It’s time for a bolder step on Canada-US regulatory harmonization. We should seek a Mutual Recognition of Functional Equivalence deal with Washington.
Maryscott Greenwood makes a characteristically strong and persuasive case that the United States and Canada should be bolder in reconciling the differences in our regulatory standards. Doing so would make it possible to overcome obstacles to market access that are particularly challenging for small and medium-sized enterprises in both countries — and opening trade to SMEs was one of the main purposes of the Canada-United States Free Trade Agreement and to some extent of the North American Free Trade Agreement (NAFTA).
Greenwood’s really brilliant observation is that addressing regulatory differences is likely to appeal to the US administration of President Donald Trump, who campaigned on cutting undue regulatory burdens and setting the US economy on a path for economic growth. She argues that identifying sectors for regulatory cooperation could offer some early, easy gains for both Trump and Justin Trudeau as well as our two economies. Still, this is a stay-the-course solution. In my opinion, it is not bold enough to seize the opportunity before us.
Recall that back in 1994, NAFTA established a set of 12 trilateral, sectoral working groups designed to align regulations and foster a single market for many goods and services. The NAFTA working groups made modest progress, but most stopped meeting because the US debate over NAFTA ratification left many US officials unconvinced that there was domestic political support for regulatory changes that would mean adopting Canadian or Mexican standards.
The George W. Bush administration was responding to the failure of the NAFTA working group model when, in cooperation with the Paul Martin government and the Vicente Fox administration, it proposed the Security and Prosperity Partnership for North America (SPP) in 2005. The SPP involved 20 working groups, 10 on economic issues such as regulatory alignment and 10 to tackle security concerns including the timely inspection of goods crossing borders and the movement of people from one country to another.
In 2009, at the North American leaders’ meeting in Guadalajara, President Barack Obama called for the abandonment of the SPP framework, which had become politically controversial in all three countries due to a perceived lack of democratic accountability. In 2011, the Obama administration launched a process to establish two bilateral agencies to replace the SPP: the Canada-US Regulatory Cooperation Council (which Greenwood mentions in her article) and the US-Mexico High Level Regulatory Cooperation Council. The Obama administration believed that the trilateral approach of the SPP had hampered cooperation between the United States and Canada, where smaller differences might be more easily overcome.
The NAFTA working groups, the SPP and the Obama-era regulatory cooperation councils (RCCs) with Canada and Mexico represent more than two decades of incrementalism in addressing the regulatory differences between the United States and its neighbours. The results have been modest, but, as Greenwood notes, the potential for gains from these efforts remains significant.
It is time for a bolder step. The United States and Canada should agree to apply a model called mutual recognition of functional equivalence (MRFE) to regulatory standards and compliance enforcement (through inspections and testing) for goods, services and skills certifications and credentials for workers.
This approach would avoid the situation in the EU, where critics charge that EU regulation is unaccountable, a perception that led some British voters to embrace withdrawal from the EU as a solution.
“Mutual recognition” is reciprocal: neither country would need to change its current practices and standards for it to work, and existing regulations and procedures would remain democratically accountable through the responsible legislative body, be it Parliament, Congress or a provincial or state legislature. This approach would avoid the situation in the European Union today, where critics charge that EU regulation is unaccountable, a perception that led some British voters to embrace withdrawal from the EU as a solution.
“Functional equivalence” means that while standards and practices set by regulators may differ, they accomplish similar objectives. A toy found safe for children aged three or older by Canadian standards is safe for children aged three or older in the United States. Pesticide warning labels convey the same concerns adequately in both countries. Architects who earn their degrees from Canadian and American universities are equivalently qualified to design a building.
By recognizing the functional equivalence of the Canadian and American regulatory systems, both governments avoid having to undertake complicated efforts to change existing regulations to converge on a new common approach, as was attempted in the NAFTA working groups, the SPP and the RCCs.
Another benefit of the MRFE model is that it would create, to borrow a phrase from President Trump, lots of winners immediately. Any firm with a regulated product or service and any individual with earned skills training would be able to enter the other market and compete for business without an additional set of applications and attestations to a new set of regulators. For those doing business in Canada and the United States, this would cut the regulatory compliance burden in half. For SMEs that don’t employ legions of lawyers, it would generate immediate new opportunities that would be too costly to pursue otherwise.
Of course, there would be areas where regulators and businesses would object that the other country’s standards or inspection practices are simply not good enough to be considered functionally equivalent. A mutual recognition agreement between Canada and the United States should include a provision allowing for a time period, perhaps six months, during which regulators or regulated businesses or individuals could submit objections. These objections would be excluded from mutual recognition and placed on a list that would become an agenda for the Canada-US RCC to tackle. Over time, the council could resolve these differences by prompting one side or the other to raise its standards, or by encouraging the two countries to opt for a better, mutually acceptable approach. If either side changes regulations with the result that the government of the other country finds they no longer meet the standard of functional equivalence, a mechanism would allow for mutual recognition to be withdrawn.
MRFE agreements are not unprecedented between two countries that are broadly similar in their approach to regulation: in 2008, the governments of Australia and New Zealand adopted the Trans-Tasman Mutual Recognition Arrangement to boost productivity and competitiveness in both economies. Note too that the arrangement was enacted as domestic law in each national parliament, making the basis for mutual recognition subject to domestic constitutional constraints and fully respecting the sovereignty of each country.
However, it is easier to bridge the differences between already similar economies such as those of Australia and New Zealand, or Canada and the United States. What would Canada and the United States do about their other regional economic partner, Mexico?
Mexican firms and workers could obtain an immediate benefit from a US-Canada MRFE agreement, since winning regulatory approval in one of these two markets would be sufficient to allow access to the other. Over time, the MRFE model might also be an option for Mexico, as the United States and Canada show what is required and establishing the approach as workable. The list of objections to functional equivalence of Mexico’s regulations is likely to be longer than the list of such disagreements between Canada and the United States, but the High Level RCC could help to resolve these issues over time.
The first step would be an MRFE agreement between Trump and Trudeau, followed by the adoption of an MRFE law in the US Congress and the Canadian Parliament. The undertaking is not simple, but it has the potential to generate significant growth in trade and economic activity for both countries.
To paraphrase a Trump campaign line, we have tried incrementalism and the results haven’t been great, so now what have we got to lose by trying a new approach?
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