches the standard of ‘fair and equitable treatment’Footnote 98 or discriminates against foreign investors.Footnote 99
Given all of these contexts in which the purpose of a measure may be relevant to its consistency with substantive trade and investment rules, the proper identification of a measure's objective in RIA may be of great value to a state seeking to defend its regulatory measure. However, a tribunal will not necessarily accept that the purpose given by the state for its measure is, in fact, the main purpose of the measure. Instead, adjudicators must determine the purpose objectively, by reference to features such as government pronouncements, the legislative history of the measure, and its design/structure.Footnote 100 For example, in Korea–Beef, the Appellate Body declared that it thought it ‘unlikely’ that Korea had intended to ‘totally eliminate’ consumer fraud through the measure at issue – even though that was Korea's stated regulatory aim – and that it had really sought only to considerably reduce such fraud.Footnote 101 Deference to a respondent state when assessing the purpose of a measure may also be limited by the fact that international arbitral tribunals have viewed some non-economic objectives as not ‘legitimate’, including domestic political interests or community opposition to a project.Footnote 102 Thus, even if an RIA clearly identifies the purpose of a measure, there is no guarantee that this will be accepted by a tribunal assessing its legitimacy.
Identification of feasible alternatives to regulation
Many of the WTO provisions that provide a defence or exception to justify social policies require that the measure at issue be the least trade restrictive means of contributing to the desired objective. For example, the TBT Agreement and the SPS Agreement require that measures are not ‘more trade restrictive than necessary’ to fulfil or achieve their desired level of protection of public health, the environment, or other public good.Footnote 103 While not mentioned in the text of the provisions, the Appellate Body has also held that interpreting whether a measure is necessary for its aim, as required by many paragraphs of the general exceptions provisions in GATT 1994 and GATS, includes a consideration of less trade restrictive means of contributing to that objective.Footnote 104 Appropriately, applying these sorts of provisions requires a consideration of what alternatives to the proposed regulation could have feasibly been implemented. While not explicitly required by any typical provisions of international investment law, a failure to consider alternatives has, in some investment disputes, been found to contribute to a lack of fair and equitable treatment.Footnote 105
The analysis of alternatives is a key part of the good regulatory practices required by Article 25.5 of the TPP.Footnote 106 This requirement incorporates some flexibility for respondent states, as they need to consider only ‘feasible’ alternatives.Footnote 107 This approach is consistent with that taken by the Appellate Body when applying provisions such as the necessity requirement of GATT 1994 Article XX, which focuses on reasonably available alternatives, taking account of the financial and technological capacity of the respondent country.Footnote 108 The regulatory coherence provisions do not only require an examination of the level of trade restrictiveness of each alternative; instead, they encourage a more holistic analysis of the costs and benefits of each option, to the extent that such analysis is feasible and consistent with domestic laws and regulations.Footnote 109 However, if an RIA process is to contribute to ensuring that a measure is consistent with a state's trade and investment obligations, then the impact of each alternative on foreign traders and investors should be a part of the impact assessment process. This assessment would include examining whether or not a measure is discriminatory in favour of domestic entities, as well as a broader consideration of whether a measure creates a barrier to trade or investment.Footnote 110 In order to achieve this:
regulators [should] have the scope, authority and incentive, as well as the capacity, through improved communication with trade officials and, where appropriate prior consultation with other relevant stakeholders, to identify the most trade-friendly among various, equally effective, alternatives.Footnote 111
Thus, an RIA that explicitly considers the extent to which each feasible alternative measure may affect foreign traders and investors may help to ensure that the state's selected approach is the least-trade restrictive means of fulfilling its desired level of protection. However, the language of the TPP regulatory coherence chapter does not explicitly require that RIA involve consideration of extra-territorial costs and benefits, although it also does not rule out the possibility of such costs and benefits being considered.
