A Call for Greater Regulatory Harmonization With Canada

A Call for Greater Regulatory Harmonization With Canada
AP Photo/Evan Vucci

President Donald Trump’s principal policy accomplishments thus far have been in the area of regulatory reform. The adoption of regulatory budgeting, use of the Congressional Review Act to repeal Obama-era regulations and a considerable slowdown in new rulemaking over the first 150 days are all positive steps.

But, of course, there is more work to be done. Nagging red tape and burdensome regulations continue to impose real costs on the U.S. economy. 

One area ripe for further reform is the possibility of greater regulatory harmonization with Canada. The economic relationship between the two countries is already the most extensive and successful in the modern world. Two-way trade reached $870 billion (or $1.6 million per minute) in 2014. Canada is the largest customer for 35 U.S. states and among the top three for 12 others. Nearly 9 million U.S. jobs depend on trade and investment in Canada.

Yet superfluous regulatory and policy differences between the two neighbors — the “narcissism of small differences,” to borrow a phrase from Freud — impose undue costs in the form of transportation delays, higher production outlays, and weakened competitiveness on both sides of the border. 

These regulatory divergences, often the result of complacency, inertia, or public choice calculations by politicians and bureaucrats, include (but are hardly limited to): different standards for consumer products; competing ballast water regulations for marine shipping; and differing rules for truckers to reposition empty trailers. A leading Canadian trade policy expert has referred to the resultant costs as an “inefficiency tax.”

Past cross-border regulatory harmonization efforts have focused primarily on low-hanging fruit, instead of fundamental reforms. A Regulatory Cooperation Council (RCC) established in 2011 to advance harmonization in key areas, for instance, achieved some initial results. But progress has been generally underwhelming. Bureaucratic wrangling, a lack of political attention in Washington, and a narrow mandate has limited the RCC’s capacity to achieve substantial reform.

A more ambitious regulatory harmonization agenda could boost bilateral economic relations, enable investment, and create jobs in both the United States and Canada. Real reform must entrench regulatory convergence in policy development, rather than subject it to bilateral negotiations between regulatory officials.

Herein lies the potential to leverage the regulatory budgeting model used in both countries to support greater regulatory convergence, as we set out in a recent R Street Institute paper. The goal should be to change bureaucratic and political incentives in favor of regulatory convergence. 

The basic premise of regulatory budgeting is akin to regular expenditure-based budgeting, whereby governments must prioritize and make trade-offs within a fixed budgetary envelope. Departments and agencies are thus given “regulatory budgets” based on the number of regulations, rules, and directives they issue, along with their estimated costs, and are expected to live within them. Any new regulations must be offset by “savings” realized by eliminating existing regulatory requirements. The goal is to bring greater accountability and discipline to the regulatory process. 

Thus regulatory budgeting is principally designed as an institutionalized tool to reduce the buildup of new regulations. But there is an opportunity to leverage the model for greater regulatory convergence between the U.S. and Canada. 

One option for policymakers is to incorporate regulatory harmonization in the incentives already inherent in the regulatory budgeting model. Departments and agencies could, for instance, receive “credit” for enacting reforms that lead to regulatory convergence, even if such changes do not produce significant domestic savings in and of themselves. Regulatory departments would then get credit for direct savings from regulatory changes and indirect ones for regulatory convergence. This would allow those departments effectively to build up credit for future regulations. 

Another option would be to make it more “costly” to enact new regulations that diverge from a continental standard and, in turn, require greater savings from elsewhere to offset them. This model would basically capture the “inefficiency tax” reflected in regulatory differences, ensuring that regulatory departments and agencies are held accountable for them.

Whichever model is chosen, incorporating regulatory harmonization into the regulatory budgeting process would shift the incentives in the direction of greater convergence — a key step to catalyze further regulatory harmonization. This would not only advance the president’s regulatory reform agenda, but also provide an economic boost for both the United States and Canada. 

Sean Speer is the author of “Regulatory harmonization between the United States and Canada” and a Munk senior fellow at the Macdonald-Laurier Institute. Kevin R. Kosar is vice president of policy for the R Street Institute and edits LegBranch.com.

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