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As the United States and European Union gear up their trade negotiations, this much is clear: A trade pact between the two powers would be monumental. The two economies comprise half the world's economic output and represent a third of the world's trade flows. A pact would offer a much-needed boost for economic growth and jobs on both sides of the Atlantic--an opportunity neither region can afford to miss. Perhaps more importantly for the U.S., trade talks present the best--if not the only--opportunity to have a say on global regulatory standards.
Existing transatlantic disagreements about regulatory standards are seen as the greatest stumbling block for the negotiations. The substantial economic gains that the trade pact would generate may be unattainable simply because the parties cannot agree on whether chlorine-rinsed chicken or hormone-treated beef is fit for importing into the EU.
But instead of seeing such differences as an obstacle, the U.S. should welcome the opportunity to address competing regulations jointly with the EU. The alternative is that the EU sets these standards alone.
It is no secret that the EU likes rules and regulations. What is less well understood is the extent to which these rules and regulations have penetrated global markets and influenced economic life in the U.S., affecting many of the products Americans use everyday, including computer software, children's toys, cosmetics, and household appliances. The EU's influence over global production patterns and business practices takes place through a process I have described as "the Brussels Effect."
Because the EU has the world's largest internal market, most multinational companies depend on access to the region. This access requires compliance with EU standards. While these companies could, in principle, adopt one set of standards for Europe and multiple other sets of standards for the rest of the world, scale economies and other benefits of uniform production make this unlikely. By choosing the most stringent standard to govern their global conduct or production, companies can ensure their regulatory compliance worldwide. In this way, market forces alone are often sufficient to convert the EU standard into a global standard--without the need for the EU to engage in international cooperation or unilateral coercion.
Today, many U.S. companies feel burdened by the Brussels Effect because of the higher compliance costs involved. The opening of these trade talks presents a rare opportunity for the U.S. to change this dynamic and regain strength in a global standard setting.
However, some U.S. stakeholders do not want to see the trade talks erode the Brussels Effect. Consumer protection advocates and environmentalists praise the EU's ability to force changes in U.S. business practices that weaker U.S. regulations fail to generate. Smaller U.S. firms competing locally also enjoy an edge over domestic, export-oriented competitors who are forced to bear the costs of producing to higher EU standards.
But why would the EU agree to give up its unilateral ability to set global standards in any trade negotiation? Normally they would not. But these are not normal times for Europe. The continent needs to hold onto the few opportunities it has to pull itself out of an economic recession and revive confidence in the European project.
Yet it is false to assume the EU needs this deal more than the U.S., which is also struggling to recover from the economic crisis. At the bargaining table, the EU will be a more powerful force than its current struggles would suggest. The biggest sticking point between the parties relates to regulatory standards, and there the EU has an upper hand. The EU knows this and will use its leverage to push the U.S. towards greater liberalization.
If the U.S. fails to agree on standards jointly with the EU, its regulators will continue to watch from the sidelines as Europe carries on projecting its values across global markets, making the world to its liking. The good news is that the deal is within reach--both sides have too much to gain to walk away.