Analysis of costs, benefits, and justification for regulation
The consideration of whether, and to what extent, a measure restricts trade or investment is only one element of the cost–benefit analysis that may be expected from best practice RIA. As noted above, in an RIA process ideally all impacts of a measure should be quantified and included in the determination of whether a measure has a net benefit (or which of the available alternatives has the greatest net benefit).Footnote 112 The breadth of the analysis that should be undertaken in an RIA was specified quite clearly in the leaked draft TPP text, which referred to the need to consider the ‘costs and benefits of each available alternative’, to determine its ‘net benefits’.Footnote 113 Notably, however, this reference to ‘net benefits’ was removed at some point during drafting and does not appear in the final TPP text. Instead, the final text requires consideration of ‘costs and benefits, such as risks involved as well as distributive impacts’,Footnote 114 and an explanation of ‘the grounds for concluding that the selected alternative achieves the policy objectives in an efficient manner’ with reference to costs and benefits if appropriate.Footnote 115
In contrast to the breadth of analysis expected in an RIA, only certain costs and benefits are typically relevant to an assessment of whether a measure is consistent with substantive trade and investment obligations. No trade or investment obligations require a state to adopt the regulatory approach that has the greatest net benefit, or even require a comprehensive review of costs and benefits. However, the need to assess the contribution that a measure makes to its objectives – which would usually be one of its main benefits – is central to applying many of the trade provisions that have been discussed above. For example, to meet the necessity standard of the general exceptions provisions in GATT 1994 and GATS, a WTO panel must assess whether or not a measure makes a material contribution to its objective.Footnote 116 Similarly, in some investment cases an assessment of whether a measure is likely to contribute to its purpose has been a key part of an examination of whether it had a legitimate purpose, rather than being an illegitimate infringement on the rights of foreign investors.Footnote 117 Yet, in relation to both trade and investment 3provisions, tribunals are not required to assess the contribution that a measure makes to its regulatory purpose against the costs of that measure, or to quantify its net benefits. Dispute settlement panels in the WTO must make an objective assessment of the facts, but cannot conduct a de novo review or their own risk analysis of the available options.Footnote 118 Even where the Appellate Body of the WTO has suggested that it engages in a sort of ‘weighing and balancing’ exercise to assess the legitimacy of a regulation when applying Article XX of the GATT 1994, in practice no such overall assessment takes place.Footnote 119 Instead, the analysis is limited to whether the measure contributes to its purpose, and if so, whether that contribution could have been achieved with less impact on international trade.Footnote 120
In this section, we compare the concept of a comprehensive RIA – which thoroughly surveys both costs and benefits – with the analysis of a measure undertaken by trade and investment tribunals, particularly when applying a non-discrimination obligation. We do not mean to imply that RIA or cost–benefit analysis is not potentially relevant to other international economic obligations, such as fair and equitable treatment, expropriation, or the application of general exceptions. We have focused on non-discrimination norms in this section because they are a core principle of both the international trade and investment regimes, and clearly demonstrate the potential disparity between RIA and international economic law analysis. For example, the findings of the Appellate Body in US–Clove Cigarettes illustrate the difference between cost–benefit analysis and the assessment made to consider compliance with non-discrimination rules. The measure at issue in this dispute was the United States’ ban on all characterizing flavours in cigarettes, with the exception of menthol and tobacco.Footnote 121 The ban included clove cigarettes, which were almost exclusively imported from Indonesia,Footnote 122 while there was significant domestic production of menthol cigarettes. In finding that the measure discriminated against imported clove cigarettes, the Appellate Body examined the extent to which the distinction between menthol and clove cigarettes could be justified on public health grounds as a ‘legitimate regulatory distinction’.Footnote 123 At no point in its analysis did the Appellate Body examine whether the measure, overall, had a net benefit, or whether alternative options would have had a greater net benefit. A full cost–benefit analysis of the measure would have quantified the health benefits of reducing youth smoking rates, as well as the cost to foreign and domestic cigarette producers of lost sales, the costs to the government of implementing the ban, and the lost tax revenue on sale of cigarettes, among other factors. The United States had raised the potential costs of banning menthol cigarettes as part of its justification for the design of the measure, including the burden on the health care system of millions of addicted menthol smokers suffering withdrawal, and the potential harms of a black market emerging for menthol cigarettes.Footnote 124 These potential costs of a ban on menthol cigarettes were, however, quickly dismissed by the Appellate Body, which was not convinced that people who were addicted to smoking menthol cigarettes would either quit or turn to the black market.Footnote 125
