Despite G7 Tiff, US & Canada Can Cooperate on Regulatory Reform

Despite G7 Tiff, US & Canada Can Cooperate on Regulatory Reform

The main story out of last week’s G-7 summit was bilateral discord between the United States and Canada. This is no doubt true. The heightened rhetoric and the risk of a “trade war” has understandably attracted considerable media and political attention on both sides of the border.

But the current political theatre obscures the regular and ongoing work between our two governments on matters of shared interest and priority. The U.S. and Canada relationship is much bigger than dairy prices or the on-air utterances of White House aides. 

One area where we’ve witnessed recent progress is on regulatory cooperation. Just last week Canadian Cabinet minister Scott Brison and Office of Management and Budget director Mick Mulvaney signed a new Memorandum of Understanding on the Regulatory Cooperation Council (RCC). This might sound a bit obscure and technocratic. But bilateral regulatory convergence is a unique opportunity to test new models of bilateral public policy and administration and in so doing enable more investment and job creation on the continent.

The recently signed MOU reaffirms a bilateral commitment to the RCCwhich was established in 2011 to facilitate greater regulatory alignment and harmonization between the U.S. and Canada. Its general pledge is to “reduce or eliminate unnecessary regulatory differences.”

The MOU represents a positive development, but there’s room for greater ambition. Policymakers in the U.S. and Canada should work to align the countries’ regulatory regimes to improve the incentives for even more regulatory convergence.

The U.S.-Canada economic relationship is the most extensive and successful in the world. Two-way trade reached $870 billion 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 countries impose undue transaction costs in the form of transportation delays, higher production outlays, and weakened competitiveness. Most of these regulatory differences, such as different consumer standards or transportation policies, have little policy rationale and effectively function as an “inefficiency tax.”

The RCC, which was established by Prime Minister Stephen Harper and President Barack Obama, has achieved some results to reduce regulatory divergence. But progress has been generally underwhelming. There are various causes for its lacklustre outcomes, including bureaucratic wrangling, a lack of political attention in Washington, and a narrow mandate focused only in prescribed areas.

The renewal of the RCC is positive to the extent that it maintains a focus on regulatory alignment and sustains an institutional capacity to bring political focus to the subject. But some of the process’s inherent weaknesses remain in place.

For instance, too great an emphasis is still placed on national decision-making, the role of domestic regulatory agencies, and particular economic sectors, instead of bilateral cooperation across the economy. The terms of reference are also still rife with carve outs and caveats such as “should consider,” “to the extent feasible and appropriate,” and “explore the possibility of adopting other measures to order to reduce, eliminate or prevent unnecessary regulatory differences between both countries.” The risk here is that RCC process will continue to focus on low-hanging fruit and neglect more systematic and fundamental reforms.

A more ambitious bilateral agenda would aim to entrench regulatory convergence in policy development, rather than subject it to negotiations between regulatory officials. Herein lies the potential to leverage the regulatory budgeting model used in both countries to support greater regulatory convergence. 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 they are expected to live within them. Any new regulations must be offset by “savings” realized by eliminating existing regulatory requirements that impose equivalent economic costs. A standard cost model is used to calculate the costs and cost savings of incoming and outgoing regulations.

Regulatory budgeting is principally designed as an institutionalized tool to enhance regulatory accountability, incentivize reforms, and preclude the buildup of new, costly regulatory requirements. Canada has implemented regulatory budgeting since 2012. And the U.S. has been experimenting with it since early 2017. The focus in both countries has been principally about reducing regulatory costs and spurring domestic reform. But there’s an opportunity to leverage the regulatory budgeting 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 to offset the cost of 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. Perhaps the standard cost model could double or triple the cost estimates of new regulations that unnecessarily diverge from a continental standard. This model would basically capture the “inefficiency tax” reflected in regulatory differences, ensuring that regulatory departments and agencies are held accountable for them.

Either option would represent a major new policy innovation that shifts the regulation-making incentives in the direction of greater convergence. It’s the kind of big thinking that has long animated the U.S.-Canada relationship and inspired new models of shared governance and public administration elsewhere in the world. It can also move the regulatory reform agenda in the right direction even in a temporary moment of bilateral discord.

Sean Speer is an associate fellow at the R Street Institute in Washington and a Munk senior fellow at the Macdonald-Laurier Institute in Canada.

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