Better than bilateral trade agreements: unilateral recognition of approvals / certificates and approval / certification hubs

This article analyses the regulatory tool “unilateral recognition of foreign product or service approvals or certificates”. This tool might in the future play a crucial role in favour of international trade. Furthermore, this article shows how jurisdictions, by applying extremely stringent approval or certification criteria on an optional basis, could become approval / certification hubs, to the benefit of many other jurisdictions and their own.

Cumbersome bilateral trade agreements

Bilateral trade agreements are regarded as suitable tool to promote international trade. However, they are cumbersome to negotiate and to manage. Their management requires periodic supervision. The partners need to agree on interpretations. Furthermore, bilateral trade agreements bind enormous human resources. To cover the free trade between three jurisdictions, three bilateral trade agreements are needed. For five jurisdictions, one needs 4+3+2+1=10 bilateral trade agreements. For 20 jurisdictions, 19+18+ …+2+1=190 bilateral trade agreements would be needed. Most jurisdictions have more than 50 trade partners today. Even some bigger jurisdictions will struggle to manage these many 50+ bilateral trade agreements per jurisdiction. Hence it is time to consider more effective alternatives.

Evidently, the most effective alternative to so many individual bilateral trade agreements are multi-lateral trade agreements. However, these are not always suitable or possible. Another disadvantage of multilateral trade agreements is that they are rarely tailored as precisely to the needs of the participating economies and their regulatory systems as bilateral trade agreements. Furthermore, progress at WTO level is slow.

Unilateral recognition of foreign approvals / certificates as trade policy tool

Each jurisdiction can unilaterally recognize approvals or certificates for products or services issued by other jurisdictions. It will do so when the recognition will lead to more advantages than disadvantages. There are at least three considerations which can lead to such a statement:

– The jurisdiction follows the theory of some economists which deem recognition of other jurisdictions’ approvals and certificates as generally advantageous even when the other side does not do the same.

– The jurisdiction has made a detailed analysis and came to the conclusion that exports by the domestic industry will be more favoured by recognizing foreign approvals and certificates than imports from the other jurisdiction. This can be the case if the domestic industry is strong in exports whereas the other jurisdiction’s industry hardly exports. If this is the case, the other jurisdiction’s industry has almost no advantage. But the domestic industry makes substantial economies in time and money by not having to undergo anymore a domestic approval or certification procedure. The domestic industry applies for approval or certificates only in the other jurisdiction and obtains permission to market products and services in both jurisdictions one strike.

– The other jurisdiction is ready to use the instrument of unilateral recognition in reciprocity. In this case, the two jurisdictions reach the same as what they can reach with a bilateral trade agreement, but with less bureaucracy and more flexibility. Adoption and amendments are easier. Technicalities can be fine-tuned more easily.

Anything that can be done in bilateral trade agreements can also be done by intelligent use of unilateral recognition. So why has unilateral recognition been so rarely recommended? Unilateral recognition is often seen as a tool for rather poor jurisdictions which cannot afford their own approval or certification system. This view is wrong. Many medium income or rich jurisdictions favouring free trade such as Canada, Finland, Australia or South-Africa also use the instrument. Two examples are presented in our Handbook “How to regulate?”, Section 8.15.

What is needed to use the instrument of unilateral recognition? Mainly two basic elements:

– A legal basis / high-level legal provision authorizing the recognition of foreign jurisdictions’ approvals or certificates (either by administrative decisions or regulation).

– A policy determining the conditions on which unilateral recognition should be considered. The policy might e.g. stipulate that the instrument shall only be used when reciprocity is to be expected or when exporting domestic industry is more favoured by unilateral recognition than importing foreign industry.

Approval / certification hubs applying “gold standards”

Imagine that there was a jurisdiction that would apply such stringent requirements for products and services that virtually no other jurisdiction has more severe stringent criteria. Or imagine that this jurisdiction just combines the requirements of all other major jurisdictions. Under either assumption, all other (major) jurisdictions could recognize approvals or certificates issued by this jurisdiction as equivalent to domestic approvals or certificates. The other jurisdictions could do so either by bilateral trade agreements or by unilateral recognition. Wouldn’t such a situation be marvellous for industry? Industry would only have to undergo one single approval or certification procedure to get market access in many jurisdictions. This is the core idea of approval / certification hubs.

Jurisdictions might be reluctant to play the role of approval / certification hubs because they fear that their domestic industry might not be able to cope with such stringent regulation or because they deem this strategy disproportionately expensive for consumers. But they should not. Nothing hinders jurisdictions from imposing less stringent minimum requirements for its home market. Jurisdictions may offer a two tier system:

– Either internationally recognized high level approvals / certificates based on stringent, but only optionally applicable regulation, or

– low level approvals / certificates valid only at home.

When offering industry this choice, jurisdictions will not ruin their domestic industry. But they will create an incentive both for domestic and foreign industry to produce in accordance with the high level requirements. On average more products or services offered on the domestic market will fulfil the high level requirements, as economic operators move to produce for worldwide markets. The local population will thus profit from the high level requirements. At the same time the domestic industry will get the best possible conditions for exporting its products and services around the world.

What is needed to become an approval / certification hub?

– The candidate jurisdiction must have a relatively good reputation in regulatory matters. Otherwise others will not recognize its approvals or certificates.

– The candidate jurisdiction must justify its reputation by rigorous authorities (issuing approvals) or rigorous certification bodies (issuing certificates). Certification bodies are only rigorous when they are carefully selected according to severe quality criteria and when they are closely supervised by the designating authority. Supervision of authorities is equally helpful. In an authorities-based system, the financial, technical and staffing equipment of the authorities is key to good quality work

– To increase chances for international recognition, authorities and certification bodies should apply internationally recognized quality management standards as a minimum basis for their own quality management.

– The voluntarily applicable regulation must integrate or require more than the criteria set out in the regulations of those jurisdictions which are expected to recognize the approvals or certificates.

– The regulatory strategy aiming at becoming an approval / certification hub and the advantages for other jurisdictions when recognizing approvals / certificates must be openly communicated.

– The expectations of those jurisdictions which are expected to recognize the approvals or certificates have to be investigated. Ideally, a dialogue takes place which leads to the recognition by the other jurisdictions.

– As the other jurisdictions might apply criteria of reciprocity, it should be checked whether approvals or certificates of that other jurisdictions can be recognized as well. Evidently, there is only room for such recognition if the jurisdiction has a two tier system.

Coming back to our initial example of 20 jurisdictions, we can see the benefit of one of the jurisdictions becoming the approval / certification hub: only 19 bilateral trade agreements or unilateral recognitions would be needed to let all 20 jurisdictions benefit from a one for all approval / certification by an approval / certification hub. And couldn’t there in theory even be a jurisdiction playing the role of approval / certification hub for the world? In principle, one such regulation / certification hub could play this role for the whole world. That could amount to replacing a WTO round in terms of utility for international trade and its consequences for contribution to human wealth. This larger vision needn’t distract distract from what is at easy reach. Already at any smaller scale the potential utility of approval / certification hubs is very high.

Conclusion

Combining an intensive practice of unilateral recognition and approval / certification hubs could considerably reduce the need for the many bilateral trade agreements that shape the current system of international trade. If properly conceived, approval / certification hubs can even foster international trade in a way similar to multilateral trade agreements.

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