We do not intend here to criticize the findings of the Appellate Body in Clove Cigarettes.Footnote 126 Instead, we seek only to highlight the differences between a cost–benefit analysis of a measure, and the evaluation of a measure that is performed when applying a non-discrimination obligation. Non-discrimination obligations, by their very nature, are not concerned with assessing the overall impact of a measure or whether it has a net benefit for society. Instead, they are focused on whether or not a measure imposes a disproportionate burden on foreign entities, and, if so, whether that burden can be justified by reference to a legitimate public purpose. The TPP provisions on regulatory coherence do not distinguish between costs and benefits that may fall on domestic or foreign entities, and do not explicitly require consideration of the impact of a measure on international trade. Arguably, the reference to ‘distributive impacts’ in Article 25.5(2)(b) could suggest that in their RIAs TPP parties should consider whether the costs of a measure fall disproportionately on foreign enterprises, although this may equally refer to domestic distributive impacts (for example, whether or not a measure would impose a disproportionate burden on a small number of domestic actors, or on a disadvantaged group).
Interestingly, while the EU TTIP proposal does not spell out many requirements for impact assessment, one of the elements it does demand is consideration of the effect a measure may have on international trade and investment.Footnote 127 This provision of TTIP may reflect the increasing number of domestic RIA processes, including in both the US and EU, which already require consideration of extra-territorial impacts.Footnote 128 Often, however, these extraterritorial RIA requirements are limited to trade impacts which may have domestic effects.Footnote 129 However, the proposed TTIP provision goes further, by requiring a consideration of any relevant international standards, comparable regulations in the other party, and the impact on international trade and investment.Footnote 130 Unlike the more general requirement under TPP for cost–benefit analysis of measures, this provision of TTIP is more closely in line with how tribunals approach their analysis of non-discrimination obligations.
In addition, even if an international tribunal were to consider the full range of costs and benefits that may have been raised in an RIA, it would not necessarily evaluate these in the same way as a domestic regulatory agency. Where a cost or benefit can be quantified relatively easily and is supported by clear scientific evidence, this obviously may not be a significant risk. However, as noted in Article 25.5(2)(d) of the TPP, some costs and benefits are difficult to assess in monetary terms.Footnote 131 In relation to these more subjective findings,Footnote 132 an international tribunal may easily take a different perspective to that taken by the relevant domestic authority. The question arising here is to what extent the international tribunal should (or will) show deference to the findings of a domestic RIA.Footnote 133 The recent decision of an investment arbitral tribunal in Bilcon v. Canada demonstrates this potential issue. The case concerned a complaint by a foreign investor that the findings of an environmental impact assessment process for their proposed quarry were inconsistent with various provisions of the North American Free Trade Agreement (NAFTA).Footnote 134 The majority of the arbitral tribunal held, inter alia, that Canada had failed to afford the investor fair and equitable treatment in accordance with the customary international minimum standard, in large part because the findings of the joint review panel carrying out the environmental assessment relied on a concept of ‘core community values’.Footnote 135 Although a central part of the basis for the Tribunal's decision was its finding that the notion of ‘community core values’ had no basis in Canadian environmental law,Footnote 136 its reasoning seemed to be heavily influenced by the subjective nature of the notion of ‘community core values’. At several points, this broad concept relating to the socio-economic impact of the project was contrasted with the value of ‘scientific information’Footnote 137 and ‘evidence-based’ reasoning in relation to other costs and benefits of the project.Footnote 138 While the Tribunal stressed that impacts on the human environment could be a valid part of an environmental assessment, the case demonstrates the very different perspectives that an international tribunal may take to the evaluation of costs and benefits that are difficult to monetize, when compared to how those benefits may have been assessed by a domestic regulatory agency in an RIA.Footnote 139 Moreover, the emphasis of regulatory coherence provisions on the need for decision-making to be based on the ‘best obtainable’ scientific evidence may, in some cases, encourage tribunals to prioritize those costs and benefits which can be easily quantified, as opposed to more subjective values.Footnote 140
Conclusions
As this article has shown, one of the most significant elements of the regulatory coherence chapter of the TPP is its focus on intra-governmental reforms of regulatory process and the promotion of ‘good regulatory practices’. These obligations may appear to have less impact on the regulatory autonomy of TPP parties, relative to harmonization of standards or detailed requirements to promote compatibility with other parties’ regulations. Yet, this article has argued that good regulatory practices have an important relationship with regulatory autonomy, particularly in light of the increase in international trade and investment disputes concerning measures enacted for the protection of public health, the environment, or public goods. The purpose of improving domestic regulatory processes is, of course, to improve the quality of regulations that are adopted. Among other benefits, this should include ensuring that regulations promote market openness, or at least interfere with international trade and investment to the minimum extent possible. Consequently, states and citizens may understandably assume that regulations enacted in compliance with the good regulatory practices set out in the TPP, which draw on previous recommendations by bodies such as APEC and the OECD, will be likely to be consistent with other obligations of PTAs.
As this article has shown, several aspects of the RIA process could relate to the interpretation and application of provisions of international trade or investment law. Yet, significant questions remain as to whether or not adhering to good regulatory practices will contribute to safeguarding the regulatory autonomy of states. First, the extent to which an international tribunal may show deference to the findings of a domestic RIA is questionable. While identification of a legitimate purpose for a regulation is necessary for a state to defend its measure, a panel evaluating the measure in a dispute is unlikely to accept that the purpose put forward in an RIA is in fact the purpose of a measure without objectively evaluating it. Second, important differences exist between the scope of RIA, which as a matter of best practice is often argued should involve a full CBA, and the factors that are relevant to determining whether a measure is consistent with a non-discrimination obligation. A party may undertake a full RIA and adopt a measure that has net benefits, yet this measure could still be inconsistent with substantive trade and investment obligations, if its costs are imposed disproportionately on foreign entities. Even for other obligations, such as fair and equitable treatment, undertaking an RIA is no guarantee that a tribunal will find the measure to be a reasonable or legitimate regulation. While regulatory coherence provisions acknowledge that sometimes the costs and benefits of a measure may be difficult to quantify or monetize, where qualitative evaluations are necessary there can be no certainty that an international tribunal evaluating the regulatory measure will take the same view as the respondent state of its relative merit. Empirical research comparing the RIA conducted for measures with their evaluation by the WTO Dispute Settlement Body or investment arbitral tribunals may provide further insights in this regard.
It is foreseeable that a party could adopt a measure in full compliance with the good regulatory practices espoused in the TPP, and yet that measure may still end up being found to be inconsistent with another substantive obligation of that (or another) PTA. Such an outcome would likely fuel ongoing concerns about PTAs undermining the regulatory autonomy of states, and raise serious questions of legitimacy. Before regulatory coherence provisions become a commonplace feature of PTAs, states should carefully consider how the regulatory practices that they require may relate to obligations such as non-discrimination or fair and equitable treatment. Fundamentally, states need to consider why they are incorporating good regulatory practices into their PTAs. If the purpose is to reduce regulatory barriers to trade, then the approach taken by the EU in proposals for the TTIP, which is limited to requiring that RIA consider relevant international comparators and the impacts of a measure on international trade and investment, may help to ensure that regulatory coherence provisions are mutually supportive with the obligations contained in other chapters of the agreement. The inclusion of broader provisions for RIA in the TPP, however, suggests that states may be seeking something more and that PTAs are increasingly becoming tools to promote a certain conception of good governance.
